Billions From Deutsche Bank Despite Trump’s Bankruptcies, Defaults, and Financial Malfeasance

Published by Anonymous (not verified) on Thu, 21/03/2019 - 10:13am in

The latest developments about Trump’s relationship to Deutsche Bank could be the unraveling with Deutsche Bank and Trump facing a serious legal probe on bank fraud by the House Financial Services Committee chaired by Rep. Maxine Waters. NEP’s Bill Black … Continue reading →

The post Billions From Deutsche Bank Despite Trump’s Bankruptcies, Defaults, and Financial Malfeasance appeared first on New Economic Perspectives.

Wolfers Blames MMT for Orthodox Economists’ Ignorance of MMT

Published by Anonymous (not verified) on Tue, 19/03/2019 - 9:58pm in

By William K. Black March 14, 2019     Bloomington, MN Number 6 in a Series of Articles on MMT Justin Wolfers is an economist who is disgracing the university I love, the University of Michigan.  I had the great fortune to … Continue reading →

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A Conspiracy Against MMT? Chicago Booth’s Polling and Trolling

Published by Anonymous (not verified) on Tue, 19/03/2019 - 1:32am in

By L. Randall Wray MMT continues to inflame hysterical attacks. Who would have thought that it would take MMT to bring together everyone from the crazy right to the insular left to unite in common cause against an obscure theory … Continue reading →

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Is a Universal Basic Income the answer to poverty?

Published by Anonymous (not verified) on Sat, 16/03/2019 - 4:00am in

Capitalism does not permit an even flow of economic resources. With this system, a small privileged few are rich beyond conscience, and almost all others are doomed to be poor at some level. That’s the way the system works. And since we know that the system will not change the rules, we are going to have to change the system.

Martin Luther King Jr.

There is nothing more guaranteed to raise the heat in any political discussions on social media than the subject of Universal Basic Income versus the Job Guarantee. From the first Muslim caliph, Abu Bakr (who actually did introduce a guaranteed minimum income) to many others like Thomas Paine, Emperor Napoleon Bonaparte, John Kenneth Galbraith and Martin Luther King, many have suggested that the solution to poverty would be the introduction of a guaranteed annual income. With the persistent rise in poverty and inequality, it has become a hot subject in political and public circles. The trials of erroneously called ‘universal basic income’ schemes in Finland and Canada now curtailed are often the subject of fierce debate. For some, such schemes are seen as offering hope and come with great promises related to giving people a stable income to allow them choices in life and free them from the slavery of work. They promise people more resources and greater freedom to enable them to rise out of their poverty.

In the face of politically induced increasing homelessness, food bank use, income poverty and precarious work not to mention the perceived threat of automation they seem to offer to many a panacea to the ills of an exploitative capitalist system which has been aided and abetted by successive governments through the pursuit of liberalisation and deregulation. Successive governments, having embraced with enthusiasm the principle of “free markets” and wealth trickledown as a means to higher living standards and poverty reduction, are now, in the face of rising discontent and fear for their political tenure, seeking solutions.

Increasingly, a universal basic income is on the political agenda. On the left, it is being pushed as a means to fight poverty and the erosion of stable jobs, with pensions and benefits while on the right it is viewed as a way to restructure welfare systems. The Welsh Liberal Democrat leader Jane Dodds recently said that we need to look for progressive solutions such as a ‘Universal’ Basic Income. In Australia, the Greens have recently announced their plans for a trial of a UBI in New South Wales. John McDonnell, Labour’s Shadow Chancellor, is set to include a pilot for one in the next election manifesto. And, only this week, the New Economics Foundation thinktank in the UK has proposed that the tax-free personal allowance should be scrapped and replaced with a flat payment, ‘a weekly allowance’ of £48 a week paid to every adult over the age of 18 earning less than £125,000 a year (which has to be said cannot be described as universal). Of course, such ideas are scarcely off the drawing board and the trials that have taken place have been cut short for political reasons and proved inconclusive.

One cannot deny that poverty is indeed a scourge on society (and has been so down the ages) and the solutions to it in recent times have rested on political ideologies. The post-war consensus brought UK governments which pursued full employment policies and saw the creation of a social security system to protect people in times of unemployment, illness, disability and old age as well as the setting up of public structures for publicly paid for free health and education services. State promotion of full employment as a policy objective plus its involvement in the provision of public services benefited citizens and provided solid foundations for securing not just price stability but the idea that the role of government was to ensure the well-being of its citizens in the common interest.

This was challenged over decades by acolytes of neoliberalism such as Milton Friedman who argued for a basic income with the precise intention of eliminating welfare payments, social security, public housing, minimum wage laws and public health and social care and replacing them with the private and or charitable sector.
The oil crises in the 1970s proved a defining historical moment when Keynesian pump-prime economics hit the buffers and was discredited. ‘Free’ market ideology was restored its crown and over the next four decades became the predominant economic paradigm seeking to transfer control of economic factors away from the public sector to the private sector and challenging the role of government spending, regulation and public ownership. From the 70s onwards, politicians on both sides of the political divide embraced neoliberalism. This not only radically reordered the economic landscape from one based on the real economy to one run by a casino style banking and finance sector but also focused on the primacy of individuals as free agents in control of their own fates. The protestant work ethic was distilled into a war of divisive words – hard working people, skivers versus strivers and welfare scroungers. Ian Duncan Smith in 2015 told disabled people they should work their way out of poverty whilst in the same year George Osborne talked about people sleeping off a life on benefits behind closed curtains and repeated the need to deliver lower welfare. Even Labour’s Liam Byrne joined in during a conference speech saying, ‘Let’s face the tough truth – that many people on the doorstep at the last election felt that too often we were for shirkers, not workers.’

This divisive language stemmed from an ideology that, since Thatcher, has promoted the individual over the collective. The neoliberal purpose to shift responsibility from the state to individuals has been served by the creation of an insidious culture of blame, which has divided society whilst allowing capital free rein to pursue its exploitative employment practices and has resulted in a massive transfer of wealth upwards aided by government itself. It has allowed governments to increasingly withdraw from their role in delivering public purpose to one where citizens are left to fend for themselves. It has done this on back of the deliberate lie of austerity, which suggests that the state finances are like household budgets and that public services depend on tax receipts. The argument hinging on affordability has, instead, allowed governments to deliver their own agendas whilst leaving citizens with reduced safety nets and struggling to make ends meet.

