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posted by Dopefish on Saturday March 01 2014, @02:30PM   Printer-friendly
from the pass-go-and-collect-$200 dept.

buswolley writes:

"Is the United States or the EU really too poor to afford to build the things each needs to maintain prosperous nations? Modern Monetary Theory (MMT) posits that America is not too poor in real resources to do the things it needs to do, and now proponents of the theory have adapted the rules of the classic board game Monopoly to demonstrate their case. For those that do not know what modern monetary theory is about, a suitable primer on the topic might be Warren Mosler's Seven Deadly Innocent Frauds of Economy Policy or Diagrams and Dollars, either as a book on Amazon or on-line for free at NewEconomicsPerspectives.org.

While the Modern Monetary Theory perspective tends to elicit disbelief and even rage, I think it is important for any scientist and geek to weigh the evidence carefully, and by doing so understand better about how and why money is created and destroyed."

 
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  • (Score: 0) by Anonymous Coward on Saturday March 01 2014, @09:43PM

    by Anonymous Coward on Saturday March 01 2014, @09:43PM (#9243)
    TL;DR: Good response, but missing multiple important points. As a defence of MMT, your post is constructive but incomplete at best.

    Your post is very long but it can be simply summarized as 'inflation', or rather 'hyper inflation.'

    That misses the point of the functional role of money, but sure, inflation is one of the concerns so you're not completely off base. It also misses the point of the concern that the multiple processes involved in the role of money are in fact feedback processes which cannot be viewed in isolation.

    Your concerns about hyperinflation are valid, however you misunderstand MMT's perspective.

    OK, I await enlightenment ...

    MMT might say something like this: The real constraint to the federal government's spending is inflation. The imaginary constraints are insolvency, which cannot happen with debts made in a fiat's currency.

    Yeah, I got this part of the MMT perspective from the outset. The problem is that there's a flaw in this perspective. Explanation follows: While it may be true that in the absence of any contextually significant factors, insolvency is impossible for the issuer of a fiat currency, the price for that immunity from insolvency is a money supply which is not linked to commodity supply and demand considerations, but simply to government expenditures regardless of their form and the effects they may have on other spending and investment decisions. While this can be construed as only being an inflation constraint, and to some extent this is a part of the truth, the fact also is that such aggressive market transactions by the government affect production activities in the market. For example, if the government decides one day that what the country needs is a truly gargantuan supply of ball bearings, it will effectively displace other production, regardless of its value to the populace at large, in favour of ball bearings because now ball bearings are the unlimited money crank which the government wants producers winding. The opportunity costs are substantial, even disregarding any inflationary push. This is actually closely analogous to the way that the government actively pushed for a hot housing market - when the correction came, it was ugly, and in the interim the distortionary effects were pretty severe as well.

    So, indeed. Let us talk about inflation. Let us not talk about government debts and deficits (which just means more money in the private economy anyway.

    A large part of my earlier post was actually pointing out that "more money in the private economy" isn't an unalloyed, unconditional, context-free benefit, so ignoring that point kneecaps analysis of the objections.

    Take a look at this:

    http://www.usinflationcalculator.com/inflation/c urrent-inflation-rates/

    In the economic crash of 5 years ago the inflation rate fell dramatically. There were things to buy, but not enough dollars to buy them with. Then the fiscal stimulus package injected money into the economy and inflation rates went above the target 2% inflation rate, and then when the stimulus ended and some austerity bills were signed into law, inflation rates fell to lower than the Fed's 2% target. Currently, we need more dollars in the economy to get to that target, which is a decent rate for growth, however congress won't pass anymore stimulus. This is over simplified narrative of course.

    Yes, partly because it ignores the political fact that a very large number of people sent their representatives to DC precisely to rein in spending. Right or wrong (and there are arguments on both sides) those representatives (mostly) faithfully discharged that duty and fought tooth and nail to put a brake on spending as their constituents required. This means that while it might be all very well to point out that the government theoretically could just unchain the (virtual) presses and print all the money it wants, in practice it's quite hard to get to that point because not everyone agrees.

    I believe that the MMT perspective goes like this. We should target 0% unemployment, because in real terms it does not make sense to let people who want to be productive sit idle when there is plenty of real resources available and the only lack is dollars flowing in the economy.

