Modern monetary theory (MMT) isn’t discussed much in Chinese universities as far as I can tell, except by a few of my Chinese friends and former students who mostly work in banking and finance. Analysts abroad often claim that China is somehow proof that MMT “works,” but to me and most of my Chinese friends, this statement is either unintelligible or just wrong.
Every Sunday afternoon, a few of the brightest math, finance, and economics students from Peking University converge on my courtyard house for an informal seminar on debt-related issues. For our first meeting of the new school year, I had them read up on MMT and research the MMT debate so that we could work out how it might apply to their own thinking.
From these readings (including a 1943 piece on “functional finance” by economist Abba Lerner), we assume that the key insight of MMT is not that debt doesn’t matter, as mistaken stereotypical views seem to assume, but rather that governments that issue their own fiat currency have no funding constraints insofar as they do not need to issue debt or raise taxes to spend money. They simply budget the expenditure, and then go ahead and spend the money.
There is a lot of confusion about this. A January 2019 Financial Times article had this to say:
Advocates for modern monetary theory argue that, for a sovereign country with its own currency, there is no inherently unacceptable level of government debt—that country does not automatically begin to collapse when debt reaches 90 per cent of GDP, or even 200 per cent of GDP. The country appropriates what it believes is necessary for domestic programs, regardless of revenue.
This, however, is almost certainly an unfair caricature of MMT. It assumes that if a country increases debt to fund spending until the economy is at capacity, it will cause the country’s debt-to-GDP ratio to rise. But if government spending directly or indirectly causes productive investment to rise in line with the debt, this kind of spending increases both debt and GDP, so neither the debt ratio nor the debt burden changes.
It is only when money is borrowed (or created) and spent in ways that do not cause GDP to rise that the debt burden rises. For that reason, a rising debt-to-GDP ratio over the medium term is almost prima facie evidence that the government should cut back its spending (over the short-term there can be timing differences between when an investment is made and when it starts to pay off). This is also true of inflation: if the government “prints money” to spend on projects that reduce excess capacity or employ workers productively, the result will not be inflationary to the extent that the increase in demand caused by printing the money will be matched by an increase in supply.
What MMT actually does say is that governments must issue debt or raise taxes if either is necessary to control the potentially adverse economic impact of the additional demand created by spending the additional money. As Lerner puts it:
The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that the taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes so that taxpayers have less money left to spend. By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced.
Lerner points out that this idea, “like almost every important discovery,” is very simple (albeit counterintuitive), to the point that when academics understand it, they often dismiss it as “merely logical.” He goes on to explain:
An interesting, and to many a shocking, corollary is that taxing is never to be undertaken merely because the government needs to make money payments. According to the principles of Functional Finance, taxation must be judged only by its effects. Its main effects are two: the taxpayer has less money left to spend and the government has more money. The second effect can be brought about so much more easily by printing the money that only the first effect is significant. Taxation should therefore be imposed only when it is desirable that the taxpayers shall have less money to spend, for example, when they would otherwise spend enough to bring about inflation.
This seems to be where much of the confusion lies. One of the main criticisms of MMT is that it seems to imply to some people that governments can spend on any project they like without worrying about the consequences. By extension, these critics also assume that for this reason there are no effective limits to government borrowing: debt can always be serviced by creating additional fiat money for the sole purpose of servicing the debt.
To sort through these various claims, our seminar decided to concentrate on the conditions under which there are no intrinsic constraints on government spending, a state that can be called MMT heaven. We also considered the conditions under which there are constraints, in which case governments would have to raise taxes to balance the government expenditures. To simplify matters, we decided that the government could basically spend the money in three ways:
- Give to the rich: The government can fund projects that effectively give money to businesses or the rich, who, for simplicity’s sake, can be defined as entities who consume little or none of any incremental increase in income and who therefore save all or most of it. The government can do this by cutting taxes on businesses and the rich, or by engaging in polices that directly or indirectly increase the income or wealth of the rich, such as certain kinds of quantitative easing, which tend to cause a rise in the prices of assets, most of which are owned by the rich.
- Give to the poor: The government can fund projects that effectively give money to average or poor households, who can be defined as entities who consume most of any incremental increase in income and who therefore save little of it. The government can do so by cutting taxes, funding social safety nets, creating jobs, or setting minimum basic income policies, and so on.
- Build infrastructure: The government can also spend more on infrastructure.
In all three of these cases, the bottom line is this: if the government can spend these additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true. The flowchart below shows how each of these forms of government spending might or might not affect the economy.
Give More Money to the Rich
Taking the first case, assume that the government implements central bank or fiscal policies that effectively deliver additional income to the rich, who (by definition) save all or most of these proceeds. These policies could be enacted under two different sets of circumstances. In the first scenario, assume that there are supply-side constraints on investment and that interest rates are quite high. Businesses have many profitable investment opportunities that would increase productivity, in other words, but they are unable to invest in many or most of them because the cost of capital exceeds the risk-adjusted expected return. To put things another way, desired investment in this economy exceeds actual investment.
Under these conditions, creating money and passing it on to the rich may lead at first to inflation, depending on how tight the resources and labor markets are, but this effect should be temporary. These policies increase savings and consequently lower the cost of capital. This causes businesses to invest more and labor productivity to increase, so the total value of goods and services produced in the economy (GDP) also rises. Because GDP goes up by more than the amount of additional money created, in the end there is no inflation and the additional value created is more than enough to service the debt.
Essentially, the government can create money or debt, so to speak, to fund transfers to businesses or to the rich without worrying about funding the expenditures through taxes or borrowing. This is what is meant by MMT heaven.
But now assume that there are no supply-side constraints on investment: this second scenario looks a lot like today’s world, with low interest rates, weak demand, and businesses hoarding huge amounts of cash for which they can find little purpose beyond speculating on stock buybacks or acquisitions. The reason businesses don’t invest, in other words, is not because they cannot access reasonably priced capital but rather because demand for their products is too weak to justify investing in additional capacity.
If that is the case, what happens when the government borrows or creates money and passes it on to the rich? As I discussed in a June 2017 blog post, when such policies are enacted under such conditions, there is no corresponding increase in investment because the inability to access savings was never a constraint on investment. This also means that, in a closed economy (or in an open economy whose capital account, like that of the United States, is determined by foreign conditions), there can be no increase in savings within the economy. This might sound strange, given that the savings of the rich definitely would have increased, but this only means that the increase in the savings of the rich had to result in a decrease in savings elsewhere in the economy. (In an open economy, of course, the increase in the savings of the rich would flow out in the form of a capital account deficit.)