In such an environment it is disappointing to see the newly vitalised progressive left in the UK, albeit in seeming good faith, supporting the UBI as a mechanism to deal with growing poverty and inequality and even up the wealth stakes. Whilst offering a bold and radical vision for a fairer and more equitable future for all along with policies to address the most serious threat the human species has ever faced, it is proposing through offering UBI, to mitigate for a rotten capitalist system and maintain the status quo. Having acknowledged rightly the economic inequality and its damaging social consequences they are proposing, in effect, a deal with the capitalists. As Edward Miller who is a senior campaigner for GETUP in Australia noted a standalone UBI doesn’t challenge capitalism it simply allows continued participation in it:
“Unconditional payments enable people to become consumers without challenging the domain of the market over production. It entrenches the aristocracy of producers who serve a democracy of consumers. It does nothing to provide people who are discriminated against or marginalised from the labour market due to their location, disability or educational background with access to the means of production. People unable to find paid work under the status quo will be unable to find paid work under a UBI. It creates no structure or framework to give people a path to forms of social inclusion that financial independence alone doesn’t offer. The best a UBI does for these groups is give them a near-poverty wage and leave them dependent upon the private or charitable sector to produce the goods and services they need.”

Addressing poverty and inequality within the context of the existing political and economic framework, treats working people as exploitable and disposable in employment terms and will simply serve, yet again, the interests of capital. Furthermore, the idea that it will alleviate poverty is yet another pot of gold over the rainbow. Non-existent. It is designed to entrench poverty and the capitalist wealth and power structures not liberate working people.

It is interesting to note, however, that our own progressive politicians remain mired in orthodox neoliberal paradigms of household budgets and bringing magic money trees back from the Cayman Islands, to pay for public services. These are feeble ambitions for introducing some form of universal basic income to address the disparities in wealth and equality instead of dealing with its source, the progressive left in the US is forging ahead with a radical plan for a Green New Deal combined with a Job Guarantee. These plans are surging ahead in popularity particularly amongst young Americans whose future lies in the balance not just in environmental terms but also in terms of their hopes for making better and more stable lives for themselves. Alexandria Ocasio Cortez, the newly elected Congresswoman when asked how such programmes will be paid for is not afraid to challenge the dominant but false household budget paradigms and talks openly about Modern Monetary Theory. A shift in the narrative is slowly taking place but, in an environment where, for now, orthodox economists and journalists are having a field day of ridicule, poking fun, unfair criticism and misrepresentation of modern monetary realities.

So, what is the Job Guarantee and why is it preferable to a UBI? What can it offer that a UBI cannot? Is it an optional extra for any progressive government whose policy choices are informed by an understanding of how a modern monetary system works?

Firstly, Modern Monetary Theory and the Job Guarantee are integral to one another. Over the last few decades, governments have allowed their economies to operate below full employment which has purposefully served capital and been detrimental to working people in terms of lowered incomes and job insecurity.

Secondly, it serves a very important macroeconomic function as a price anchor to subdue inflation and also as a stabiliser that maintains economic activity in the real economy when total demand falls below the level required to maintain full employment. A Job Guarantee works counter-cyclically, enabling nations to weather the cyclical economic downturns, an unavoidable feature of modern economies.

And thirdly, it restores the balance of power towards labour acting not only as a redistributive mechanism but also reducing the social and economic stress that unemployment brings and thus contributes to improved health and well-being. The empirical evidence of the advantages of having a job are well researched and charted and not just related to having an income.

So how does a Job Guarantee work and what can it offer? The Job Guarantee resolves the problem of the unemployment that government taxation creates, enabling the population to earn the currency. When the private sector cannot employ all workers, especially in an economic downturn, the government can step in by providing public sector employment, at a living wage, to facilitate transition to private sector employment as the economy grows. Fundamentally, it is a permanent employment programme, fully funded by the currency-issuing national government but locally operated.

It offers local councils, non-profit organisations and charities a funding pool to create local and useful employment, payment for which then circulates in local economies. It supports local communities in the delivery of unmet needs that the market has no interest in providing because they are deemed unprofitable. It is a voluntary scheme (unlike workfare), sets a minimum floor for wages and working conditions and offers employment security and training. To hire from the pool of JB workers, the private sector must offer an improvement on the JG wage rate and benefits.

It also invites us to be creative and rethink the definition of work in relation to a changing world where technology is increasingly playing a role in production and automation is replacing humans. It invites us to challenge the idea that automation is necessarily a bad deal for humans and gives us the possibility of thinking how it can release us from drudgery and dangerous occupations to open up many other possibilities. An opportunity to define roles which have real value and worth to our local communities, with the added advantage of ensuring social inclusion and improved human interaction – from beautifying our parks and public spaces, human services and social care, people using their creativity, skills and talents in our communities to bring worthwhile contributions to their better functioning. Indeed, it invites us to examine the current boundaries of productive labour and think in terms of human enrichment.

As Pavlina Tcherneva, a leading MMT economist and expert on the job guarantee notes there are millions of people who wish to work even at the best of economic times when conventional theory says we are at full employment. An employment guarantee could play a valuable role in helping to address the serious and harmful gaps in public provision to serve the public good. She refers to it as a ‘National Care Act’ which could focus on the creation of well-being not just for individual citizens but for our communities and the nation as a whole.

Such proposals are not pie in the sky; they are serious observations about the catastrophe that economic and political orthodoxy, monetarist thought and austerity has proved itself to be and the need for a revolution in thought and action. Left-wing progressives may have their hearts in the right place in their support for the UBI, but they need to think bigger beyond mitigating for a rotten system which has failed all but the very rich and has brought grinding poverty, rising inequality and environmental degradation. It needs to show a willingness to think out of the neoliberal box and challenge those in whose interests it is to promote such schemes.

As a final thought, why not think about an employment guarantee combined with a basic, living wage income for those unable to work for whatever reason along with access to universal basic services such as education and health and social care free at the point of delivery? And that should be just the start for creating a better, kinder and more sustainable world to ensure the common good and the future survival of our species. The challenges we face are not insurmountable we just need those with the real political will to act for change.





