Paying for Hurricanes

Published by Anonymous (not verified) on Tue, 18/09/2018 - 11:50am in

By J.D. ALT What you believe America can build—or rebuild—as a collective society hinges on how you answer one fundamental question: When the U.S. government issues a treasury bond, is it “borrowing” money that must be repaid with future tax-dollars—or … Continue reading →

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Jayadev/Mason Article On MMT

Published by Anonymous (not verified) on Mon, 10/09/2018 - 10:37am in



Arjun Dayadev and J.W. Mason recently published "Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?", which suggests that the gulf between Modern Monetary Theory (MMT) and mainstream macroeconomics is smaller than suggested, that MMT is much closer to orthodoxy than is normally portrayed.

I have been battling with installing a locking floating floor, which is an engineering task that I discovered that my doctorate in engineering provided little training. As a result, I have been somewhat distracted, and only quickly read the article.

I am unsure how the academic MMT community will view the paper; being portrayed as orthodox is perhaps not the way that they think of themselves. Furthermore, some of the theoretical points run into the thorny questions of academic originality. As an ex-academic, I understand concerns about originality and distinctiveness. Since I only browse the economic academic literature looking for useful tidbits, I cannot comment on the academic originality of MMT.

From my decidedly ex-academic perch, I am open to the idea that the gulf between the mainstream and MMT in policy terms is more a question of political economy and terminology. If mainstream economists actually paid attention to the mathematics that they say is so important, a lot of the distinctions with MMT would disappear. Essentially, they have built qualitative folklore around not particularly useful mathematics. Modern Monetary Theory is battling with the folklore, not the mathematics.

I just want to comment briefly on a few points that I saw some disagreements. (These are the points that stuck out to me when I was sprawled on top of a pile of building materials, and are not necessarily the most important parts of the paper.)
InflationThey state the following:

Output below this level implies unacceptably high unemployment and perhaps deflation; output above this level implies unacceptably high and/or rising inflation. This assumption can be represented as a Phillips curve, the same general form of which is used by MMT as in conventional textbook presentations. A corollary is that policy affects inflation only via the level of output.

From what I have seen, the MMT story on inflation is more complex than that text suggests. The "nominal price level anchor" provided by the Job Guarantee wage is constantly emphasised. My interpretation of the Functional Finance part of MMT as suggesting that "large enough" fiscal loosening leads to inflation -- but until we hit that "large enough" level, inflation may do whatever it does. The psychological anchoring of wages relative to a Job Guarantee wage may be far more effective tool for inflation stability than changing the overnight rate on risk-free collateral.

If the MMT inflation story was as simple as just a Phillips curve, why don't they say that themselves?
Aggregate Demand ManagementThe article was premised entirely on aggregate demand management. And MMT economists have discussed such aggregate management with respect to current events. However, the emphasis in MMT is on using a decentralised automatic stabiliser -- the Job Guarantee. The key advantage of the Job Guarantee is that it is spatially targeted at the areas of greater need.
The Debt Ratio (My Perspective...)

We noted above that while MMT advocates would probably agree that the debt ratio should not rise without limit, in general, they do not see the debt ratio as an important target for policy. 

I cannot speak for MMT academics, but I am far more worried about a Martian invasion than a country's debt ratio rising without limit.

If we start from a stock-flow consistent modelling perspective, we assume that the stock of private sector wealth enters into consumption decisions. As the government debt ratio rises, by definition, private sector wealth is rising. Eventually, the drawdown from saving will dwarf spending out of income if it is not otherwise budging. The increased spending creates a circular flow of income, driving nominal GDP above expectations. Since the duration of government debt is not zero, the debt-to-GDP ratio will fall -- as exactly happened in the post-war uplift in inflation.

As always, inflation is the limit for fiscal policy.

This allegedly does not happen in mainstream DSGE models, mainly because the mainstream economists make no real effort to solve the models. If they actually did the math, they would probably see the same effect.