There are many ways that savings in another part of the economy could decline. If the government borrowed the money, for instance, the corresponding decrease in savings could be explained by a rise in government debt (which is just negative savings). If instead the central bank created the money and used it to buy assets, the resulting rise in asset prices could create a wealth effect that would cause households to consume a larger share of their income (and therefore save less), or it could cause lenders to lower their lending standards and encourage a rise in household debt. Or if the increase in savings were to flow abroad, it would be matched by a current account surplus as some of the goods produced at home were exported. The larger point is that, however it happens, because the increase in domestic or foreign demand is not met by an increase in the value of goods and services produced, ultimately these policies enacted under these conditions must result in higher inflation, which in turn would reduce real household income to balance out the increase in the wealth of the rich.
A second adverse effect could easily occur too. Because this policy effectively would transfer wealth from the poor to the rich, there would be a net reduction in consumption. In a closed economy (or in an economy that has little or no control over its capital account, as I explain here) that net reduction would result in a further decrease in business investment and with it, by necessity, a further decrease in national savings, driven by a rise in unemployment, household debt, or the fiscal deficit.
Again, creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment. In this second scenario, creating or borrowing money and passing it on to businesses or the rich only redistributes wealth from those who did not benefit from government policies to those who did. That requires that the government raise taxes to reduce demand and prevent unwanted inflation.
Give More Money to the Poor
In the second case, the government enacts policies that directly or indirectly give more money to average or poor households. Again, these policies could be enacted in two different scenarios. For the first scenario, assume that the economy operates under demand-side constraints. This mean that the economy suffers from weak demand—consumption and investment—and that there is resource and labor slack, or inefficiencies in the economy.
Under these circumstances, delivering money to the poor directly boosts consumption (because, by definition, they consume most additional income) and indirectly boosts investment as businesses increase capacity to meet this additional demand. There are various iterations in which the increase in household income would be partly consumed and partly saved, with the saved portion funding new investment to serve the increase in consumption, which further increases household income and, in doing so, creates additional consumption and savings, and so on. The basic arithmetic (found in any introductory economics textbook) isn’t worth getting into, but it is easy to show that as long as there is slack in the economy, both investment and savings will rise as consumption is boosted.
Once again, the result is MMT heaven. The government can create money or debt, so to speak, to fund transfers to the poor, but because the consequence is that investment grows by at least as much as the amount of money or debt, there is neither inflation nor an increase in the country’s debt burden (as the debt grows by less than GDP does, which is a proxy for debt-servicing capacity).
In the second scenario, however, assume that there are no demand side constraints. In such a world, growth is constrained by high costs of capital, regulations, or other supply-side constraints. Under these conditions, delivering money to the poor boosts consumption, but because the supply-side constraints aren’t addressed there is no equivalent boost in investment or GDP. This means that, at current prices, total demand for goods and services has risen with no equivalent rise in the supply, so the country must suffer from inflation or, if unlike the United States it has control over its current account, it must run a trade deficit, which is balanced by equivalent capital outflows. The way to prevent either outcome is for the government to raise taxes enough to reduce aggregate demand to its original level.
Spend Money on Infrastructure
For the third case, a government could pour money into building new infrastructure. Again, assume that this policy could be enacted under one of two scenarios: either there is substantial room for productive infrastructure spending or there isn’t. In the first scenario, if the government creates debt or money to fund productive infrastructure spending, the result is MMT heaven once again because the total value of GDP—that is, the goods and services produced by the economy—rises faster than the money created, so there is no inflation, and rises faster than the debt created, so the country’s debt burden doesn’t increase.
In the second scenario, government spending on infrastructure is largely nonproductive and creates little value for the economy—as is the case in China today. This time, the consequences are a little more complicated because they can involve wealth transfers from one group to another. But ultimately, either money increases faster than the value of goods and services produced, in which case there is inflation, or debt rises faster than the country’s overall debt-servicing capacity.
For an example of MMT working under the first scenario, consider China in the 1990s. Money creation and debt went mostly to fund businesses and the rich (as ordinary households were forced to heavily subsidize borrowing costs), thus forcing up Chinese savings rates; the proceeds were then poured into productive investment, generating enough growth to trickle down to the poor at a substantial rate. Perhaps that is what people mean when they say that China supposedly proves the validity of MMT. There seemed to be no constraints on the country’s ability to expand its money supply directly or via increases in debt because real GDP grew at least as quickly as the money supply and the debt, so there was little inflation and no increase in the country’s debt burden (since debt grew no faster than GDP).
More recently, however, China represents the second scenario. Money creation or debt still go mostly to fund businesses and the rich, but there are few productive investment opportunities left. Although investment still continues to rise quickly, much of this investment is nonproductive and only shows up as increases in GDP because the entities responsible for the investment are not subject to hard budget constraints, so they never write down bad investments on the books. That being the case, debt creation causes a surge in the country’s debt burden as debt rises much faster than the country’s debt-servicing capacity. Because of the distribution of income, money creation shows up more as asset price inflation than as consumer price inflation.
When Do Increases in Money or Debt Matter?
As always in economics, it depends on the circumstances. It is easy to consider cases in which rising debt or money creation results in an equivalent or greater increase in total GDP or debt-servicing capacity. In such cases, in the aggregate, an increase in debt or money mostly doesn’t matter insofar as it results in greater wealth and a declining debt burden. It is also easy to consider cases in which rising debt or money creation doesn’t result in an equivalent increase in total debt-servicing capacity. In these scenarios, in the aggregate, it does matter because rising debt or money results in less wealth due to inflation and/or a rising debt burden.
For simplicity’s sake, it can be assumed that rising debt or money creation doesn’t matter under the following conditions that characterize MMT heaven:
- When it involves a transfer of wealth to the rich or to businesses—in a way that boosts domestic savings—in a supply-constrained economy with high capital costs (typically, developing countries);
- When it involves a transfer of wealth to the poor in a demand-constrained economy with a great deal of slack or inefficiency (most advanced economies today);
- When it involves the building of needed infrastructure.
All that being said, I don’t want to be too cavalier about rising nominal debt levels. Balance sheet conditions and constraints matter to a country’s future economic growth in at least three ways not discussed above.
First, an economy driven by rising debt tends to adjust in ways that systematically incorporate strong positive feedback mechanisms (as I explain here), pushing domestic balance sheets away from their optimal structures. These balance sheet mismatches can lead to suboptimal resource allocation and can cause future growth to slow.
Second, high levels of debt directly increase the volatility of earnings and income, so a country with more debt has less room to withstand temporary shocks, even if more debt comes with more assets that can service the debt over time.
Third, when debt levels are high enough and balance sheets sufficiently fragile that there is uncertainty about how future debt-servicing costs will eventually be allocated, the different sectors of the economy that might be forced to absorb the debt-servicing costs will change their behavior in ways designed to protect themselves. As financial distress theory shows, the ways in which they change their behavior almost always reduce growth, further increase balance sheet fragility, or both.