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The Day Orthodox Economists Lost Their Minds and Integrity

Published by Anonymous (not verified) on Sat, 16/03/2019 - 2:54am in

William K. Black March 14, 2019     Bloomington, MN Fifth Article in a Series on MMT Something extraordinary happened yesterday.  Orthodox economists, frustrated by their inability to intimidate progressive elected officials, have launched a coordinated assault on MMT in hopes of … Continue reading →

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Four “Tells” That Show Krugman Knows He Cannot Win an Honest Debate

Published by Anonymous (not verified) on Fri, 15/03/2019 - 7:46pm in

William K. Black March 13, 2019     Bloomington, MN Fourth article in the Series on MMT Honest debaters do not create strawmen arguments about opposing theories and then claim victory by attacking their own strawmen. When Krugman and a bevy of … Continue reading →

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Three Natural Experiments Documenting Krugman’s Bias Against MMT

Published by Anonymous (not verified) on Fri, 15/03/2019 - 9:45am in

William K. Black March 13, 2019      Bloomington, MN Third article in a series on MMT[1] I urge readers to review Scott Fullwiler’s brief paper on the theoretical and predictive successes of MMT scholars on a topic of enormous theoretical and … Continue reading →

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What Did We Learn From The MMT Maelstrom?

Published by Anonymous (not verified) on Wed, 13/03/2019 - 11:00pm in



My guess is that every prominent economist that wants to mouth off about Modern Monetary Theory (MMT) has already said their piece, and the arguments that swamped my Twitter feed may finally go back to their earlier levels. It is abundantly clear that the prominent New Keynesians who attacked MMT want it to disappear, but that seems unlikely (although I am obviously biased in that assessment). From the perspective of the history of economic theory, the neoclassical reaction was following past form, and we can expect the same patterns in the future.

The MaelstromThe early months of 2019 saw a flood of attacks on MMT, with almost all the articles following into the following types.

  1. Prominent neoclassicals presenting straw man versions of MMT and attacking those versions. Arguments were presented that MMT is "just" IS/LM. (This is not a new tactic, as I discussed this before.) Despite having top tier academic credentials, these luminaries are unable to provide any useful references from the MMT literature. 
  2. Left-wingers who otherwise have a negligible following have discovered that they can gain temporary prominence by attacking MMT. 
  3. Right wingers writing articles screaming that "MMT is socialism" and that hyperinflation is around the corner. (Admittedly, many of the prominent New Keynesians argued the same thing about hyperinflation.)

Since none of these attacks on MMT actually discussed MMT (with the exception of reviving some old internet arguments from the dead), there is literally nothing worthwhile to respond to. Instead, I will discuss what we can learn from this episode.

(On the chance that the reader wants to get a sample of these criticisms as well as a response, this article by L. Randall Wray offers some of the highlights.)
Update: I was Early (by a Few Hours)My call for "peak MMT madness" was off by a few hours; we reached the peak this afternoon (Montreal time). I do not apologise for being early: researchers need to inform clients of the trend change before it happens, so that they can position themselves accordingly.
The peak was the publication of this survey on MMT by the IGM Economic "Experts" Panel. In my view, it will be nearly impossible to upstage this piece of work.
The IGM describes these experts as follows:

For the past two years, our expert panelists have been informing the public about the extent to which economists agree or disagree on important public policy issues. This week, we are delighted to announce that we are expanding the IGM Economic Experts Panel to add ten new distinguished economists. Like our other experts, these new panelists have impeccable qualifications to speak on public policy matters, and their names will be familiar to other economists and the media. 

As for the survey on MMT, I leave the contents for historians of economic thought to judge. Any attempt to describe the current situation in economics will need to match the assertion that these are distinguished economists versus the questionnaire contents. To be fair to the economists surveyed, they were not responsible for the questions, and some noted that questions were ambiguous.
I draw the reader's attention to the second question:

Question B: Countries that borrow in their own currency can finance as much real [emphasis mine] government spending as they want by creating money.

If the premise of that question were correct, it would be possible for the United States Government to purchase eleventy quadrillion aircraft carriers in 2019. Needless to say, that is physically impossible, and most reasonable people would point out that the person asking the question has gone completely nuts. To be completely fair, at least one respondent noted that point, but it should have been completely obvious to everyone involved. (One might argue that the survey questions were probably written up by some intern or grad student, and they might not have expertise in macro, and so did not understand the implications of the question. However, it seems completely unlikely that there was nobody senior at the IGM who is taking credit for the surveys, and somebody who knows at least something about macro had to have fed some information to the unfortunate survey builder.)

No competent historian of economic thought would actually impute that view to MMT. If the word real in the question was changed to nominal, you would run into the MMT position: if the government wants, it can outbid everyone for the finite stock of real goods and services on offer -- with the side effect of driving up the prices for those goods.

If anyone wants my opinion on the intellectual integrity of economics, I think they need to think deeply about the implications of this survey.
Keep Doing What I am DoingI largely confine my writing to a narrow segment of macroeconomics: the parts that rates market participants care about. This spreads out into a lot of topics of interest to others -- i.e., the limits of fiscal policy -- but such readers are more interested in the analysis of policies that are being proposed, not proposing new ones themselves.
For such a reader, this whole episode is just an embarrassment for the so-called authorities among the neoclassicals. If one is interested in the theory, one does not care about straw man attacks on it. The only question that really matters: is it a theory that is progressing, or regressing? I am writing about MMT for a reason, and that is the reason. I am currently researching a book on recessions, and unlike the various New Keynesian luminaries, I am going to give a good faith summary of the theories I am not a fan of. Unless I run into some gems of new research -- which I accept as a possibility -- neoclassical theory has severe drawbacks when compared to post-Keynesian approaches in that area. 
I saw three common lines of criticism of MMT, which I may keep in mind when writing, and the reader might be interested in pursuing. As I will explain in detail, I think these arguments are misunderstandings of the actual situation.

  1. Does MMT have empirical work?
  2. Do MMTists question their assumptions?
  3. Does MMT have formal theory in the form of mathematical models?

I will discuss these in turn.Empirical Work
One of the reliable stylised facts about economic discussions around MMT is that a condescending neoclassical graduate student will appear to announce that MMT has no empirical work. This is the result of The Iron Law of Research: if you do not read the literature, you will not find the research.