(c) Brian Romanchuk 2018

Japan And The Costs Of Bond Yield Control

Published by Anonymous (not verified) on Thu, 06/09/2018 - 12:03am in


Japan, MMT

 10-year JGB Yield
The dangers of distorting free market interest rates is one of the bits of market folklore that keeps getting passed around. There is actually not a whole lot of data to defend this view; it is best viewed as faith-based reasoning. This topic is particularly interesting in the case of Japan. I am somewhat agnostic on this issue; I do not see particular risks from manipulating the yield curve in the current environment, yet I can see some plausible dangers.

This article was triggered by the article "Bank of Japan once again shows who calls the shots," by Bill Mitchell, one of the leading Modern Monetary Theory (MMT) economists. In addition, I had a discussion about this topic with someone doing some research awhile ago. Rather than re-hash Professor Mitchell's points from the MMT perspective, I will put on my "generic market analyst" hat and give a description of the issue from a more theory-agnostic perspective. This article probably covers topics I have already covered, but I am still recovering from the Banjo Bowl disaster on the weekend (plus I am now doing more home renovations).
Mainstream Macro TheoryI do not want to get involved in the great mainstream-heterodox mud-slinging match right now. However, it would be crazy to ignore the distinction in views when discussing this topic. The standard view is that interest rates are critical for determining economic outcomes, and so any manipulation of the yield curve is extremely important.

Standard mainstream macro -- and even offshoots, like Austrian theory -- assume that interest rates are critical for all economic decisions. The reason being is that everyone buys all products in spot and forward markets extending over all time horizons. Interest rates are assumed to be important for the relative prices between spot and forward.

For fixed income markets, interest rates and forward purchases obviously matter. Furthermore, there are some flexprice commodities (oil, grains) that are bought/sold forward. However, these markets are a small subset of all market transactions in the economy. So it is very much unclear how applicable the assumption that interest rates are paramount really is.

From what I have seen of the mainstream empirical literature (which is admittedly a small portion), the analysis bakes the assumption that interest rates matter into the cake; there is literally no way of falsifying the thesis that interest rates matter or not. From my perspective, the interesting observation is that I cannot think of any empirical observations that confirms the conventional view of the effectiveness of interest rates, beyond the Volcker episode. Being able to point to one data point -- at a period of history when there was a lot of economic policy shifts -- is not the most impressive defence of a theory.

I am not going to resolve that debate herein. All I can say is that if one is not willing to assume that small changes to interest rates are of critical economic importance, we need to dig further into what the costs to yield curve manipulation are (which is what will be discussed in the remainder of this article).
Costs to Yield Curve ManipulationThe Mitchell post explains why the government can set the entire yield curve. I will instead focus on the potential risks to such a posture.

  • Losing the ability to influence the economy via setting interest rates.
  • The political cost of changing bond prices.
  • The loss of market information.
  • Political cost of interest expense.

I will cover these in turn.
Influencing the EconomyFrom a real world political perspective, the dominance of conventional thinking about the effects of interest rates on the economy makes this the primary practical concern. However, since I am skeptical about the ability of the central bank to control the economy with interest rates, I will dig further into the topic from this vantage point.

Even if "control" of the economy with interest rates might be far less feasible than mainstream thinking suggests, it seems reasonable to argue that interest rates can be useful to influence it under certain circumstances. For example, higher interest rates will eventually curtail real estate speculation. Admittedly, this is not a big worry in Japan right now.

An alternative use of high interest rates is of more interest: attempting to defend the value of a currency in foreign exchange markets. I am unconvinced that a high policy rate will necessarily help defend the value of the currency, but I am almost certainly in the minority with that view. If enough market participants believe that high interest rates boost a currency's value, that is what we should expect to happen. (This is perhaps a better topic for anthropology than economics.)