It is not clear to me that pure money creation under the positive circumstances listed above comes with comparable problems, so perhaps this means that governments should fund wealth-enhancing income transfers or productive investment mainly by creating money, not by borrowing. This suggests that hard-core MMT proponents are right when they say that governments don’t borrow or raise taxes to fund spending. Instead, they simply spend. The purpose of borrowing or raising taxes in those circumstances is to counter the impact that MMT can have in some cases, but not in all.
There are, on the other hand, cases in which governments can simply create money or borrow with no ill effects, that is to say, with no inflationary impact and no increase in the debt burden. As always in economics, the outcome depends on the underlying conditions.
So how do these insights apply to the world today? If they so choose, the U.S. and European governments should be able to create money or debt with no ill effects if the proceeds were used to fund needed infrastructure or to reverse income inequality by increasing the incomes of the poor and middle classes. Either way, productive investment would rise faster than debt or the money supply, as would the total value of goods and service produced.
As for China, money or debt can no longer be used to fund infrastructure because the resulting increases (in money or debt) will not be matched by increases in real GDP. Beijing should, however, be able to create money or debt with no ill effects if the proceeds were used to reverse income inequality by increasing the incomes of the poor and middle classes.
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Comments(71)
So clear and logical. Beautiful. The problem, of course, is that the powerful don't want to hear this. It's mindboggling that billionaires fight to keep, and even increase, their wealth. What for? One quibble: in the last sentence under "GIVE MORE MONEY TO THE RICH," shouldn't it read, "That requires that the government raise taxes on the rich to prevent unwanted asset-price inflation"?
Thanks, Karen, and sorry for such a late response, but I was traveling much of the past week. I wrote "unwanted inflation" because the impact of the transfer could be any kind of inflation. You are right to assume it will probably be asset inflation, but not necessarily.
Michael, Excellent piece. This type of logical balance-sheet analysis is unfortunately omitted from most discussions of MMT. I believe that there is an error in next-to-last sentence of the section "Give More Money to the Poor." The last word of that sentence to be "inflows" not "outflows."
You are right, Ken. Thanks for catching that.
Just to clarify for my own understanding, whenever you mention the scenarios wherein the optimal solution involves "raising taxes", does that directly imply that the optimal solution simultaneously involves paying off debt (to improve the GDP to debt burden and increase future capacity to generate debt when required)?
Claire. I know you weren't directing your question to me. But. I can't resist getting my 2 cents in. MMT people would never advise paying off all the debt. All the worry about Federal Government debt is a contrivance meant to justify austerity to the general population. You see, they always have their snouts in the public trough. I'd like to see the government debt more evenly distributed in the general population instead of concentrated at the top. Of course the wealthy and the powerful are always seeking to subjugate the general population to themselves. You know, place them or the whole community in debt and obligation.
Hi Yok, I appreciate the response. I understand the view about never paying off all the debt--I guess I am curious as to when it is advisable to pay off *some* of the debt--if for no other reason than to increase debt servicing capacity. The other part is that when the government increases taxes under MMT, does that necessitate paying down debt (presumably it can just burn the money, but any other action, I think, amounts to recirculating the money, which is counter-productive?). . . . As for Michael's book, I tried to reply with a link on the last thread, but it didn't get posted. Based on Amazon, you're going to have to wait until spring: Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace Hardcover – May 19, 2020 Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace Hardcover – May 19, 2020
Hi Claire. Thanks for the heads up on Mike's book. "under MMT, when taxes are increased, does that necessitate paying down the debt?" I'm not clear as to your deeper question. But YES - INCREASING TAXES NECESSARILY PAYS OFF THE GOVERNMENT DEBT. Consider, every dollar, every unit of currency, is an instrument of debt. They say right on them "Federal Reserve Note." Have you ever written out a note? When an instrument of obligation to returned to the issuer, the obligations of the issuer have been reduced. The important thing is the obligation, not the paper it is recorded on. Most obligation spent into existence by the government never reaches physical form. I'm reaching for your search. Is there a limit to the amount of obligation, or debt, a sovereign can take on before the thing gives way. I wonder that too. MMT people believe that point is much, much bigger than generally assumed. In Japan I think I've heard it said that debt to gdp is 250%. It might even be bigger than that. Interest rates are at zero. Governments control interest rates. The wealthy and the powerful through the government control interest rates. Functionally the government never needs to borrow it's own currency to have money to spend. It can always just issue new obligation. All the borrowing they do is to control interest rates, and to provide the wealthy and powerful, people and corporations, a way to lock in their relative wealth position. A way to enjoy, partake of the economic growth of a country without contributing anything to that growth. Just based on the idea that the whole country is in obligation to them. Or that they own the country. Very high government debt means that the wealthy and the powerful have been feeding at the public trough. Trump cuts taxes for the wealthy. They didn't do anything with it except save it. So the government maintains spending while decreasing the extinguishment of existing obligation. So federal debt is exploding. At some point community obligations to the wealthy are too great, like Japan, and they quit distributing growth. They wealthy don't really want to spend, but they won't see it grow. The debt or obligation is meaningless until someone wants to use it. Then it might require government action to limit the ill effects. I ran on. Hope it helped.
Mike. I'm glad to see that you finally gave MMT a look. I like it. Gonna sit down now and give you a thoughtful read. Hey. Where's your new book?
i really appreciated your article i have read such really knowledgeable and very use ful
Why do global policy makers keep prescribing policies that help in fixing "supply constraint" issues when clearly in all your writings we live in a "demand constrained" world? Ignorance? Politics? A book you may be interested in is "Princes of the Yen" that talks about how the Bank of Japan used targeted credit creation (very MMTish) to sectors of the economy (window guidance) to get its post WW2 economic growth. The author tries to argue that the B of J purposely caused the "lost decades" to shock the system off the government's guidance (as using your concept of "supply constraint"); the government no longer thought they could centrally plan anymore (no more obvious low hanging fruit investments) and wanted the economy to transform to a more American free market system of competition and innovation.
Why are global policy makers prescribing policies that would fix "supply constraints" when we, as you argue live in a "demand constrained" world? Ignorance? Politics? Also Have you read Princes of the Yen? The author argues that the Japanese got its post WW2 economic growth through the B of J's targeted loan growth to sectors of the economy that they deemed productive. Ultimately the B of J's elite did not think they could centrally plan anymore and wanted to transform the Japanese economy to an American free market system of competition, innovation and risk taking. But years of government planning made businesses comfortable with being told what to do and hence the author argues that the BofJ pumped a bubble and pricked it in order to encourage economic reforms. I find what you wrote about China being at first "supply constrained" to now being "demand constrained" very similar to the Japanese experience as described in Princes of the Yen.