When I was first introduced to MMT, even though I was a mere control systems engineer looking at economic theory in my spare time (day job was rates analyst), I managed to find Full Employment Abandoned by William Mitchell and Joan Muysken. It is a mixture of theoretical and empirical analysis of trends in the labour market, and offers a compelling alternative explanation to the collapse of inflation in the 1990s. If I could do that, what exactly are they teaching neoclassical doctoral students in economics nowadays?

There's certainly more empirical work; there's at least one in the L. Ranndall Wray article I linked earlier; one can search the resources at Since MMT covers a lot of ground developed over decades, there's a lot of empirical work already done. It's up to the reader to find work of interest.

The MMT-oriented institutions do not have the funding that is showered on neoclassical economic research; for obvious reasons, the pure numerical statistical work is going to be done at "mainstream" institutions. The post-Keynesians have access to the very same statistical packages as the mainstream, and so many of the tools are the same. The methodologies differ, for reasons that are well articulated by the heterodox community.

I am applied mathematician; I do my own empirical work, thank you very much. Since nobody wants to read boring stuff about statistical tests, I shy away from that. For the very same reason, MMT primers on the internet don't attempt to lose readers by regurgitating statistical mumbo-jumbo. The "empirical" content will usually cover the cases where the neoclassicals were hilariously wrong -- which is extremely empirical, just the neoclassicals want to ignore those episodes.

I have eccentric views on economic models. They are:

  1. You cannot do good empirical work in macroeconomics without reference to a good model.
  2. All macro models are terrible. (My stepped up version of the "all models are wrong" mantra that various mainstream economists intone, without actually thinking about the implications.)

Put those two points together, and guess what? One ends up with profound skepticism about academic empirical economics. I do not think I was completely alone in that view, although I was probably an outlier in terms of awareness of the issue. I both produced and consumed interest rate research for about fifteen years. On paper, the mainstream empirical research ought to have been up the alley of rates market participants. In reality, very little was looked at. My explanation is straightforward: academic/central bank research is judged on its ability to impress peer reviewers; market research is only judged on its ability to make money. Making money is far more objective and stern criterion than vomiting the results of statistical tests that are chosen by convention.
To repeat: these are my views, and not "MMT's". That said, I am far more sympathetic to the post-Keynesian approaches to empirical work than the mainstream's as a result of those prior views.

Finally, there are questions about empirical testing of MMT proposals. If one actually read the MMT literature, the argument is made that the Old Keynesians as well as the New Keynesians approached fiscal policy incorrectly with aggregate demand management. The models relied on aggregated behaviour, and the hope was that a rising tide would lift all boats equally. This is exactly what did not happen, and so inflationary bottlenecks crop up. To fairly do an empirical analysis of MMT policies, we would need a data set of countries where policymakers listened to MMTists, not neoclassicals.Questioning Assumptions
Although not repeated as often, I saw a few variants of the criticism that MMTists do not question their assumptions, or less politely, "a cult." The usual phrasing invokes Scientism: it's scientific to question your assumptions!

Having gone through an undergraduate degree in the applied sciences, I would respond that these representations of the sciences are highly questionable. Undergraduates are taught year after year with the same texts. We do not see Circuits I professors stopping in the middle of lectures and asking: what if Kirchoff's laws are wrong? Even in my field of control systems, I would have been happy teaching an intro course to signals and systems using a textbook that was decades old -- even though the entire research and advanced design paradigm had shifted. The internet/op-ed arguments about MMT are on basic issues, for which no new information has arrived for decades. For more esoteric topics, research is ongoing.

However, to understand MMTist behaviour, we need to step back and think about the context. Modern Monetary Theory fits within "broad tent post-Keynesianism," as described by Marc Lavoie in Post Keynesian Economics: New Foundations. (There are a few "narrow tent Post-Keynesians," who dislike MMT, but tough luck for them; nobody is going to come up with another label for "broad tent post-Keynesianism" to please a shrinking group of zealots.)

That is, MMT is a sub-set of post-Keynesian economics. There's a few constraints on a theorist to stay within that set; probably the most important of which is an affinity to a floating exchange rate. If a theorist questions a few assumptions of MMT, they just end up being classified as another branch of post-Keynesianism. Why should anyone care about that?

It takes a lot of effort to move from inside the post-Keynesian set to an internally-consistent set of beliefs. I've only really encountered the following alternative (internally consistent) views:

  • neoclassical economics, which is split into different genres;
  • doctrinaire Marxists (I think some Marxists sneak into the edge of post-Keynesianism);
  • Austrians;
  • physical scientists pushing mechanistic models of the economy.

If you look at this list, you realise that in order to not be a post-Keynesian, you have to reject almost everything in post-Keynesianism, which is far beyond questioning an assumption or two.

If one reads between the lines of Lavoie's book -- which lovingly details the dozens of factions within broad-tent post-Keynesianism -- one can see that post-Keynesians managed to rip themselves to shreds in completely pointless theoretical disputes. (My Twitter timeline used to be filled with such attacks before they became so deranged that I quietly did a mass unfollow.) Given that behavioural pattern, one is perhaps not surprised by how post-Keynesians were marginalised in the overall debate on economics. The "MMT project" dropped the emphasis on the petty infighting, and instead focusing on advancing a theoretical/policy agenda. As such, MMT is self-selecting: whiners who want cry about minor details select themselves outside of the group. More politely, MMT is characterise by "joiners," not "splitters" (I think that Marc Lavoie used that terminology in a different context). Such cohesive behaviour is not unprecedented: by forcing macro research to use the DSGE paradigm, the mainstream selected out the heterodox elements.Formal Theory
In my lengthy experience, people fetishize mathematical models in economics and finance. In the case of finance, the mathematical models have an important place, but the reality of mark-to-market accounting tends to constrain one's enthusiasm. In economics, the inherent difficulty of forecasting really hammers the simplistic nature of mathematical models.

There are plenty of mathematical models in the MMT literature; they are almost all (I believe) stock-flow consistent (SFC) models (and perhaps some toy models that might be special cases of SFC models). These models are mathematically simple, but the simplicity is based on some very cagey analysis of the limitations of mathematical models in macroeconomics. Speaking as an applied mathematician who learned economics on the job, the wrong place to understand SFC models is in complex models in the literature. Instead, you need to start with the basics, and learn why the models are constructed the way they are.

