MMs, MMTers, Larry Summers, young tweeters, and politicians
Larry Summers sees a roughly equal chance of three outcomes: high inflation, a soft landing, and the Fed slamming on the brakes so hard that the economy falls into recession. That’s a nice prediction, as whatever happens he won’t be wrong. (I’m being sarcastic. I don’t have much better to offer, other than to look at market forecasts.)
Larry now seems viewed as some sort of old fuddy duddy, to be contrasted with hip young pundits who think worry about inflation is as old fashioned as a 70s-era disco music.
Some people associate the “What, me worry?” school with MMTers, which seems kind of strange. As far as I can tell, MMTers are the most likely to believe that inflation is caused by big deficits. If inflation is rising, then the MMTers say that tight money won’t work, as open market sales merely swap one government liability for another, without changing income. That means inflation can only be stopped by tax increases, which means that if you haven’t stopped inflation then that indicates that your budget deficit is too big. Thus in the MMT model, inflation is basically caused by excessively large budget deficits. A very crude fiscal theory of the price level.
But then maybe I’m all wrong, as trying to pin down MMTers is like playing a game of whack-a-mole (as Paul Krugman once observed.) All I know for sure is that if we get a lot of inflation then MMTers will say, “See, we told you to raise taxes”, and if we don’t, they’ll say, “See, we didn’t expect inflation.”
Meanwhile, young tweeters seem to forget the Great Inflation happened, or perhaps that it was caused by some sort of oil shock. How oil shocks cause double digit NGDP growth has never been explained. Everything we learned about unreliable Phillips Curves and shifting inflation expectations seems to have been forgotten. You simply can’t have too much stimulus.
I suppose their ignorance is understandable. If parents expertly adjust the thermostat to keep the house temperature at 71 to 73 degrees for 20 years, with a 72 degree target, can you blame the kids who grew up in that house for thinking that thermostats don’t have much impact on temps? (Let’s hope Powell knows!)
My views are orthogonal to this intra-Keynesian debate. I don’t think the fiscal stimulus is a good idea, but not because I expect much inflation. The inflation rate will be determined by the Fed. Rather it’s a reckless policy because it will lead to higher tax rates in the future and won’t do much to generate growth beyond Q3. (Deficits do cause higher interest rates, but only slightly higher in a country like the US.)
For 250 years of American history, politicians have held the peacetime budget deficit in check because of fears of either inflation or higher interest rates (or perhaps a loss of confidence in the gold standard.) What would happen if they begin to sniff out that the actual risk is not inflation or much higher interest rates next year, rather the risk is higher taxes in 20 years, after they’ve safely retired? How would they respond to this information?
I fear that we are about to find out.
Tags:
21. March 2021 at 07:26
I’m baffled by Scott’s suggestion (his last two paras) that an increased deficit might result in increased inflation, and hence higher taxes in 20 years time. I mean if Biden’s Covid related largesse results in firms not being able to meet demand in 2021 are firms seriously likely to abstain from raising prices for twenty years, i.e. till 2041?
21. March 2021 at 08:08
Scott,
The fed seems to be predicting that they won’t need to act, at least until well into 2023. Do you expect that delivered inflation and expectations of further inflation will remain modest through then, or that one or both of the above will force action on their part before 23?
Thanks
21. March 2021 at 08:29
Won’t fiscal policy have more of an impact given the Fed’s commitment to avoid raising rates for several years regardless of economic conditions?
21. March 2021 at 08:47
Ralph, I said exactly the opposite, that deficits would not result in more inflation.
Effem, It would if the Fed had made that commitment, but it did not.
21. March 2021 at 09:04
The temperature analogy over last ten years would be better:
“Parents told us they would keep the temperature at 72 but never let it get over 70 and then seemed shocked when ppl stop listening”
21. March 2021 at 09:49
In fairness to some of the non-monetary models I’ve seen for inflation, some think the pick up of women entering the workforce in the 70s helped increase velocity. I suspect that’s true, but it was still all about the expected growth of the money supply.
21. March 2021 at 10:19
Great post !
I have a question: you say ‘The inflation rate will be determined by the Fed. Rather it’s a reckless policy because it will lead to higher tax rates in the future’. If the fed can always determine the inflation rate then why will big deficits now lead to tax increases in the future ? Wouldn’t your statement imply that tax increases could always be deferred by appropriate monetary policy ?
