Archive for the Category Modern Monetary Theory


12 drummers drumming

A few days ago I discussed a long article on blogging in The Economist.  It turns out that the same edition also has a shorter piece (I presume it’s one of the short lead articles, which they often develop further in the middle of the magazine.)

Here’s an excerpt:

Previous publishing revolutions, such as the advent of printing, prompted similar concerns about trivialisation and extremism. But whatever you think about the impact of blogging on political, scientific or religious debate, it is hard to argue that the internet has cheapened the global conversation about economics. On the contrary, it has improved it.

Research (by two blogging economists at the World Bank) suggests that academic papers cited by bloggers are far more likely to be downloaded. Blogging economists are regarded more highly than non-bloggers with the same publishing record. Blogs have given ideas that failed to prosper in the academic marketplace, such as the “Austrian” theory of the business cycle, another airing (see article). They have also given voice to once-obscure scholars advancing bold solutions to America’s economic funk and Europe’s self-inflicted crisis.

A good example is Scott Sumner of Bentley University, who believes that America’s Federal Reserve should promise to restore “nominal” GDP (as opposed to “real” GDP, which takes account of inflation) to its pre-crisis path.

.   .   .

The back-and-forth between bloggers resembles the informal chats, in university hallways and coffee rooms, that have always stimulated economic research, argues Paul Krugman, a Nobel-prizewinning economist who blogs at the New York Times. But moving the conversation online means that far more people can take part. Admittedly, for every lost prophet there is a crank who is simply lost. Yet despite the low barriers to entry, blogs do impose some intellectual standards. Errors of fact or logic are spotted, ridiculed and corrected. Areas of disagreement are highlighted and sometimes even narrowed. Some of the best contributors do not even have blogs of their own, serving instead as referees, leaving thoughtful comments on other people’s sites and often criss-crossing party lines.

At the top of the on-line article is this close-up of the bigger illustration provided in the longer article.

Because I’m so vain my family was curious, I asked the artist if I was supposed to be the drummer.  Yep, it’s me.  Bob Murphy and Warren Mosler are also so honored. I never expected my picture to appear twice in my favorite magazine; and in caricature no less.

It makes me feel guilty to be singled out, so here are 12 other drummers that might have been included:

David Beckworth, Niklas Blanchard, Lars Christensen, David Eagle, David Glasner, Josh Hendrickson, Robert Hetzel, Doug Irwin, Kantoos, Marcus Nunes, Nick Rowe, Bill Woolsey.  I consider Hetzel to be the most distinguished market monetarist, although because he’s at the Fed he might not be comfortable with that label.

I’m being sent so much interesting stuff that it’s hard to keep up.  I hope to do posts soon on David Eagle and William Barnett, who have sent me material that relates to market monetarism.

PS.  The artist didn’t say which drummer; I’m hoping it’s not the one on the left.

PPS.  I apologize to any market monetarists if I left your name off the list; I wanted to stay at 12 for obvious reasons.

Update: My wife says the caricature looks much better than me.

Strange bedfellows

The Economist has an excellent new article on heterodox economics in the blogosphere.  Lars Christensen should be proud; he created the name “market monetarist” just a few months ago, and now it has the official imprimatur of The Economist.

The article discusses three heterodox schools; neochartalism (MMT), market monetarism and Austrianism.  The Economist is careful avoid any suggestion that the three are comparable in all respects:

These three schools of macroeconomic thought differ in their pedigree, in their beliefs, in their persuasiveness and in their prospects.

Market monetarism has recently been the most successful in garnering high level endorsements.  The Austrian school has probably gained the greatest number of adherents (think about the Ron Paul phenomenon.)  As for neo-chartalism, I always thought of them as being a bit wacky, and thus was surprised that Warren Mosler was cited more than any other individual, indeed 4 times as often as the Austrian representative (Lawrence White.)  I might have reversed that ratio had I written the article.  In any case, I see this article as a big win for both MMT and market monetarism, as Austrianism was already pretty well-established.