I would argue that Godley and Lavoie's Monetary Economics is the go-to textbook for that. My book on SFC models in Python offers an inexpensive, breezy introduction to the concepts, but I would argue that it is best a sampler for the delights found in Monetary Economics (unless you want to use my Python sfc_models package, as it is the de facto user guide).

The key is that you do not fall into the trap I have seen others fall prey to: you cannot strip out the mathematical model and then ignore the text around it. These models have limitations -- remember, all models are terrible -- and the eye is immediately drawn to those limitations. In most cases, the key is not learning how SFC models work, rather it is unlearning your prior assumptions about mathematical economic models.

Obviously, people will want to debate the models. However, that requires that they actually roll up their sleeves and read the literature.

Finally, I want to underline that we cannot capture all of MMT with mathematical models. For example, one of the more interesting parts of MMT research for rates market participants is the legal analysis of default, monetary operations, and the framework for central bank independence. If we want to use mathematical models, we cannot fit them to what we want to happen, they have to match the legal reality we live in. In reality, floating currency sovereign default is hard to arrange within most (all?) institutional frameworks, and we need to listen to legal opinions, not those of finance bros.
Room for a Neoclassical-MMT Synthesis?Anyone coming to the horror show of academic economics from another field has to wonder whether there is a better way. Anyone with an applied science background would be very tempted to rip out all the mathematical models and empirical work out of the existing body of knowledge, and start over.

I have sympathies for that view. The creation of a collective group that writes a self-contained economics text that publishes under a pseudonym and similarly ignores claims of academic precedence might solve a lot of problems. However, that is easier said than done: the theory determines what are acceptable models and empirical methods.

In particular, one might ask: can neoclassical economics swallow up MMT? Certainly, one could use neoclassical arguments to justify the same policy proposals as MMT, but that just tells us about the theoretical ambiguity of neoclassical macro. Since the leading lights of neoclassical economics refuse to even cite MMT papers, one could easily imagine them claiming to have covered "MMT" with some neoclassical thinking.

However, for anyone who is intellectually honest, swallowing MMT would be pretty awkward. If we look at the actual contents of MMT papers, they are filled with discussions how the underlying assumptions of neoclassical models are outright incorrect. That's going to be pretty hard to reconcile.

Even more limited contributions will not be embraced by the entire neoclassical community. The fear of "bond vigilantes" and "the 90% debt limit" were already laughable within the context of neoclassical models; they did not need MMT to reject such thinking. However, making up vague stories about debt limits is too politically useful for neoclassical economists as a class to give up. We end up with the strange situation of neoclassical economists disclaiming any responsibility for the policies followed by other neoclassicals (e.g., austerity). Was this not supposed to be a rigorous, mathematical, science? This shiftiness turns neoclassical economics into a giant game of Calvinball.

Furthermore, it is very hard to see the central bank-oriented neoclassical consensus embracing the actual contents of MMT thinking about monetary policy. I admit that I am perhaps too cynical, but I cannot see how embracing a view that interest rate policy is possibly ineffectual -- and possibly with the opposite sign assumed by convention -- is anything other than a career-limiting move in a central bank. Perhaps I could be proved wrong, but I will believe it when I see it.
Concluding RemarksFor those of us who are interested in economic theory as theory -- and not a battleground for political economy -- the recent uproar told us nothing.  (I am interested in political economy, but as usual, I am an eccentric on that front as well.) There are good faith arguments about MMT, but you need to read the damn literature in order to discuss those.

I hope that this is the end of my comments on the internet/media brouhaha. I have been waiting (for a long time) for the "big" MMT macroeconomics textbook before I turn to write some primers on topics of interest. These primers would hopefully answer some of the legitimate theoretical questions people have (including myself, as I have a hard time differentiating "MMT" from "post-Keynesianism," as I do not make a big deal about distinguishing the two).

NOTE: The book covers that appear in my articles are affiliate links to the books on; I get a small fee if you follow them and make a purchase. The three books by other authors are highly recommended if you want to get a handle on these topics. Once again, I am book-oriented in my learning, not article-oriented. 

(c) Brian Romanchuk 2019

Lara-Resende and MMT in the Tropics

Published by Anonymous (not verified) on Wed, 13/03/2019 - 2:24am in

So André Lara-Resende, who I discussed here before, is again writing on the crisis of macroeconomics (in Portuguese and you might need to have a subscription), and now instead of embracing the Fiscal Theory of the Price Level (FTPL), has supposedly embraced Modern Money Theory (MMT). Many US MMTers cheered this as a demonstration of the reach of MMT in other countries. I would be less cheerful.

Lara-Resende, let me explain to non-Brazilian readers, was a student of Lance Taylor at MIT, and then a professor at the Catholic University in Rio, being a key author of inertial inflation, an heterodox view of inflation, that was central for the failed Cruzado Stabilization Plan back in 1986. He then participated in the successful stabilization of the economy with the Real Plan, when Fernando Henrique Cardoso was the finance minister in 1994, and during the latter's presidency a short lived president of the development bank (BNDES, in the Portuguese acronym) -- and not the central bank as many in the US have suggested (that was Persio Arida, his frequent co-author on inflationary inertia). Btw, he fell as the head of the bank because he was recorded in conversations with the president (Cardoso) on issues related to the privatization process of the telecommunications sector, in which they seemed to favor a particular group. The development bank during this period was essentially used to promote privatization as a part of the so-called Washington Consensus policies. Also, by the 1990s all the economists from the Catholic University had adhered to the Washington Consensus, and moved away from heterodoxy in the same way Cardoso distanced himself from Dependency theory, and still remain essentially aligned with neoliberal policies to these days. Lara-Resende included, as we will see.

