Sunday, March 27, 2011

More on Modern Monetary Theory

I view this debate as another round of “deficits don’t matter,” which was the hue and cry from both the left and the right a decade or so back as we were digging the hole we’re now in.

Let me say at the outset that I sympathize with the goals of Jamie Galbraith and others who would like to see the Fed finance Great Depression-type jobs programs, education, and other investments in human and physical capital.  It is what the country needs.

However, I view the problem not as insufficient aggregate demand but as our broken social contract, our broken government, our broken American dream.  Printing more money will just go into the pockets of the plutocracy if the banking bailouts and the Stimulus are any indication.  MMT is a joke in the present monetary historical context.  The American income distribution is like a Detroit V8 firing on one cylinder:  it doesn’t matter how much you step on the gas, only one cylinder going to fire.

Until we address the distribution directly, debating the issues in terms of distribution-blind standard macroeconomics is just obfuscation of the real issue, which gives the plutocracy no end of pleasure, I’m sure.  “Raise taxes on the rich?  How dare you speak those taboo words?”

Talking about the income distribution or “incomes policies” has been taboo in academic economics for generations.  “Why should the other developed economies like Germany and Japan with essentially the same aggregate production functions be able to have so much flatter income distributions?” we asked to deafening silence thirty years ago, as Reagan led the charge toward increasing inequality.

Now Emmanuel Saez and colleagues have gotten the distribution into the universe of discourse, but the debate is still stuck in distribution-blind macroeconomics.  Maybe after the revolution the academic economists will talk about why the revolution occurred, and discover that there are standards of fairness that seem to be hard-wired into people (plus or minus a cultural bias) that, once absolutely binding constraints on acceptability are violated, create systemic blowback.

So, again, my sympathies are with the goals of MMT as represented by Jamie Galbraith and others.  But I’d rather see the lessons learned be that (1) fiat currencies always fail because no group of human primates can responsibly handle having the power to print money, and (2) once you’ve gotten rid of the fiat currency, target your social policies (notice I am not saying “economic policies”) on helping people, not with stabilizing the business cycle.  My personal view is that a brisk business cycle is good for us, keeps us on our toes, permits necessary adjustments, etc.; and that we should abandon counter-cyclical economic policies and replace them with [approximately what the Germans have] social policies to provide health insurance, a poverty level dole, job search and retraining assistance.  And pay for it out of tax revenues.

How we get from point A to point B is going to be the challenge of the next generation, and I do believe it will entail revolutionary changes in the structure of American government and society.

Here are the links that inspired this comment:

Paul Takes Another Swipe at MMT - Lambert Strether (Pro MMT)

US Employment and Wages, Modern Monetary Theory, Trade, and Financial Reform – M. Jesse (anti MMT)


  1. Good post. You should consider chiming in on Pragmatic Capitalist - some good discussions on MMT there. Like most things that go terribly wrong, MMT seems elegant in theory and naive in practice.

    I agree with you on the social contract; however, I have also become quite pessimistic about the odds of that changing for the better without a large scale (and probably global) crisis.

  2. However, I view the problem not as insufficient aggregate demand but as our broken social contract, our broken government, our broken American dream. Printing more money will just go into the pockets of the plutocracy if the banking bailouts and the Stimulus are any indication.

    I don't disagree with you that the broken social contract & income inequality are the key issues and utterly neglected. But I guess I'm far less sanguine about the ability of primates to responsibly handle zero-sum situations either--if there are no political checks, the less powerful get screwed either way. But it seems to me that an 'austerian' mindset is more likely to exacerbate those problems than an MMT one is (if nothing else, the reduction in the public deficit in the 1990s led to overleveraging in the private sector).

    While I would like to see a more progressive tax code, a transaction tax and so on to reduce income disparity, it's much easier to increase spending to help the middle class--and the middle class needs help now. To the extent that would help rectify the political imbalance (which could then lead to higher taxes, a better social net, etc.), that seems to me the way to go.

  3. Mike,

    The usual response to zero sum situations is war, which is what we're getting. Then comes the inflation or hyperinflation (as wars are the easiest and fastest way to start an inflation). In this context, MMT's prescriptions are pouring gasoline on the fire. Wall Street/Daddy Warbucks will have not only a war but another series of bubbles to play, long and short, to further expropriate the financially naive.

    I feel the temptation to spend fiat "sovereign bucks" to benefit the middle class but in general the results of hyperinflation (which is entirely plausible in this context) are very, very bad for the middle class.

    We are living through some historical dynamics that none of us has any direct experience with. Hence, I favor addressing the problem directly, which proximately is millions of American families falling into poverty. A dark age may be upon us if the rich do not accept that they are part of humankind, and share.