I don’t have any significant issues with the article, but will provide a slightly different take on a couple issues.  Most of the market monetarism discussion focused on NGDP targeting, which of course is only one aspect of our model.  But I think that was a wise move by The Economist, as you can’t possible explain all the theoretical nuances in a magazine article.  And NGDP is where the attention is focused right now.  Here’s their comment on the political feasibility of NGDP targeting:

The market monetarists argue that fiscal stimulus should be redundant, because a central bank can always revive spending””if it sets its mind to it. If the Fed’s efforts have disappointed, it is not because market monetarism is wrong, but because the Fed is not sufficiently committed to the cause.

This is probably true. But it makes it hard for the market monetarists to clinch their case. Until a central bank truly commits to their policy, they cannot prove their point. But until they prove their case, central banks will be reluctant to commit to their policy

As with almost all discussion of monetary policy these days, this mixes the issue of feasibility and desirability in a rather ambiguous fashion.  NGDP targeting is actually not all that different from the Taylor Rule, or some other version of the Fed’s dual mandate.  And Bernanke continually insists that the Fed doesn’t have to worry about running out of ammunition.  So they can certainly boost NGDP if they want to. The question is; do they want to?  Or perhaps I should say; is their desire to do so strong enough to overcome the perceived risks?

When I point this out to other economists they are inclined to smile politely, and say;  “Well of course Bernanke would say that, imagine the market panic if he said they were out of ammunition.”

I point out that Bernanke held these views as an academic, when he had no reason to lie.  Some argue that he changed his views after joining the Fed, for some mysterious unspecified reason.  So although he’s always said the Fed never runs out of ammo, and he used to really believe it, now he’s lying.  I have a two word response.  Occam’s Razor.

Here The Economist exaggerates the amount of “activism” in market monetarism:

The market monetarists do not fret about the side effects of the activism they seek, which can misdirect capital, inflate bubbles and seduce people into over-borrowing.

I think they are confusing “activism” with “different policy.”  We want the Fed to adopt a different policy, but the NGDP targeting regime would certainly be less “activist” than current policy, even if it didn’t involve the futures targeting regime that Woolsey and I have advocated.  The current dual mandate/dual target approach allows for all sorts of activism.  NGDP targeting has a single target, and would result in far less activism, and almost certainly far less of the bubble phenomena that are associated with dramatic changes in NGDP growth rates.

Tyler Cowen had this to say about the article:

I know that Scott would insist he is not heterodox macro at all, but I can report I found it striking to be cited in this article as a more or less establishment source, rather than heterodox myself.  In both cases the journalist is probably correct.

Because Tyler anticipated me making a mistake before I actually made it, I must of course try to frustrate his expectations.  Here’s the reply I left in his comment section:

I was an orthodox economist in 2007, completely heterodox by early 2009, and am now becoming slightly more orthodox. Interestingly, my views haven’t changed at all during that 4 year span.

Seriously, Tyler has been the biggest factor in the success of my blog.  I’m constantly getting invitations, and then am told that Tyler Cowen recommended they contact me.  Next to Tyler, Ryan Avent has probably been the most helpful.  Note that Ryan works for The Economist (although he’s probably not the author of this particular article) and also note the title of the article: “Marginal Revolutionaries.”

Update:  Here’s Arnold Kling:

Krugman’s liquidity trap analysis is a blogosphere phenomenon; in the professional journals, it has little credence. One can make a good case that Scott Sumner, portrayed as heterodox in the article, is more mainstream than Krugman.

So Tyler, Arnold, and I offer 3 different perspectives, all of which are valid.  There is no “fact of the matter.”  (Just as there is no fact of the matter as to whether China is larger than the US, or whether the Ryan plan would abolish Medicare.)  In response to a comment below, I replied:

I suspect there is no “orthodox” view of monetary economics, as many economists lack coherent views. The same economist might believe in liquidity traps, or not, depending on how the question is worded.

PS.  Any thoughts on the artwork?  At first I thought that was Bob Murphy chasing Krugman.  But Bob’s not mentioned, and in any case he’s much more handsome than the cartoon character.  I’m also not quite sure what to make of the Goya etching reference, which I believe is entitled something like “The sleep of reason produces nightmares.”

Update:  Oh dear, I didn’t realize what I was getting into when I agreed to debate Bob Murphy.

PPS.  Because of the holidays I won’t be able to catch up on comments for a few more days.

PPPS. I did see the story about the two Fed appointees, but have no comment because the press told us nothing about the only thing that matters—their views on monetary policy.  A sad comment on our press, unless they don’t have any monetary policy views.  In which case a sad comment on our political system.