Note that he does say that the four pillars of the new macro are that money and taxes are connected, that the government has no financial constraint, but only a real (capacity) constraint, that money is endogenous (the central bank sets the interest rate), and that the Domar rule holds and stability of debt-to-GDP ratios require the interest rate to be lower than the rate of growth. He also says inflation is all about expectations, and the Quantity Theory of Money (QTM) does not hold, something he had already said in his previous op-ed. Many (too many) interpreted this as being Chartalist Money, Functional Finance and Endogenous Money and as such as a version of MMT. Including some analysts in Brazil, with whom I fully agree on their critiques of Lara-Resende's policy conclusions, like the sharp critique by Guilherme Haluska here (also in Portuguese). Note, however, in my previous post on him, that he thought that the FTPL was an heterodox view of the macroeconomy, and he is explicit in his new op-ed that his ideas follow from his last book, in which he defends the FTPL.

In his book what he refers to "heterodox" is the experience with alternative monetary policies after the 2008 crisis, meaning Quantitative Easing, simply because it does not follow the QTM. In his words, from the 2017 book: “The result of the heterodox policies of the central banks in advanced economies, after the financial crisis of 2008, raised serious doubts about some fundamental points of the foundations of macroeconomic theory" or in the original if you don't trust me as a translator (I don't): "O resultado da experiência heterodoxa dos Bancos Centrais dos países avançados, depois da crise financeira de 2008, levantou sérias dúvidas sobre alguns pontos fundamentais da teoria macroeconômica." He does say that one of the pillars of the new macro paradigm is in his 2017 book, but my guess is the ideas are essentially the same. He used the language of MMT, and cited Knapp and Lerner to promote the same neoliberal policies of the 1990s, and the same ideas he defended a couple of years ago using FTPL.

So it is clear that the pillars are essentially of some weird New Classical story of the FTPL, in which fiscal dominance is central to the argument, and there is endogenous money, because of the neo-Wicksellian twist in modern macro. Yes, the QTM does not hold, but it is the expectations about future inflation that matter, and those are tied, in Lara-Resende's views, to fiscal policy (or at least were two years ago). The argument is the fiscal dominance one, that monetary policy has to deal with the unsustainable debt, so inflation is a fiscal phenomenon, and fiscal adjustment is needed. He was and is for austerity! He does use an MMT rhetoric and cites Abba Lerner for sure (more on that below), and that's a testament of the current relevance of MMT and its role in shaping the Bernie and Ocasio-Cortez's progressive views (something positive as I noted in my last post).

His argument is that Brazil is on the wrong side of the Domar stability condition, and, hence, the debt-to-GDP ratio is increasing (in domestic currency), and that something has to be done about it. Not sure why. Note that I always say that in domestic currency there is no default, and one of my complaints about MMT is that they do not pay attention to debt in foreign currency (at some point Warren Mosler was against capital controls and for flexible exchange rates, since the former were not necessary and the latter would solve external problems). But Brazil is not borrowing in foreign currency, and is sitting on top of a mountain of foreign reserves (something like US$ 380 billion, last time I checked, someone correct me if I'm wrong). Then he argues that inflation is all caused by excess demand in the developmentalist period, the period from the 50s to the 80s. However it is unclear why that is still a problem, or why there was excess demand, if it wasn't as a result of fiscal policy.

Fiscal reform, and, in particular, the pension reform are needed not to raise revenue (here is an MMT theme), in his view. He suggests that the reasons are that the pension system is unfair, and that in Lerner's fashion [sic] tax cuts are needed to promote the reduction of bureaucracy and allow for the expansion of more effective private investment.* These should be complemented with trade liberalization, a lower interest rate with a digital currency (bitcoin?) and fiscal adjustment, because the State is "bloated, inefficient and patrimonialist" (in the original: "Estado inchado, ineficiente e patrimonialista").

With friends like these, who needs enemies?

* It's true that Brazil has relatively high levels of taxes, in comparison to developing countries, but the problem is not that they are high, per se, but instead that they are regressive.

Big Guns Shooting Holes in the Sky

Published by Anonymous (not verified) on Wed, 13/03/2019 - 12:28am in

The New Keynesian monetary mainstream has brought out the big guns. Paul Krugman, Kenneth Rogoff, and Larry Summers have come out to shoot down the rising star known as “MMT,” which stands for Modern Monetary Theory. For a while, it was academically convenient to withhold paying any public attention that could foster competition in the field. Like other non-mainstream ideas in economics, MMT was simply ignored by our star mainstream economists, who are always ready and keen to lend their wisdom and advice for public action. Now that MMT has reached the public debate through arousing interest among powerful public voices, fostering political debate about available policy options, protecting the mainstream monopoly of opinion has prompted them to take aim at MMT.

The key issues in the battle of ideas between Paul Krugman (New Keynesian monetary mainstream of the IS/LM variety) and Stephanie Kelton (MMT) are out there for everyone to see (see Krugman, Feb. 12th; Kelton, Feb. 21st; Krugman, Feb. 25th; and Kelton, Mar. 4th). It is noteworthy that the two do not seem to be all too far apart regarding their preferred policy agenda. At its core, the controversy really concerns monetary theory – including the question of what kind of money and monetary economy any relevant monetary theory should theorize about. Regarding this particular battle, I will only add that Keynes, in his response to John Hicks’ (1937) IS/LM model interpretation of The General Theory, addressed the very point that Krugman and Kelton strongly disagree on.

In terms of the IS/LM model that Paul Krugman is so very fond of, increased government spending means increased government borrowing pushing against an upward-sloping LM curve that generates a rising interest rate, and hence “crowding out” of private borrowing and spending.

Remember here that the LM curve’s upward slope stems from the assumption of a given money supply apparently controlled by the central bank (Keynes preferred the notion “pool of liquidity” as provided by the banking system). When Hicks highlighted this outcome in his seminal 1937 article, Keynes responded:

From my point of view it is important to insist that my remark is to the effect that an increase in the inducement to invest need not raise the rate of interest. I should agree that, unless the monetary policy is appropriate, it is quite likely to. In this respect I consider that the difference between myself and the classicals lies in the fact that they regard the rate of interest as a non-monetary phenomenon, so that an increase in the inducement to invest would raise the rate of interest irrespective of monetary policy, — though they might concede that monetary policy was capable of producing a temporary evaporating effect. (Keynes 1937, Collected Writings, vol. 14, p. 80)

In contrast to the [neo-]“classicals,” Keynes regarded “the” rate of interest (i.e., the whole complex of interest rates featuring risk, term, and liquidity premiums) as a purely monetary phenomenon. According to his liquidity (preference) theory of the rate of interest, interest rates reflect a portfolio equilibrium, a (momentary) balance between those that need to be convinced (rewarded) to give up any liquidity they may have together with the willingness of the banking system to meet any pressures for more liquidity as generated in growing economies (thereby enlarging the pool of liquidity available to appease the nonbanks’ preference for liquidity at any time).