For Japan, defending the yen in a reasonable concern (if we put aside Japan's rather sizeable foreign exchange reserves). Japan is an island nation in a rather awkward geopolitical neighbourhood, and is dependent upon various imported raw materials. The Japanese government can certainly always buy domestically produced goods and services with yen (as per MMT arguments), but import requirements need to take into account the external value of the currency.*

Another practical problem is the design of pension systems. Pension systems were designed on the assumption that it would be possible to eventually meet actuarial cash flows with assets with a positive real rate of return. Locking bond yields at a negative real rate represents a serious incoherence in policy design. This is a problem for Japan, as well as elsewhere.

If everyone switched over to a MMT-ish world view, concerns about the loss of interest rate control might disappear. However, this has not happened yet.

The remaining sections of this article are based on the assumption that interest rates can change in the future; if they are locked at 0% permanently, they are moot.
Political Cost of Changing Bond PricesIf the central bank changes the policy rate, it is changing the pricing of an overnight instrument -- with a duration remarkably close to zero. If it changes its target for bond yields, it is handing capital gains/losses on long duration instruments.

This will cause annoyance among bond holders, and creates a huge potential for shenanigans. We live in a world where there is a revolving door between governmental posts and the private sector, and I am unsure whether there is a widespread belief that this revolving door should be closed. (I am a prairie populist, and not a fan of these revolving door arrangements. However, I recognise that my view is in the minority.) Even if there are no shenanigans, the suspicion that they exist will always be there. If I were a central banker, I certainly would not want a system that induces people to assume that central bankers are corrupt.
Loss of Market InformationAnyone from the Chicago School, or of an Austrian bent, will be quite adamant about the importance of market information. By pegging bond yields, policymakers have destroyed the information content of the yield curve, which is one of the most reliable recession indicators (in the United States; ZIRP destroyed the information content of the JGB curve).

I am highly skeptical with regards to the importance of the loss of market information for the private sector. In the real world, people do not plan all consumption decisions in hypothetical forward markets that use the risk-free rate as a discounting instrument. Meanwhile, changing the risk-free rate will not greatly influence lending decisions: the private sector lends on a spread basis. Government interference in private lending only matters if they are distorting credit decisions -- exactly like the CMHC in Canada. Otherwise, we are just back to the debate around the importance of the level of the risk-free curve for the economy, as discussed earlier.

Where the loss of information might matter is for policymakers. If we believe that policymakers can fine tune the economy with interest rates, the signal provided by the yield curve presumably gives them some information from private sector market participants. The exact value of the information can be debated. If one believes that the term premium tears around in a random, unpredictable fashion, the curve is not going to contain a lot of information. Furthermore, the market consensus can be quite wrong, particularly in the early parts of expansions.

Policymakers could turn to other markets for information, such as the inflation-linked market. (My book on which is supposed to be nearly done...) All they need to do is avoid destroying the information available in the market by passing it through an affine term structure model, or by pinning those prices as well. (In the same fashion that Market Monetarists insist that central bank can set the level of nominal GDP by buying or selling hypothetical GDP futures, one could imagine the New Keynesian brain trust arguing that inflation rates can be set by pegging inflation breakeven rates.)
Political Costs of Interest ExpenseOne of the side effects of central bank yield curve control is that it cannot force people to buy long maturity bonds at the price it sets. Eventually, it will run into a situation where it owns most of the long end of the yield curve.

If we consolidate the central bank with the Treasury (which we should), this creates a situation that is economically equivalent to replacing long maturity debt with short maturity paper. As a result, changes to interest rates will immediately change fiscal interest expense, whereas a long-duration debt structure will insulate overall interest expense for years.

Financial commentators, mainstream economists, and politicians have a well-recorded tendency to scream about rising interest costs. Since there is no chance of a competent currency sovereign going bankrupt, these concerns are meaningless. However, in the real world, we have to deal with people who indulge in magical thinking (as I believe most anthropologists would attest).