Links to my views on money/macro

Here’s my long promised post that introduces my views to a wide range of issues.  I will occasionally update this post, adding links where appropriate.  Feel free to make suggestions, but understand I can’t add all suggestions without making it too cumbersome.

Let’s start with a (slightly simplistic) intro to my view of monetary economics

And an earlier attempt from 2009 (very long) to summarize my views in one blog post.

Also check out my FAQs.  (Contains suggestions about other authors.)

And why I don’t like the IS-LM approach

The best intro may be my recent magnum opus at National Affairs defending NGDP targeting:

And shorter versions at the Adam Smith Institute and National Review:

My Cato paper on how tight money caused the crash of 2008:

And a similar paper from The American

A blog post on NGDP futures targeting

And an academic paper on futures targeting

And my first paper ever, a 1989 paper on using NGDP futures (not really recommended, just to show I’ve been focused on this idea for a long time.)

Critiques of MMT here and here.

A post defending the EMH.

My views on methodology (one of my favorites.)

An early critique of the “liquidity trap.”  A longer and more recent version.

An example of the importance of rational expectations theory

Why the Keynesians are wrong about FDR’s high wage policy

Petition for Monetary Stimulus (March 2009)

The Great Danes blog post and academic paper (thoughts on culture, policy and neoliberalism.)

Conversations with Russ Roberts on monetary policy and growth and neoliberalism.  (Something to listen to on the exercise bike.)

And finally a post I’ve always liked, a odd sort of mixture of Tyler Cowen and Paul Krugman.

I’ll add lots more later, but I don’t want to overdo it.  I may substitute things as well.  I already slightly disagree with a few points in my early posts–but nothing major.

Krugman, Keynes, and the MMTers

In the past Paul Krugman has expressed sympathy for me, deserted by most of my fellow right-wingers as I try to re-shape Milton Friedman’s ideas for the 21st century.  Now I get to sympathize with Krugman, tangling with the extremely frustrating MMTers.  Here’s how it goes.  The MMTers say X.  You show that X is not true.  They get outraged, claiming you misrepresented their views.  They never said X, they said Y!  Then you show that Y isn’t true.  Now they are even more outraged, “we never said Y, we said Z.”  And so on.   I feel a little less stupid about not understanding their views, as even a Nobel-Prize winner is apparently too dense to understand.  And yet hundreds of followers, many of whom seem to have little education in economics, have no trouble at all understanding what the MMTers are all about.  It makes you wonder.

In any case, here is Paul Krugman:

But what happens next?

We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle; they’ll convert them into currency, which they lend to individuals. So the government indeed ends up financing itself by printing money, getting the private sector to accept pieces of green paper in return for goods and services. And I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue.

For it is. And in my hypothetical example, it would be quite likely that the money-financed deficit would lead to hyperinflation.

In the comment section, Scott Fullwiler:

Fourth, no, a deficit financed by “money” is NOT more inflationary than a deficit financed by bonds. There’s a very simple reason for this–it is operationally impossible to finance a bond issue with “money” unless you have a zero interest rate target, in which case in your own paradigm you are in a liquidity trap.

Here’s how I’d respond to Mr. Fullwiler:  Argentina, Turkey, Brazil, Bolivia, Israel, Chile  . . . . case after case of countries experiencing extremely high inflation and extremely high nominal interest rates, all because they were monetizing their debts.  Not only is it possible, it happens almost every time a country tries to rely on money creation to pay its bills, at least for any extended period of time.  Very easy money usually makes interest rates rise.

Here’s Keynes:

“If you are held back [i.e. reluctant to buy bonds], I cannot but suspect that this may be partly due to the thought of so many people in New York being influenced, as it seems to me, by sheer intellectual error.  The opinion seems to prevail that inflation is in its essential nature injurious to fixed income securities.  If this means an extreme inflation such as is not at all likely is more advantageous to equities than to fixed charges, that is of course true.  But people seem to me to overlook the fundamental point that attempts to bring about recovery through monetary or quasi-monetary methods operate solely or almost solely through the rate of interest and they do the trick, if they do it at all, by bringing the rate of interest down.” (J.M. Keynes, Vol. 21, pp. 319-20, March 1, 1934.)