    Again, I got this part of the MMT perspective early on, and it drastically oversimplifies two major problems. The first is that 0% unemployment presupposes that the standing offers for all possible employment hours are such as to offer every worker in every field adequate recompense to overcome all converse preferences whatsoever, and yet that the costs to businesses for hiring these people are somehow lower, regardless of how basic the labour, than the equivalent costs in terms of automation or alternative business strategy implementations - either that or that the government is constantly slurping up all available labour at rates which people find compelling. Bear in mind that the market participation rate for labour is contingent on price and conditions. Remember those farmers in Georgia who couldn't find people to bring in the harvest at any kind of realistic price after the immigration crackdown? That's a microeconomic example of full employment. Anyone who wanted a job harvesting fields for the price on offer could get one - but it was not a good state of affairs. And this leads me to the other major problem; the mere availability of money qua money does not guarantee an allocation of resources which permits any given person to do anything productive - all the more so if inflation is biting. This works on multiple levels. For example, if you want a job as a mechanic, and there are already mechanics doing all the car repair which there is to be done, the net demand for your mechanical services is nil. Even if your argument is that the government should print money to retrain a mechanic as a steam fitter, that relates to the correction of misallocation of resources. The problem is that friction in the real economy guarantees some degree of misallocation at any given time. This is a roundabout way of getting to the point that dollars themselves can also be misallocated as far as the economy is concerned. More dollars don't fix anything - more dollars in the right place at the right time may fix some things but a large part of the problem is getting the dollars there, rather than just turning up the speed on the money presses.

    So, no. While I appreciate the seriousness of your response, and while I appreciate the sincerity of the people who may be proposing MMT seriously, and while I even appreciate the sincerity with which they see problems in the status quo, their proposals are fraught with all manner of practical concerns. I can't recommend it, and I still hope that people aren't taken in by it.

  • (Score: 2) by buswolley on Saturday March 01 2014, @10:28PM

    by buswolley (848) on Saturday March 01 2014, @10:28PM (#9263)

    Thanks for your thoughtful post AC. I will first note that this is not a conversation of the usual type: oh no China is going to own us! :)

    I summarized your AC original post as inflation because uncontrolled inflation undermines many functional aspects of currency; for example the balance between maintaining value over time vs maintaining growth. Inflation devalues savings, and it devalues the debts that have been issued. This can be a boon for the debtor but can severely disrupt the system.

    I agree that unrestrained government spending can cause inflation, and I further agree that an unrestrained government spending can incur a large opportunity cost in the private sector if those spending priorities are allocated poorly. I also fear a government that could crowd out all private enterprise. However this latter is mostly a danger (maybe) when there are both a very high tax rate and very high fiat spending. In this case, since money is destroyed by taxes so quickly all economic activity chases Federal spending directly. Low taxes and low spending leaves little growth and little government power. With low taxes and high levels of spending targeted as near zero unemployment via a job guarantee buffer stock, I do not yet see how government is crowding out the private sector from achieving non-government priorities because the low tax rate keep the money in the private sector. After the initial spending into the economy, that money will continue to flow through the economy, and businesses will chase that money.

    Now I admit, I am not a trained economist, so perhaps I am fooled by things simple for others to see. But the logic of fiat currency, at the minimum, destroys the usual rhetoric about debts and deficits. Ultimately that cannot be a bad thing.

    I am curious. What do you think of the Modern Monetary Realism perspective?

    Also let us be clear. If I understand correctly, congress has authorized banks to create money via loans to the private sector. This is happening now. The government has ultimate monopoly on fiat currency creation has the power to create money directly if it so wished. Thus the whole debate aught to shift to a debate about whether money creation should be wholly private, wholly Federal, or a mix of private and Federal. I think that it should be the latter as each are better equipped to respond to different threats to a healthy economy and nation.

    --
    subicular junctures
    • (Score: 0) by Anonymous Coward on Sunday March 02 2014, @12:10AM

      by Anonymous Coward on Sunday March 02 2014, @12:10AM (#9285)

      Thanks for your thoughtful post AC. I will first note that this is not a conversation of the usual type: oh no China is going to own us! :)

      No problem. And it's worth noting that while China was never going to own the US, it's also true that China decided that owning the US is a bad deal. (I'm summarising their decisions with respect to US debt in the light of instability prospects, imbalancing effects on current account deficits, prospects of currency revaluations (theirs) and diversification.)

      I summarized your AC original post as inflation because uncontrolled inflation undermines many functional aspects of currency; for example the balance between maintaining value over time vs maintaining growth. Inflation devalues savings, and it devalues the debts that have been issued. This can be a boon for the debtor but can severely disrupt the system.

      But all of that matters precisely because of the unchanged function of money regardless of its value: that of a unit of account. In fact, it's because it's a unit of account that savings and financial assets are vulnerable to inflation.
      This next segment I will go through in small parts, because it's messy to untangle.

      I agree that unrestrained government spending can cause inflation, and I further agree that an unrestrained government spending can incur a large opportunity cost in the private sector if those spending priorities are allocated poorly.

      So far, so good.

      I also fear a government that could crowd out all private enterprise. However this latter is mostly a danger (maybe) when there are both a very high tax rate and very high fiat spending.