It seems to me that MMT means two broadly different things depending on who you speak to. In the first version, direct monetary injections in the economy via government budgets or directly via households with no debt liabilities attached come together with monetary reform removing the ability of commercial banks to create money via credit origination. In that version, MMT closely resembles 100% money system and the question is merely whether these direct channels are better than bank credit channels from the point of view of the efficacy, stability and income distribution of the economy. I believe the answer to that question is “yes”. In the second version, direct monetary injections are introduced in the economy alongside monetary creation via the credit system and it seems to me that this is merely a dose escalation strategy after the lack of efficacy of QE policies. Unsurprisingly, that’s the version of MMT more generally endorsed, doing more of what has not worked being the default option of monetary policy for now several decades. In any case, in both versions, MMT remains a domestic monetary policy which leaves unattended the problem of global current and capital account imbalances which lies at the heart of current difficulties. So, somewhat besides the point in the best case.
Excellent response as usual DvD. Your last issue is the issue. I am reading the comments before Michael's blog entry; so, not sure if he has discussed. But, how to prevent direct leakage of any MMT thru different accounts. As to Trade, perhaps, on account as Adair Turner (DMF) notes, monthly debit card, use it or lose it, but can only be spent on services; this might allow for recycling of money thru economy, create part-Time jobs for the under-employed and extra money making opp's for the employed. Increasing incomes, and a habit, of using tutors, gardeners, graphic artists, caterers, spa's, etc.... TO get that money, moving thru and thru, over and over, before it leaks out to another moderate tech electronics purchase. Summers, for infrastructure and point to whether that wil alter who is getting the resources in the economy. Keen suggests, paying off private sector debt to an arbitrary number, say 150K person, then if no debt, 150K in assets.
Yes, cstevens, it seems to me the last time the US engaged in de facto MMT was under Lyndon Johnson Great Society programs in the mid-1960’s. The result was a sharply increasing external trade deficit which precipitated Nixon 1971 decision to suspend the dollar convertibility into gold. There is no such convertibility to suspend this time around but I don’t see why the effect on external trade balance would be any different. Since external creditors will always attach obligations to their capital injections required to fund the trade deficit (even as domestic monetary creation will come with no liabilities attached under MMT), this will still be a system where US debt will keep growing and for which the flow of new domestic and external liquidity injections would need to keep permanently expanding proportionally to the real economy. For the US or for any deficit country for that matter, I really don’t see the point. Might be more appropriate for a surplus country if directly distributed to households since surplus countries typically have households retaining a low share of production. In this situation, MMT should stimulate household spending with some of it leaking abroad and reducing the trade surplus.
Forgive Me DVD. "the last time we did MMT...the great society....trade deficits....dropped the gold convertibility." I read a book by Michael Hudson. He was working for a bank, I think Chase, under contract to the department of defense. He found that there was a balance in domestic goods between the US and the rest of the world. For all practical purposes the trade deficit was due the Vietnam War. It seems fighting a foreign war requires extensive purchases in the area of conflict. In his paper he said that a continued war would result in a growing trade deficit and eventual collapse of the gold convertibility. This was around 64 or 65. I believe it was Mcnamara, he was so pleased, he told Chase that if the paper was published or leaked they shouldn't expect to be paid, and they should forget about future defense work. It worked.......A second point. MMT is a way of understanding things, not a policy prescription. They have their ideas of how things should be done in light of their understanding. But there are differences among them for the right policies.
Michael says China has for now exhausted productive destinations for investment. As a result further investment will increase debt without increasing GDP. This has negative effects on growth that are severe, prolonged, and very difficult to correct. There does not need to be any financial crisis. German rearmament in 1930's increased debt without increasing GDP (in the medium term - of course a tank increases GDP in the year it is built). The autobahns were built but the new Volkswagen cars were too expensive for people to buy them and the roads remained empty (except for the tanks I suppose). We can see this investment is unproductive a priori, while China investment is at least the right sort of investment. It *could* be productive. Present Green New Deal proposals to close down existing power stations and replace them with others that produce less CO2 seems misdirected investment, of the second because we can know a priori that it cannot increase GDP, just as we can know for the tanks. Two caveats: first the addition of large numbers of nuclear power stations that made energy cheaper and more abundant would obviously be a productive investment which would increase GDP long term. But this is not proposed, Green New Deal focuses on renewable (wind and solar). Second, small scale Green New Deal is not important. It has to be a really big undertaking. That said, MMT proposes funding Green New Deal by government created money. So without increased GDP the money created must, one thinks, lead to inflation. But there is an alternative. A sovereign government that creates money can also contrive to control wages and prices. If it does so then it will come to rule over a command rather than a market economy. I believe this happened in Germany from 1935 onward So the Green New Deal is (a) too small to matter one way or another (b) will lead to a large inflation (c) will actually lead the US to become a command economy. The first is by far the most likely, the last surely absurd!
Peter. I'm not sure, but I think the direction of your analysis is that the GND is a faulty thing. I don't know much about it. So I'll look to faults in your analysis: The first caveat, that additional nuclear power stations would be good or great for gdp, is deeply questionable. The nuclear power industry has only existed because of great subsidies from the federal government here. The're un-insurable privately. Where mishaps occur the economic loss is incredible. Large areas are made uninhabitable. You know in your heart the health consequences will be studied, but covered up by the government. The number of lives affected could be very large.
Peter. Now I want to look at "MMT proposes funding GND by government created money. So, without increased GDP the money created, must, one thinks, lead to inflation." You just prove the point of Mike's article - the people critical of MMT, most often don't really know anything about it and are unfair. Yea, according to you, what is distinctive about MMT is that the government will make the money it wants to spend, instead of taxing or borrowing it. This really set it apart from what exactly is being done now? Huh? No. MMT really just describes correctly what is already taking place. MMT is not a policy prescription. It's a way of understanding what is really going on, so that the mind can work without bumpers. At this time, the government is always spending by creating money. What appears to be, isn't always what is actually taking place. Associations don't prove cause. Or dynamics. I think the MMT people would say we accomplish GND by first looking at the economy for the amount of available unused resources that could be employed without reducing existing levels of production, and the level of taxation needed to free up the resources from private uses for commitment to the GND. But hey. To me these are the things the government is already doing. Nothing new. Just understanding it better.
But bank money, private money creation through the private bankign system is what has caused the spies in PRIVATE SECTOR DEBT that has led to several boom and bust cycles. As Keen notes, this globally, and a far bigger problem than Gov debt. Now Real Estate, Now Corporate, Now Credit Card, Now Student Loans, on and on Dot.com, Housing, Student Debt, Corporate Debt...so not sure what to fear, when we have what we have, and no the market isn't disciplining itself, eventual busts do, private delverages and gov debt has to spike, last last time, unless you would live for a principle of your ideology, rather than a reality of income streams needing to continue flowing so households, businesses and gov's don't collapse; especially as the worst you can imagine is a failure to fulfill a premise of your ideology.
You are correct. Contrary to Michael's assumptions, China's government debt is of high quality and high yield, including projects like the Three Gorges Dam (which returns its capital investment every 4-5 years), the South-North Water project (which is covering its 15-year bonds handily) and its urbanization drive.