The point emphasized by MMT is that modern money, unlike commodity monies such as gold that the mainstream traditionally has in mind, is ultimately a creature of the state, a token that owes its value to the fact that the state requires its subjects to pay taxes in terms of the very token that is a creature of the state. It is a matter of pure logic to accept that for these subjects to be able to pay their taxes in terms of said monetary tokens, the state has to first issue its money.

While featuring the state, this point also highlights the logic of capitalism: the “money-first principle.” For without money (liquidity, really), not much will happen in a capitalist economy. In a monetary production economy, for anyone to order the production of anything, you need to get your hands on money first (which may of course feature many forms of credit, including shadowy ones). It takes money – obtained from the financial system where it is made – to spend, produce, or acquire assets. This point was at the heart of the “finance motive” debate following the publication of The General Theory, a debate that allowed Keynes to drive home the vital insight that “loanable funds theory” was fatally flawed. In preindustrial agrarian economies, the saved corn provides the seed (the investment) that yields next season’s harvest. By contrast, in capitalism, economic activity in monetary production economies is not drawing on some preexisting pool of saving or loanable funds, but on the pool of liquidity as provided by the financial system.

Stephanie Kelton emphasizes that a state in control of its own sovereign monetary tokens can be thought of as spending these tokens into existence. Increased government spending then pushes liquidity into the system – while bond issuance is the means and monetary policy tool used to mop up liquidity from the system. In other words, bonds are issued to control interest rates – but not to collect any saving or loanable funds from some imaginary loanable funds market used to “finance” government spending, as Mr. Krugman would have it. And it makes no material difference here if, as a practical matter, the tokens are not generally spent into existence but are born when the central bank buys (“monetizes”) any assets. The government may issue bonds to fill up its account balances at the central bank or banks before it spends from it, while the central bank manages the liquidity it provides the system so as to maintain its desired target rate of interest. The point is, as Keynes emphasized in his response to Hicks, that at issue is deciding the “appropriate” monetary policy – rather than any invisible hand market mechanism ruling in some imaginary loanable funds market.

One can be brief on Kenneth Rogoff. It appears Mr. Rogoff felt a strong enough urge to declare that MMT was nonsense – but didn’t really have anything of substance to say on MMT, or didn’t care to even try to do so. His foremost concern in his op-ed “Modern Monetary Nonsense” appears to be that MMT would result in excessive public debt, mount an attack on central bank independence, and ultimately end in hyperinflation. It is not the first time that Kenneth Rogoff has issued such scares.

For anyone willing to take their cue from Kenneth Rogoff, just remember here that this particular mainstream greatness was a key leader in the debate raging in the aftermath of the last big crisis about whether western governments were facing bankruptcy and should therefore better embrace austerity before it was too late. At the time, Kenneth Rogoff came up with the magical number of 90 percent for the public debt ratio as the critical threshold that would see growth crumble and debt disasters unfold. Too bad not everyone realized quickly enough that his magical number was based on flawed arithmetic. Take a look at what happened over in Europe when, under German leadership, countries collectively embarked on a mindless austerity crusade. Their efforts were so successful that the European Central Bank (ECB) is today still keeping interest rates in negative territory while the economy continues struggling to recover from the public finance insanities inflicted on it.

Kenneth Rogoff had further great ideas. I still remember when I first came across Mr. Rogoff’s famous call for “conservative” central bankers as a graduate student at Cambridge U.K. in the early 1990s. This was in the context of the debate about central bank independence, made fashionable by ideas like Mr. Rogoff’s. It was conventional wisdom among mainstream experts that the Bundesbank was the model of a conservative central bank. As it happened, the Bundesbank came to bequeath its sound money conservative wisdom to the ECB when the euro was launched in 1999, and it still plays the role of the guardian of monetary conservatism in European monetary affairs until today. Incidentally, it took until 2015 for the ECB to finally embark on QE. Not everyone is still convinced today that central bank conservatism might offer any free lunch.

Academics sometimes seem to have great trouble observing what central banks are actually doing. In fact, there appear to be long and variable lags in mainstream monetary economics between fashionable academic modeling exercises and actual central banking practices on this planet. If you need any further evidence, check out modern macro text books (including Paul Krugman’s). They are still full of banks that collect loanable funds in the form of deposits to be lent on as loans while multiplying some money base helicoptered upon them by the central bank. If some mainstream theorists seem upset about the appearance of the word “modern” in MMT, could it be that they are subconsciously aware that much of mainstream monetary economics is awkwardly pre-historic? Even the Bundesbank, of all central banks, has by now openly declared that mainstream textbook fictions about banking and money creation were nothing but stale monetary nonsense.

But at least in one respect the mainstream has caught up with central banking reality: variables representing some money supply have disappeared from the monetary policy literature and given way to interest rate rules like the famous “Taylor rule,” describing how a central bank should set its policy interest rate to keep the economy in non-inflationary, full resource utilization equilibrium. While Taylor rules are generally understood as guideposts for sound monetary policies, central bankers are still understood as chasing some invisible Wicksellian “natural rate” that the imaginary loanable funds market is supposedly grinding out as the system’s intertemporal anchor.

In contrast to Messrs. Krugman and Summers, who are on the liberal side of the New Keynesian mainstream spectrum, Messrs. Rogoff and Taylor represent the conservative side of the mainstream money crowd. Rogoff’s preferences for “conservative” central bankers and central bank “independence” have survived until today and are shared by many liberals. John Taylor has prominently attacked the Greenspan Fed for keeping its interest rate too low (i.e., below “the” Taylor rate) for too long before the crisis. And he also attacked the Bernanke Fed when it embarked on QE, declaring (together with a group of conservative compatriots) that this would debase the (gold?) dollar and put the U.S. on the Weimar path. With some amusement we could all witness last year that not even monetary nonsense of this magnificent caliber would prevent John Taylor from getting an interview with the president for a job that he is quite obviously not qualified for (and I will refrain here from turning this observation into a pun about the president).