Keynes didn’t believe in a Fisher effect, unless inflation reached hyperinflationary levels.  Joan Robinson (an MMTer before her time) was even more extreme.  They were both wrong.  But modern Keynesians like Krugman have lived through decades in very high trend rates of inflation in lots of fiat money countries.   They’ve seen the Fisher Effect in action.  They’ve read Cagan’s research on money demand during hyperinflation.   That’s why they (and I) are impervious to the MMTers siren song that we can print money to pay the government bills.  Perhaps they will have more success attracting a younger economists to their, er . . . group, as the younger generation has experienced little hyperinflation, and several examples of large increases in the monetary base leading to no inflation at all (at near-zero nominal rates.)

Where MMT went wrong

I must be a masochist.  I feel like Humphrey Bogart, about to slide back into that leech-infested water.  But here goes:

Suppose we pick a fairly “normal” year, when NGDP growth and nominal interest rates and unemployment are all around 5%.  It might be 2005, 1995, 1985, whatever.  The exact numbers aren’t important.  Now the Fed does an OMP and doubles the monetary base by purchasing T-securities.  They announce it’s permanent.  What happens?

One MMT answer is that the Fed can’t do this.  It would cause interest rates to change, and they peg interest rates.  But the more thoughtful MMTers seem to be willing to let me do this thought experiment, as long as I acknowledge that interest rates would change and that it’s not consistent with actual central bank practices.  I’m fine with that.

So let’s say they double the base and let rates go where ever they want.  I claim this action doubles NGDP and nearly doubles the price level.  MMTers seem to disagree, as I haven’t changed the amount of net financial assets (NFA) at all.

But here’s the Achilles heel of MMT.  Neither banks nor the public particularly wants to hold twice as much base money when interest rates are 5%, as that’s a high opportunity cost.  So they claim this action would drive nominal rates to zero, at which level people and/or banks would be willing to hold the extra base money.  Fair enough.  But then what?  You’ve got an economy far outside its Wicksellian equilibrium.

The MMTers like to talk about cases where large base injections did coincide with near zero rates—The US in 1932 or 2009, Japan in the late 1990s and early 2000s.  But those were all economies that were severely depressed and/or suffering deflation.  I find it hard to believe that you could cut rates from 5% to 0% in a healthy economy without triggering an explosion of AD, especially if the economy was already experiencing normal levels of NGDP, normal growth in NGDP, and normal unemployment levels.  The closest example might be the US after WWII, but remember that people (wrongly) expected deflation after the war, and by 1951 the Fed gave up on that policy due to rapidly rising inflation.

MMTers forgot that the nominal interest rate is the price of credit, not money.  The Fed can’t determine that rate, it reflects the forces of saving supply and investment demand.  Hence an attempt to set interest rates far below their correct level in savings/investment terms (the Wicksellian natural rate), would trigger an explosion in AD, and much higher inflation.  Central banks know this, which is why after the inflationary 1965-1981 period they adopted the Taylor Principle.

That’s the flaw with MMT; it’s not net financial assets that matters, it’s currency.   And the Fed doesn’t set interest rates, markets set interest rates.  The Fed can briefly push them out of equilibrium (due to sticky prices) but this triggers big changes in AD and the price level.

The whole point of my Quantity Theory of Money post (and especially the Canadian/Australian comparison) was to smoke out their views of currency and the price level.  It was hard sifting through all the comments, which were often on side issues, but it seems they regard base money as just another financial asset.  But it’s not, which is why their view of monetary policy is wrong.  Indeed in a sense they don’t even have a theory of monetary policy, they have a fiscal theory that implies open market operations don’t matter.   But the Canadian/Australian data tells us that currency does matter, and NFA is the wrong aggregate to look at.

This is my very last MMT post . . . until the next one.

PS.  Quiz question:

1.  Sumner claims that a 5% NGDP growth rule will lead to roughly 5% NGDP growth, 5% interest rates, and 5% unemployment.  What would a 3% NGDP target lead to?

Answer:  About 3% NGDP growth, about 3% interest rates, and about 5% unemployment.

PPS.  The previous MMT post has 292 comments, and counting.  I may not have time to answer all the comments here.  In that case I’ll answer the 1% or 2% that actually comment on what I say here.