Mike, for a few years now I've been trying to harmonize MMT thinking and your thinking. The conceptualization is so different. The frames are different, sufficiently so that conversation in one is unintelligible in the other. Or at least to me. The problem comes when I try to understand a concept or principle of one, within the context defined by the other. Much maligned MMT. The wealthy and the powerful abhor it - with good reason - the wealthy and the powerful demand an ideology that serves, not undermines. All the lies about it. Your right - they're unfair to it. They want to put a label on it and cast it aside. Financing is never a problem for a sovereign government - that the community must turn to the wealthy for the money is an illusion. You know-it's funny, whenever people talk about Medicare for all, helping the sick, the weak, the poor, the old, you get the same old "and where you gonna get the money?" But in 2008, 2009, and bailing out wall street and the wealthy, not once did I hear someone say: "and where you gonna get the money." It was never an issue. Seems our hearts go out to the wealthy and the powerful. The total amount of loans and loan guarantees made by the federal government: a trifling 29 trillion dollars. They sure found the money for the wealthy and the powerful. Our GDP was about 17 trillion then. Sure enough, just like you say, in this instance the end result is the same as you: just because you have the power to create credit doesn't mean you use it wantonly. No. Credit creation to mobilize resources to productive capacity generation. Yes. MMT is a way of understanding things. It embraces a wide range of tools to achieve wholesome economic growth. A lot of levers. Not a dullard without understanding pulling forcefully and ignorantly on his sole lever.
Hi Michael, do you foresee in the future that central banks are given authority to cut or raise taxes to balance consumption in line with investments and exports and imports to ensure that the economy stays balanced? From my understanding, right now taxes is purely fiscal domain. Central banks can only control interest rate and currency. so why not give them the authority to keep the economy balanced, and give them power to tax capital flow and consumption of goods and services?
Liao, taxes are mainly about income redistribution, and I don't think this should be left to a central bank or to any other non-elected entity. In my MMT discussion I don't discuss at all the politics of the decision-making process because I really wanted to focus on the conditions under which countries have debt or money-creation constraints.
Thank you. Your blog, and especially this post has increased my understanding greatly. This is a great public service.
Hi Michael, looking forward to reading the new book which I suspect will answer my question here. Similar to your long-standing comment on not just focusing on bi-lateral trade, is it even possible to think about MMT heaven under a single condition like "transferring money to the poor"? Wouldn't excessive saving of businesses/corporations and the rich (and their continuing low investment) thwart reaching heaven? Infrastructure makes more sense (if it remains publicly owned).
If money were directed to the poor under the conditions described above, JT, their additional consumption would boost GDP by boosting investment. Although some of this wealth would 'trickle up" to the rich, the net impact should be that everyone is better off but the GDP share of the poor has increased relative to that of the rich.
Suppose we're in a situation that looks like the description of the demand constrained scenario—unemployment and low interest rates. But suppose that marginal costs are rising (because the laborers who are unemployed are less productive than the ones who are). If hiring more workers at current wages means pushing the per unit cost above the current per unit price (i.e. negative profits), then demand-boosting government spending would have to cause inflation. Does such a scenario fall within the demand constrained scenario or is it a different scenario altogether? If it is a different scenario, how do you tell whether we are in that scenario as opposed to the demand constrained one? In any case, it doesn't seem we can conclude that the government can spend without causing inflation simply because there is unemployed resources.
Daniel Ricardo, particular circumstances so often determine the rightness or wrongness of a behavior. I can think of a situation where the government can always spend without causing inflation - when the compensation given is at, or below that given by the state, to support those individuals survival. In essence the community is obtaining some measure of value back from those it has to support anyways. This would be a government program. Government spending, obtaining some value, for the spending it must do otherwise anyway.
Daniel Ricardo. Another response to your post. The post says that if business has determined that some portion of the population is not as productive as they want and does employ them, for the government to step into the situation and through spending, stimulate demand, that action cannot but have the negative consequence of inflation. Firstly, I find a deceit in the phrase "negative profits." After all, the true wording would have been "reduced profits." You create the deceit of suggesting a loss. Secondly, you have the implication that inflation is something to be avoided. You have a certain ignorance of economics as now practiced around the world, and a prejudiced view of inflation. Every country I know of, and the Euro Zone, they all have a level of desired inflation for their economy. I remember Bernanke, at that particular time, saying that 3 or 4 percent inflation wouldn't be a cause for concern. So an accepted economic principle is that some level of inflation is a wholesome thing. I know that right now Japan would love to have 2 percent inflation. So I see in your post, certain ideas posing as truths, but are misrepresentation of fact and practice.
Daniel Ricardo, are you talking about Michael’s second MMT Heaven, which he defines as “When it involves a transfer of wealth to the poor in a demand-constrained economy with a great deal of slack or inefficiency (most advanced economies today)”? If so, I think it may be that even if what the government does is simply hand out money that it has just created to poor people, that would be MMT Heaven because then companies would shift THEIR money from nonproductive uses like buying back shares into productive investment in expanded capacity to produce whatever the poor people wanted to buy with their new money. The companies would hopefully have to hire people who were previously producing nothing (unemployed), and if they paid those people enough so the extra products continued to be purchased at a price that allowed for a profit, all would be good. I don’t think it matters whether the new workers are as productive as the ones already employed before the money handout, just that they are productive enough to allow for enough profit to motivate enough companies to meet the increase in demand with increased production. To make sure that happens, I think it would be important to (1) commit to enough ongoing money handouts for a long enough time to make mobilization seem safe and (2) ensure the marketplace is competitive (antitrust actions if/as necessary).
Daniel Ricardo, in a demand-constrained economy there is no reason to think that the newly-employed will actually be less productive than those already employed. Nor that the productivity of those already employed will remain stagnant when demand increases. A lot of productivity is the result of how well employers equip their employees to be efficient and is not under the control of the employee. I think that a lot of potential productivity is lost in a demand-constrained economy, in the ways described in the book “Bullshit Jobs.”
Danny Ricardo, I found another deceit in your post. You describe a particular set of circumstances in which something can be true. But at the end you say "In any case, it doesn't seem we can conclude that the government can spend without causing inflation simply because there is unemployed resources." DO YOU SEE THE LIE - YOU EXPANDED IT TO "IN ANY CASE." That's why I could quickly find a situation that defeats the conclusion you presumed to have established. Milton Friedman used to lie like you do. YES, THERE ARE CASES WHERE THE GOVERNMENT CAN SPEND WITHOUT CAUSING INFLATION JUST BECAUSE THERE ARE UNEMPLOYED RESOURCES.