Although it would be great if everyone were willing to think sensibly about government finance. I am not going to hold my breath waiting for that to happen. From my perspective (which I believe would not be shared by Bill Mitchell and other MMTers), I would not want to waste political capital walking into an obvious trap.

Returning to Japan, I see very little risk of rising inflation on any reasonable horizon, outside the possibility of some form of energy price shock. However, I see the risk of the Bank of Japan robotically raising rates in response to some inflationary shock. This will create a feedback loop to fiscal policy, with rising interest spending creating the spending power to sustain higher prices. (This was a common view in the inflationary 1970s, which disappeared after the consensus decided that high interest rates suppressed inflation.) A short maturity debt structure allows for such a feedback loop; if interest costs are largely fixed, this effect cannot kick into gear. In other words, a long maturity debt structure helps prevent the economy from being blown up by pro-cyclical policies by mainstream central bankers (again).

The relatively high debt-to-GDP ratio of Japan makes this more than a theoretical corner case. It would not be hard to craft a "Japan is doomed!" narrative based on post-Keynesian theory, and assuming that Japanese policymakers follow the mainstream script to the letter.
Concluding RemarksAustrian economics is far more influential in market commentary than it is academia. As a result, we should expect complaints about the dangers posed by distorting the yield curve to continue. That said, there is not a great deal of evidence that it actually matters.


* Some Post-Keynesians go on about the "external constraint" when discussing MMT. For floating currency sovereigns, the "external constraint" is really just the external value of the currency. A falling currency value should probably be lumped in with "inflation," which is already discussed in Functional Finance. In other words, people who are concerned about "the external constraint" are more worried about semantics than the operational effects of policies.

(c) Brian Romanchuk 2018

Miscalculating Medicare-for-all

Published by Anonymous (not verified) on Mon, 20/08/2018 - 7:07pm in

By J.D. ALT A report from the Mercatus Center at George Mason University calculating the “cost” of Medicare-for-all has received much attention recently—first, because Bernie Sanders claimed the report concluded that Medicare-for-all would save the American people $2 trillion over … Continue reading →

The post Miscalculating Medicare-for-all appeared first on New Economic Perspectives.

How big does the fire need to be?

Published by Anonymous (not verified) on Mon, 13/08/2018 - 7:11pm in

By J.D. ALT I have written about this before, but it bears repeating now—and perhaps it bears repeating every week until somebody with more leverage than me picks the message up and carries it a step further: America (and the … Continue reading →

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The Explicable Mystery of the National Debt

Published by Anonymous (not verified) on Thu, 02/08/2018 - 9:36am in

By J.D. ALT America’s current “national debt” is tallied to be $21.5 trillion. When politicians and economic pundits talk (worry, fret, wring their hands, gnash their teeth) about this “debt” they implicitly assume—along with their listeners, readers, and potential voters—that … Continue reading →

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How to Draw Unique and Entertaining Comparisons to Express MMT Concepts

Published by Anonymous (not verified) on Sat, 28/07/2018 - 1:25am in



It’s the weekend, so nothing heavy. Well, maybe. I’ve got one or two articles finished and I might post one. Depends on how I feel. Anyway. People always ask me how I come up with interesting and fun analogies to teach MMT. So, I thought it would be fun to address that question. Now then,[...]

The post How to Draw Unique and Entertaining Comparisons to Express MMT Concepts appeared first on Ellis Winningham.

On the Use of the Ubiquitous Term “Printing Money” by MMT Novices – Please Stop Using It

Published by Anonymous (not verified) on Sat, 28/07/2018 - 1:07am in

Try to understand: The public tends to view dollars/pounds in terms of a physical object that travels in an eternal circular flow. I: Introduction – The Errant, Fantasy View of Currency People tend to view “money” as though it were a precious stone. It’s always been here since the beginning of time. It was discovered[...]

The post On the Use of the Ubiquitous Term “Printing Money” by MMT Novices – Please Stop Using It appeared first on Ellis Winningham.