      Pragmatically, it really can't, except by regulation. Why? Because people will continue to serve each other's needs regardless of what the government wants as long as there's a return. The higher the burden, the larger the black market and the more destructive of government control the situation is. Prohibition and the War on Drugs are microeconomic examples, and the old USSR is a macroeconomic example. If you try to tax what people want out of existence, they smuggle it. If you ban it, they make it in the black market. If you ban private commerce entirely, you probably fail and you certainly foment vast human misery. The answer to that is to guard civil liberties, of which private enterprise should be regarded as one.

      In this case, since money is destroyed by taxes so quickly all economic activity chases Federal spending directly.

      The problem in this scenario is one of relevance. If the only buyer for what I do is the government, and the only purpose for the sale is to gather money which is paid to the government, where's my motivation to participate? I'd rather deal in barter, or a potlatch style economy and have no usefully measurable taxable income which does me no good anyway. And if that is banned or choked by regulation, I'll sit in a corner and compose poetry because what motivates me to do anything else? This is the dilemma, or something very close to it, which is created for many third world farmers who flooded out by well-meaning food donations. They know they'll be fed, so subsistence isn't much of a driver. Working the land is punishingly hard work, so if they don't have to farm they won't - so they stop farming. This is a real example, and so destructive that the very concept of food aid is under heavy fire.

      Low taxes and low spending leaves little growth and little government power.

      It's not at all clear that the low growth is a certain thing - in fact, provided a reasonably free field and a chance to accumulate meaningful capital, people will generally work like dogs to better their own lot. There's a fair amount of evidence to suggest that private expenditure is in fact more efficient than government expenditure at wealth creation.

      With low taxes and high levels of spending targeted as near zero unemployment via a job guarantee buffer stock, I do not yet see how government is crowding out the private sector from achieving non-government priorities because the low tax rate keep the money in the private sector.

      Again, you're looking at the money to the exclusion of other elements in the economy, which is probably why you don't see the distortionary effects. First, if there is large government expenditure but low taxes, you're either extracting capital via a bond structure, thus reducing your short term money supply and choking the supply of capital to enterprise, or you're printing money and essentially reducing the reward for financial success by guaranteeing inflation down the line. But even assuming neither of those is true because you're spending an accumulated rainy day fund of some sort, you're raising the cost of labour in the market and introducing inelasticity. Slice it how you like it, but some element of this pattern is affecting one or more of access to labour, capital and given the twisted priorities behind government employment of last resort as a universal, you're probably not getting value for money in terms of what the government employees are giving you anyway, thereby reducing net productivity even though you have nominal full employment. The mere fact that there are low taxes in the abstract doesn't mean much if the capital held is withdrawn via bonds or devalued by inflation.

      After the initial spending into the economy, that money will continue to flow through the economy, and businesses will chase that money.

      It's not clear that the spending continues infinitely (in fact in reality it's crystal clear that it doesn't) and businesses will only chase money which is worth their time and effort. There are actually businesses which use durable commodities as hedges against inflation and currency fluctuations and this is standard practice.

      Now I admit, I am not a trained economist, so perhaps I am fooled by things simple for others to see. But the logic of fiat currency, at the minimum, destroys the usual rhetoric about debts and deficits. Ultimately that cannot be a bad thing.

      It turns out that debt does matter, interest payments do matter, and deficits (current account as well as budget) do matter. While I agree that the rhetoric is often a little hysterical, it's not entirely divorced from reality. Moreover, the logic of fiat currency actually supports concerns about debts and deficits when you look at longer term consequences and the degree to which these systems are interconnected. Sorry, Modern Monetary Theory doesn't rescue the theory of consequence-free government spending.

      I am curious. What do you think of the Modern Monetary Realism perspective?

      It strikes me, frankly, as people who realised that MMT doesn't get it all right, but don't really want to give up their vague optimism that somewhere, somehow, if they look long enough, they will find a free lunch. I have yet to see a cogent explanation of what MMR actually is, because it's largely defined as all the parts of MMT they don't adhere to. This is not helpful.

      Also let us be clear. If I understand correctly, congress has authorized banks to create money via loans to the private sector.

      This is more or less correct. A more accurate statement might be to the effect that congress permits it up to a point, but has banned reserveless banking. It's actually even more complicated than that, but you're not really wrong.

      This is happening now. The government has ultimate monopoly on fiat currency creation has the power to create money directly if it so wished.

      This is not as true as a lot of people would love to think. The government would love to have total control over fiat currency supply manipulation, but those darned general public people keep misbehaving themselves in complex ways. The government is constantly chasing a mirage, in terms of money supply control, and its actual powers are very blunt, heavy instruments. Also, the less convenient money is, the more people turn to alternative means. For example, in much of the rural regions of the USA, guns and ammunition are as good as money.

      Thus the whole debate aught to shift to a debate about whether money creation should be wholly private, wholly Federal, or a mix of private and Federal. I think that it should be the latter as each are better equipped to respond to different threats to a healthy economy and nation.

      It already is. Most people just don't understand that.