I gotta give you credit Davy Ricardo. You got it all figured out. Imagine it's 1931, millions are homeless, hungry, unemployed, poorly clothed. Farmers are pouring milk into the gutters of streets because they can't sell the milk for anywhere near the cost of production. There are millions who would do anything for the food that's being destroyed. Then there's old Davy Ricardo telling Hoover the worst thing he could do is stimulate demand by providing work for the people who want to work. It would upset the careful balance of the marketplace. You see, the economy wasn't designed to meet the needs of the people who lived here. It was designed to satisfy the greed and selfishness of the wealthy and the powerful. They had wrung just about all the wealth out of the economy and to themselves as was possible. Just when they had almost acquired all the money possible from everyone else, there goes FDR getting rid of Gold, and making it impossible from them to acquire all the money in the world.
The deceit of Davy Ricardo. I find this post a rich mine of insight into the characteristics of the wealthy and the powerful and the people who serve them. Most people have indifferent, benevolent, or even altruistic motivations. Not so, the wnp. They have something of a predatory nature; seeing the bulk of humanity as a target of exploitation, or theft; not as kin, but as another aspect of existence that could be a utility to them. Davy's first sentence says, "suppose we are in the conditions of Mike's post, high unemployment and low interest rates." His 2nd sentence begins with a "But suppose that marginal cost are rising(because the laborers who are unemployed are less productive than the ones who are). Suppose means "assume to be true for the sake of argument. But what he would have us assume is an absurdity in two ways: first, in an economy with high unemployment and low rates, we would be in a depression, or strong recession. His supposition implies a shortage of labor and rising labor costs because of supply and demand for a commodity, labor. He has shoehorned the opposite economic situation into Mike's given situation. He has shoehorned a boom, into the bust. You see, he doesn't plan on being honest. He plans on deceiving. Mike's suppose and his suppose are mutually excluding. The sentence within the parenthesis is another deceit. Get this "the people who are unemployed are less productive than the ones who are, and so marginal costs are rising. Another absurdity. People who aren't working? If they aren't involved in the production of anything, how can they be the reason for the rise in the cost of anything? THESE LIES ARE MEANT TO MANIPULATE THE READER. They cause the reader to reach. Reach for a way to comprehend. The mind naturally seeks to sort and organize. The mind of the reader is put into a groping position. I'll continue with this later.
I have a question for Prof. Pettis. Do you take into account demographics into your analysis? Because almost every major nation from Italy to Germany to China to Japan is facing demographic decline with shrinking working age populations. China's youth population will fall more than 30% over the next decade while the retiree population will surge. What will be the effect of this on consumption and growth and public finances and debt sustainability? People aged 25- 35 are the major consumers of houses or cars or electronics ? If their number is collapsing, how can a nation increase consumption ? Of course every nation can't export it's way out of trouble because then the question is who will do all the importing ? Would love to know your opinion.
This discussion isn't really affected by demographics, Dr. Maulik, although of course demographics matter. The point here is that the sustainability of money- or debt-creation depends mainly on the specific conditions under which they occur. In countries like China, with its declining working-age population, consumption will still increase dramatically if the remaining households are able to retain a larger share of what they produce. The problem in these countries is not whether populations grow or shrink but rather the low share they retain of what they produce.
This discussion isn't really affected by demographics, Dr. Maulik, although of course demographics matter. The point here is that the sustainability of money- or debt-creation depends mainly on the specific conditions under which they occur. In countries like China, with its declining working-age population, consumption will still increase dramatically if the remaining households are able to retain a larger share of what they produce. The problem in these countries is not whether populations grow or shrink but rather the low share they retain of what they produce.
Michael posted an article in Foreign Policy for those who are interested...(I don't believe that this site will accept links, but the title for those who wish to read it is "Why Trade Wars Are Inevitable")
If you give the poor/middle class enough money, plenty of people who formerly labored will simply cease to work. So one key is to distribute the money in such a way that the incentive to work is increased not decreased. An earned income tax credit is an example of what works. A welfare check is an example of what does not. If extra money distributed to workers creates more demand but less labor participation inflation will tend to result. Money for nothing, to quote the legendary Dire Straights, will also impact individual decisions so if a person can get a subsidy in the form of an earned income tax credit and stay a mechanic they may choose that route instead of becoming an engineer while the overall economy is crying out for more engineers. The devil is in the details and government, at least in the US, has proven to be rather inept in the last couple decades at directing money to its highest and best use. The USA is plagued by a shortage of labor. It is not acute yet, but it is tending that direction. So all this theoretical discussion while interesting must take into account not only the political constraints but the thorny problem of implementation. Furthermore, at least in the USA, what has been given is incredibly difficult to take away so while demand stimulus may be advantageous in the short run once it is given through an embrace of MMT it will become a permanent fixture even though the environment in the future may call for less demand stimulus.
BCB, it sounds like you buy into the old trope of the wealthy and the powerful - the reason people are poor, is because they deserve to be: they lack motivation, initiative, commitment to a goal higher than immediate gratification of animal needs. They need to be whipped, or driven by need, into activity. Fundamentally that is an un-christian point of view. I guess that's where you put about 60 percent of the US population. I see things differently. There are certainly differences in the endowment of mind and body. They way I see it, the wealthy and the powerful are no better than anyone else. Considering it just from a moral point of view, the morality of the wealthy and the powerful, if anything, is less than that of the general public. They'r always looking for opportunity of more, not based on need, but vanity and lust. Many of them will lie, steal, murder, to get more wealth and power. Here's a quote I think you'l enjoy "THE DISPOSITION TO ADMIRE, AND ALMOST TO WORSHIP, THE RICH AND THE POWERFUL, AND TO DESPISE, OR, AT LEAST, TO NEGLECT PERSONS OF POOR AND MEAN CONDITION, IS THE GREAT AND MOST UNIVERSAL CAUSE OF THE CORRUPTION OF OUR MORAL SENTIMENTS." ADAM SMITH, The Theory of Moral Sentiments, 1759.
Citation needed. Most studies I am aware of show a very small likelyhood of people working less when they get more money. Surprisingly small, as I would also have expected a noticeable but tolerable decline in propensity to do paid work as income increases. Welfare is different because means testing makes it act as a marginal tax on the poor, which can easily exceed 100%, and poor people need money more than the wealthy do. Facing someone with a 100% marginal tax is expecting them to work for free, at a loss really, assuming some costs and opportunity costs arise from work. I know that they arise in my work. The mechanic could just as easily use the money he gets to train as an engineer as use it to decide he doesn't want more money. I'm more concerned about the massive subsidies to the FIRE/government sector letting rich people stop doing socially constructive work.
Opposite the front entrance to the British Museum is a shop that sells old banknotes from around the world. Most are colourful and of high denomination: all are worthless as money. They can make good wallpaper for the smallest room - and a talking point if you have an advocate of MMT visiting. The banknotes are all proof that governments can trash their currency. There is a tipping point when neither foreigners or citizens with a choice want cash, deposits or IOU's any more from that nation.
Yes Ian. And all governments & civilizations have come and gone too! Everything has its' time.