The Case for Income Tax.

Published by Anonymous (not verified) on Fri, 27/07/2018 - 7:23pm in

Claire Connelly is a young journalist specialising in economics and finance. An MMT sympathiser, she has written popular pieces about it.

She wrote “The Case Against Income Tax” about the need (or lack thereof) for income taxes. Although she has “no hard opinions on whether or not to abolish income tax”, as she says towards the end of her piece, it’s evident she finds that possibility attractive, particularly within the Australian context, where tax cuts have been a thing lately.

It’s understandable then that she produces a list of income tax criticisms (going as far back as Henry George, whom she mentions approvingly). A bit more worrisome is that she presents no argument in favour of income taxes.

Ironically, though, she links to an article of a leading MMT proponent, Prof. L. Randall (Randy) Wray, dealing precisely with the need (or lack thereof) for taxes. There Wray explains some misunderstandings about taxes in general and income taxes in particular, and their legitimate uses (because, against a common misunderstanding, taxes do have legitimate uses within MMT, beyond driving the demand for money).

To that end, Wray discusses the work of Beardsley Ruml (whom Connelly also mentions) and asks (my emphasis from here on): “Why, then, does the national government need taxes?”

Ruml -- Wray says -- gave four reasons:

  1. “As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
  2. “To express public policy in the distribution of wealth and of income as in the case of the progressive income and estate taxes;
  3. “To express public policy in subsidizing or in penalizing various industries and economic groups; and
  4. “To isolate and assess directly the costs of certain national benefits, such as highways and social security.”

And further elaborates: “The second purpose is to use taxes to change the distribution of income and wealth. For example, a progressive tax system would reduce income and wealth at the top, while imposing minimal taxes on the poor.”

Which, one gathers from Connelly’s piece, seems to be what Dr. Steven Hail, apparently a local MMTer, tried to tell her.

Without being an expert, I’ll try my hand at some answers to Connelly’s questions and comments.

Connelly asks: “If income tax were really important, how come those who make the most often pay the least?” The fact that those who earn (not make) the most often pay the least does not prove income taxes are unimportant. It is, instead, an argument for the closing of the loopholes in taxation law allowing that to happen and it’s a demonstration of the influence those who earn the most have on lawmakers and bureaucrats. Wouldn’t the elimination of income taxes only play to their hands?

“[Henry] George argued that a land-value tax” -- writes Connelly -- “should replace all other forms of taxation, ‘leaving labour and capital to flourish freely, and thus ending unemployment, poverty, inflation and inequality’.” If workers and capitalists don’t pay taxes wouldn’t their inducement to demand money be reduced?

Moreover, wouldn’t that increase inequality?

Which lead us to this comment: “In the current climate, with wages stagnating or in some countries even going backwards, it makes little sense to take money away from people already struggling to pay their bills for the sake of an almost permanent deficit.”

That’s all very truth. But there are tax cuts and tax cuts. The one already approved in Oz precisely cuts the taxes the least for people struggling to pay their bills as their wages fall, and the most for those whose salaries have been rising lately. These are tax cuts, the question is: are they good? I fail to see how inequality can fall with that.

That is a misunderstanding that may come back to haunt MMTers: when they say “taxes drive the demand for money” people tend to hear “the only purpose of taxes is to drive the demand for money”. Often -- as I’m sure is the case with Connelly -- it’s an honest mistake which a little thought, hopefully, can correct, thus, this post.

I fear, however, sometimes there’s more than a little equivocation behind it; which may have something to do with its zombie-like resilience.

The Five Stages of Money (and why we’re stuck at stage 4)

Published by Anonymous (not verified) on Tue, 19/06/2018 - 10:24am in

By J.D. ALT Like everything else, money has evolved. It began in a primitive form and morphed into something more sophisticated, more successful. Then, probing and testing for an even better form, it morphed again. A simplified history of money’s … Continue reading →

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