Let’s turn then to Larry Summers. Larry Summers is not only a well-known mainstream Keynesian monetary economist. He also played prominent official roles: at the World Bank, at the U.S. Treasury under President Clinton (highly instrumental in liberalizing finance both nationally and internationally), and the National Economic Council for President Obama. At one point he was also a candidate as Federal Reserve chair. It is said of him that he is usually the smartest person sitting at the table. Reading his Washington Post op-ed made me wonder what kind of people Mr. Summers tends to share a table with. In his contribution to the debate, he took an embarrassingly shallow shot at MMT, referring to it as a set of “new ideas [that] are being oversimplified and exaggerated by fringe economists who hold them out as offering the proverbial free lunch.”

Most of what he says is completely beside the point, because MMT does not deny that there are real resource constraints that any government, even a left-wing one advised by fringe economists, has to acknowledge. In fact, the whole point about MMT is to get government to focus on the real policy options available and not get distracted by allegedly missing money or missing loanable funds or any such mainstream money lunacies.

What is most remarkable is that Larry Summers almost seems to refuse to talk about the U.S. and the relevance of MMT in the land of the dollar. Instead, he refers to emerging markets that have allegedly undertaken MMT experiments. And he also refers to European countries that have allegedly done so too: “The Mitterrand government in France in 1981 and the Schröder government in Germany in 1998 began with MMT-type approaches to policy and were forced to reverse course.”

It is true, the French government did make a critical macro policy U-turn in the early 1980s. In the early 1980s, West Germany chose to pair tight money with fiscal austerity, burying any remnants of Keynesianism that may have existed in the country before. Mitterrand’s France made the consequential decision to accept Bundesbank diktat. In intricate ways, this French decision prepared the ground for the euro’s launch in 1999. The immediate consequence of France’s U-turn of the early 1980s was what Americans pitifully refer to as “eurosclerosis”: unemployment got stuck at high levels. Hence, public debt levels increased too, driven by unemployment and crazy-high interest rates.

The U.S. approach was quite different. The U.S. combined tight money (“Volcker shock”) with Reagan’s fiscal expansion caused by drastic cuts in marginal tax rates coupled with huge increases in military spending. This policy-mix certainly failed to deliver on wild promises of the Laffer-curve “voodoo economics” kind, but at least it avoided stagnation and “yankeesclerosis.” Mr. Summers declared he doesn’t think much of voodoo economics; and neither do I. But he does not explain what he liked so much about the French macro policies at the time (and after), saving France, apparently, from MMT.

Larry Summers’ remarks about Germany’s macro policy shift in 1998 are even more puzzling. I still lived in Germany at the time and I was unaware of any MMT experimentation or even discussion thereof. What I saw was permanent austerity combined with, starting around 1996, wage repression. We all know where Germany’s “sound money” choices have gotten Europe in the meantime. In the beginning, Germany only turned itself into the “sick man of the euro.” Later on, the relentless German drive for über-competitiveness wrecked the Eurozone. Germany continues to run huge current account surpluses as well as budget surpluses until this day. And Mr. Trump is congratulating Mrs. Merkel on her unparalleled macro policy successes almost daily. It appears Larry Summers also likes the policies that Germany adopted after, apparently, reversing course away from MMT in 1998.

Essentially, Mr. Summers is setting up an MMT strawman in his Washington Post op-ed: anything he ever saw (or thought he saw) and didn’t like, gets defined as MMT. The shots he takes, supposedly at MMT, are nothing but hot air. He repeatedly warns of “voodoo economics” and “monetary nonsense” in referring to MMT. It turns out Mr. Summers is a closet admirer of “sound money” à la Buba. Beware what you wish for.

Let me show my hand then. I am not an MMT follower, but an MMT sympathizer. I am foremost a Keynes scholar; you may consider me a traditional Cambridge Keynesian if you like. I sympathize with MMT for two reasons. First, MMT offers a logically coherent theory of money and a framework based on observations about money and monetary economies on this planet. (If you consider the mainstream neoclassical theoretical framework consistent, you are either ignoring the “loanable funds fallacy”—see here and here—or you should at least admit that your preferred theory is not about money and monetary economies on this planet.) Second, I appreciate MMT’s refreshing impact on policy debates. MMT seems to help liberate us from the box (or: monkey house) in which neoliberalism, with the help of our great mainstream monetary thinkers, has trapped us.

There is a peculiar contrast in U.S. politics. Republicans talk a lot about public debt but when in power make it clear that they could not care less. For three times in a row, Republican (Reagan-Bush 1, Bush 2, and now Trump) policy choices have blown gigantic holes through public finances. Somehow the U.S. did not experience hyperinflation and the U.S. dollar is still king. Democrats, on the other hand—similar to Germanized Europe in this respect—have been trained (by whom?) to focus on balancing the budget above all else and forgetting about their real policy priorities. Because somehow the money isn’t there or the needed loanable funds are in short supply on just those occasions. That’s terrific nonsense of course, and MMT provides a welcome wakeup call – even if our mainstream New Keynesian friends don’t seem to like that so much.

It feels weird to explain to neoclassicals—who really only ever do “real analysis” and at best treat money as a mostly “neutral” add-on—that it is the real resource constraints that matter in making our political choices. Of course, there is no free lunch in an economy that cannot mobilize any more real resources. But don’t try to fool anyone by declaring that a lack of money or loanable funds would prevent the U.S. from going for a “Green New Deal.”

I commend Paul McCulley’s call for open-mindedness in this controversy. In contrast to Blackrock’s “garbage” talking Larry Fink, former Pimco Fed watcher Paul McCulley understands money and central banking. And I also recommend reading Conor Sen’s reminder of how well the promises of mainstream monetary economics – instrumentalized to peddle neoliberalism – have worked out for the few while the many got fleeced. If you want to get the usual monetary nonsense, you know where to go. If you think it may be time to think afresh, check out MMT with an open mind.

In a sober moment, with an open mind and mindful of the standards of intellectual honesty and academic integrity (perhaps after chatting with Brad DeLong), I even venture the thought that Larry Summers might come to look back at his Washington Post op-ed of March 5, 2019 with embarrassment.