YOK- I think Mr. Pettis has done a solid job of explaining when MMT may be able to be utilized without much in the way of adverse consequences. My comments do not suggest that the Rich and the Poor have different moral underpinnings. To the contrary, people are pretty much the same. What differs though is the response to incentives. A rich person give an extra dollar will generally invest. A poor person given an extra dollar will generally spend. The two people are not morally different. They just have a differing economic situation so respond to the same incentive differently. MMT may work well in certain scenarios for a brief period of time. But it is far from a one size fits all solution, cannot be effectively implemented in the US with the political constraints, and theory is far different than practice. Serious thought must happen about unintended consequences as once it starts it probably cannot be stopped. If I am driving a car with no brakes, I should travel very slowly and try to avoid going downhill.
BCB - You do realize, that Mike, with his "MMT Heaven and MMT Hell," was having a little humor with the general ignorance of MMT? DON'T YOU? I disagree with you generality "a rich person, given a dollar, will generally invest." No, generally they will save that dollar. They will accumulate. Generally, the rich don't invest - they accumulate. They are at the point of surfeit, spending won't improve their life. The poor spend because that spending will improve their life. You ought to read a book or two by the people of MMT.
MMT holds that the value of the currency comes in part from the power to tax in that currency. Everyone knows that governments can and usually do abuse Fiat currencies, because printing money is a lot more fun than taxing it, but I bet if you had to give the government old banknotes or they would take your house they wouldn't stay worthless long.
MMT Perhaps, Blake, but the government isn't the one who has done or does most of the "money-printing", for that look to the Private Banking sector. Can say the government encourages money-printing, isofar as Central Bank is the government and they lower interest rates that the private sector uses to "print" money. Wanna print less money, raise interest rates. You are clear as to what printing is, correct... and who, prints money, right. Review M2 for different countries, notice trends. M2 to see money-printing. M2 of countries to see who doing. Take the ones you think doing good, and those judged as bad, then compare.
Ya, we outsource our "money printing" in a way that I find opaque, for what I consider to be nefarious reasons and outcomes. Especially dangerous now, when even a perfectly handled fiscal and monetary response would be painful and destabilizing by my expectations. Well, but less painful and destabilizing than the alternatives. I would favor a UBI with fresh money and raising interest rates or whatever capital requirements are constraining money creation now in order to control the resulting inflation. Also a carbon tax, and other pollution taxes, replacing basically our entire tax code, which I consider indefensibly stupid at this point. Tariffs to partially balance the offshoring of pollution, and to encourage sufficient domestic production to be autarkic in a pinch, and see what happens. MMT I think classically just mostly ignores the outsourcing of money creation as a distraction. They can play shell games all they like but the buck stops at the Sovereign.
I have been thinking a bit about debt levels and capital investments lately in terms of Britain's 1976 IMF Crisis. Was the UK correct to cut its budgets in order to stabilize the exchange rate, or would it have been better off to simply accept a dropping pound at the time? It was (well) before my time, but I am guessing that a large constraint at the time was likely that the world would not have so readily accepted the ensuing UK trade surpluses? Or am I completely on the wrong track?
Always humble Claire. I say they should have just accepted the falling pound. I do't know the history well. But, yes the partners wouldn't have liked it. But the wealthy and the powerful hate that too. As creditors they take a hit.
Hi, I'm not an economist neither a finance expert. I love these texts, because they really explain things in a rational and understandable way. But I still don't understand it so well that I can discuss with others about these issues. Why for example is the US economy growing and is unemployment so deep? They say it is, because taxes for the companies were lowered so that they spend more to hire new people. According to what I always read hear these lower taxes should create more investment in some kind of bubble somewhere. How would you Michael and Readers here describe the situation? Thanks
Mr. K. Forget about the tax cuts to the wealthy - they didn't help the economy at all. The stimulus is coming from the federal government - it's spending like a drunken sailor. The budget deficit is running about 6.8%. Nominal gdp is about 3.7%, so you know it can't last that long. Probably enough to get past the election.
Hi Klumpatsch, I’m not an expert either but have done a lot of reading since the financial crisis and the foreclosure crisis. I am not sure I understand exactly what you are asking here, but will try to address what I think you want to know. First, if GDP increases while hours worked remains constant, that’s the classic definition of increasing labor productivity. Though unemployment rates aren’t the right statistic for that because part-time employees are counted the same as full-time employees. You’d want to look at total hours worked compared to GDP, or just go directly to labor productivity graphs. Second, a demand-constrained economy can have some growth in demand (leading to some growth in GDP). It’s not necessarily zero-growth. What makes it demand-constrained is that you can only make it grow faster than it already is growing by taking steps to increase consumption, not by taking steps to encourage business investment. So lowering taxes on businesses and lowering interest rates on business debt won’t result in the businesses expanding production beyond what they would have done if you’d kept their taxes the same and offered them only high-interest-rate loans. What they will do instead with their increased cash (whether from tax savings or low-interest borrowing) is bid up asset prices. The iconic example of our times is share buybacks. Corporations are bidding up the price of their own shares at unprecedented rates over the last however many years (I haven’t kept close track).
Hi, I'm not an economist or a financial expert, but I like Michael's texts, because I somehow understand them. But I'm not certain in these things. Is it Trump's policy that made the US economy grow and unemployment shrink? Shouldn't they create bubbles instead of jobs when there is too much capital? Maybe someone could explain it here? Thanks
"Every Sunday afternoon, a few of the brightest math, finance, and economics students from Peking University converge on my courtyard house for an informal seminar on debt-related issues". How bright can they be when Professor Pettis has been wrongly predicting the collapse of China's economy for 12 years and makes statements like these: 1. "government spending on infrastructure is largely nonproductive and creates little value for the economy—as is the case in China today." Even China's massive South-North Water Diversion project is paying its way and the World Bank (an early funder of the high speed rail system) reports that China's HSR is returning a fat 6% annually on its capital invested. 2. "China represents the second scenario. Money creation or debt still go mostly to fund businesses and the rich, but there are few productive investment opportunities left." No, China's debt goes to create projects like Xiong'an New District, a greenfield site sixty miles south of Beijing. Tough two-thirds of its forty square miles will be wetlands and forest, it will connect the world’s richest city to its poor hinterland, re-house industries incompatible with the needs of a world capital and be bigger than Greater London. Its twenty-five-acre city hall opened in 2018 and seven hundred miles of new commuter lines put it thirty minutes from downtown Beijing. Lines connect the district’s city centers, universities, factories, hospitals, offices, institutions and government departments and keep all commutes below sixty minutes. Four high-speed train lines connect its three new airports: Beijing Daxing, Tianjin, and Shijiazhuang. Planners designed Xiong’an around 5G Internet of Things, artificial intelligence, big data cloud computing, smart sensors, smart lighting and integrated facial recognition. Their goal is to reduce time and manpower expenditure, raise energy efficiency, and reduce management overhead. To optimize space, much of its transportation, water and electricity infrastructure is underground. Local media predict that Xiong'an will have neither traffic lights nor traffic jams because Alibaba’s AI CityBrain will manage traffic with Baidu GPS and remote controlled, self-driving vehicles. Who will pay for this whizzbang technology? The UN's Urbanist Alain Bertaud says that, just as the Industrial Revolution gave England a productivity advantage over the world, the new urban clusters will give Xiong’an residents a productivity edge over competing cities: it will literally pay for itself.
GODFREE, I can't speak to your points 1 and 2 above. But ".... Professor Pettis has been wrongly predicting the collapse of the Chinese economy for 12 years and ....." is flat out a false characterization or statement on your part. I've been following Mike since about 2013, 2012, and he has never predicted a collapse. He has predicted a slow steady decline in economic growth eventuating in an economic malaise. By my thinking I expect the full malaise about 2025 and lasting for a couple decades. But, the future is hard to predict! What would a war or climate change disaster do to it. I don't know. He never predicted a collapse. I took the malaise as resulting from an erosion in trust, confidence of the general population, in the leadership of the country; somewhat along the lines of the dissolution of the Soviet Union.
Thanks, Yok, but no need to respond. Roberts is a little elderly and fairly obsessed about China, and the more China slows, the angrier he seems to get at people who don't agree with him (e.g. his claim that my PKU students are not bright is just silly). Several years ago I explained to him that in fact I have always argued that China wouldn't collapse, but he doesn't remember my explanation and won't remember yours.
Got it.
Very clear and interesting essay. There may be however two things not taken into account in this analysis for the "give to the poor MMT heaven in developed countries". - The "poor" may spend much of the MMT money they receive in imported goods, which will not increase GDP, but will only increase trade deficit (which will ultimately lead to monetary devaluation and inflation). - In developed countries, where "the poor" are not in extreme poverty, the MMT money should have an adverse effect on supply side : the more MMT money "the poor" will receive, the less they will feel the need to work and produce (they can live happily and enjoy free time with enough MMT money). This is one of the main causes of socialist economies failure. This supply side adverse effect will increase even more the trade deficit and then the inflation (and at the end lead to complete monetary failure).
LOIC ABADIE, I think I agree with your first point, that even in a demand-constrained economy, giving money to “the poor” (I think in this piece that’s shorthand for the not-rich, i.e. much of the middle class as well as the poor) can lead to trade deficits rather than only to increases in productive investment. That might be a small flaw in the discussion of the second MMT-Heaven scenario.
Loic, in regards your first objection - that a positive act could be negated by the actions of an outside power is not valid. The domestic government can simply use its power to restrict the availability of imported goods and confine the additional spending to the domestic economy. In regards the second: it sounds like you buy into the trope "the poor are poor because they are lazy and want to be poor. Nothing can be done to help them cause they don't help themselves." That's not a Christian belief. By your name, I doubt that's an Islamic belief. That's mostly a belief of the wealthy and the powerful toward the people they take advantage of. Here in the US we have a lot of the working poor - husband and wife both working to provide a decent life. Subservient type jobs. By directing more of the flow of national income to them, you allow them to work for themselves, in the sense that productive investment in the domestic economy make these very people more productive. In regards to your comments to the failures of socialism: the Chinese economy has vaulted itself to a global power in the last 30 to 40 years under what is generally considered socialism. So here you show some ignorance of economic reality.
Interesting, an MMT advocate that doesn't advocate print and spend in abandon. I sill disagree with the fundamental premise however, i.e. the implied assumption that there is some Goldilock's monetary scenario whereby an overseeing architect/architects can artificially set the optimal monetary conditions (i.e. appropriate price and quantity) for the economy. To do so would require perfect knowledge of the economy at all times, which is just not possible. Politicians have tried creating artificial markets for all sorts of goods and services, and none of them have worked particularly well, I see no compelling argument to suggest that money is different (most countries already have an artificial market in money controlled by a central bank and fiat issued currency, and this article clearly points out the intractable shortcomings).
Mr. Folly, it's funny. I've read 4 books by MMT people. Follow their blogs. They never use the word "print money" or "money printing." Only their detractors do. I've never read or heard them speak of " spend in abandon." Only their detractors do. What am I to think?
Yok Amazing how the superficial thinkers, whose perspectives have led to the current crisis, who identified all the wrong villains, applauded all the wrong angels, can not move past their systemic belief-based ideological cum group-think delusion and onto more green pastures, especially as their perspectives, and the infancy of the thought on these matters, are often those that progressed to the dysfunction in the first place. Keep letting know, how it really is. I wonder if they tire of their stale old premises. If they even know enough to see how irreal, unrelated, unimportant and barren their oft-repeated, but never relevant thoughts on these matters are; how trivial and trite their thought. They are merely unable to see. Since they have been repeating for decades a poor doctor they must be to ascribe the same medicine to a great variety of different ailments especially as the reason for the medicine has as to yet has not availed itself when it was supposed to have done so, so many times before.
If the U.S. has adopted MMT and wishes to buy goods from Russia does Russia accept our fiat out of thin air currency?
Ya, just like they do now. MMT is like gravity, you practice it whether you believe in it or not. If you create more money than the economy can handle and don't tax it back it will lose value until it is more valuable as kindling, and if you tax too much back you will get a deflationary collapse as it gains value too rapidly. Money velocity and other kinds of debt obligations play complicated roles I think but can be glossed over here. MMT is a description of the process, not a prescription for specific actions, that has to grow from your values and what outcomes you are seeking. In my opinion anyway, a lot of MMT people try to lump in job guarantees and stuff that they want to fund, which I believe muddies the water.
“What MMT actually does say is that governments must issue debt or raise taxes if either is necessary to control the potentially adverse economic impact of the additional demand created by spending the additional money.” Taxes yes. But they never say that governments must issue debt.
Hi Michael... For someone with finance background, it is easier to understand the logic of MMT, and it is elegantly proven through Balance Sheet Approach. Anyway, do you have any knowledge, whether one or some scholar already wrote this transaction based or balance sheet approach analysis in a more structural and well explained economic model? Thanks,
If supply can keep up with increased demand, inflation should not result. History shows that excess money always causes problems. Think petrodollars into US banks. loaned to South America and eventually lost by banks due to defaults. If Treasuries had replaced petrodollars and FED bough them, can there be a default. Can't the FED put Treasury Bonds on the shelf for 100 years?
Antonw, your closing question doesn't make sense to me. For me, within, or implied by your question, is a mistaken conception of financial realities. Yes, if supply can keep up with demand, and there is no change in the distributing of wealth, and if there is no change in the effort required to accomplish task in the real world, there will be no inflation. Just what does history show about the supply of money? How do you know when there is too much money? Do you have too much money? How and when will we know when you have too much money and power? Petrodollars into US banks and they loan them out again. To my way of thinking, complete misunderstanding of banking. Petrodollars increase bank reserves, but Fed will supply whatever reserves the banks require.
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