21. March 2021 at 11:07
I’m confused by some of the comments above (Musgrave and Market Fiscalist) that seem to link inflation and tax hikes. Inflation is not a necessary precursor to tax hikes. We will need tax hikes in the future to pay for all the deficit spending now. Basic budget constraint: present value of taxes over all time must equal present value of spending over all time. Borrowing is a way to shift taxes in time, not eliminate them.
Scott, during the recovery from the Great Financial Crisis, expansionary monetary policy changes generally were accompanied by increases in stock prices and long-term interest rates. Stocks and bonds moved in opposite directions, interest rate changes mostly reflected changes in expected inflation, all consistent with low AD. In recent weeks, long-term nominal rates seem to rise more than long-term expected inflation and stock prices drop. So, bond and equity prices seem to move in the same direction and real rates are rising. That long-term inflation expectations remain anchored indicates Fed credibility (and stable AD). However, that real rates rise as stock prices fall doesn’t seem consistent with rising growth expectations. (We would expect rising growth to lead to rising stock prices.) So, my interpretation is that real rates may be rising due to extremely large fiscal spending, which is expected to crowd out private investment (hence, falling stock prices). Fed AIT is stabilizing AD, but large fiscal deficits are acting as a negative supply shock. Does this make sense to you?
21. March 2021 at 11:20
Whether the topic is trying to permanently “run the economy hot” or providing welfare payments for having children and not working, the thing about the young tweeters is that they seem to think these debates are hypothetical and speculative rather than re-hashes of what we’ve already experienced in the 70s-90s. The warnings about inflation aren’t mere speculations about what could happen, they’re reminders of what did happen. Similarly, for the negative incentive effects of welfare (and might as well add minimum wage hikes and rent control to the list too). The young tweeters don’t even try to argue why This Time Will Be Different. They act as though there were no Last Time. The Great Forgetting is what I think Tyler Cowen called it.
21. March 2021 at 13:24
I guess Scott is saying that large deficits now lead (other things equal) to either higher taxes or inflation in the future and if monetary policy is used to keep inflation low then higher taxes are inevitable.
21. March 2021 at 13:29
You have to remember the deficit is a residual. Scott still doesn’t get that is the point of the Job Guarantee and auto stabilisers. Government spending increases during recessions and increases during booms.
https://new-wayland.com/blog/how-the-jg-controls-inflation/
Inflation happens when somebody asks for more money and somebody else pays it.
How does that happen with the Job Guarantee? Answer: it can’t.
The wage earner can’t ask for more money because if they do they will be replaced by another person currently on the Job Guarantee. The JG won’t bid back with a higher wage offer so the firm can swap people as it sees fit. This is how current unemployment anchors wages at the low end and the Job Guarantee retains the mechanism.
The firm can’t ask for more money either because if they do then the ‘no compete’ protection in the Job Guarantee is removed and social entrepreneurs can use Job Guarantee labour to create competitors to any price raising firm. Since JG labour is free that gives them a huge cost advantage. Firms won’t put up prices for fear of being destroyed. Instead they will have to invest in capital and quantity expand their operation, or be out competed by those that do.
What that means is that the Job Guarantee forces capital depth improvement in low end firms, or it forces their elimination so that firms slightly higher up the tree have space to improve their capital.
Firms can’t cry ‘what about the jobs’ when under competitive pressure, because we don’t care any more. All the workers will just transition to the Job Guarantee when a capitalist firm fails. And firms can’t undercut labour or import cheap labour because they will simply leave and join the Job Guarantee.
When the economy recovers and the private sector bids people away from the Job Guarantee the amount of government spending drops precipitously automatically, spatially as well as temporally. You can have areas being ‘highly taxed’ by this reduction in spending, while there are other areas in the country getting ‘tax cuts’ by increased JG spending. All without anybody lifting a finger.
Overall the JG is a powerful automatic stabiliser both in income and expectational terms that operates both temporally and spatially across the entire currency area.
All these secondary effects, that you don’t get with a pile of unemployed people on the dole or by just throwing money at people, force capital deepening and widening in the economy, and along with the anchoring effect means that MMT can run with about 2% unemployment, all of which will be wait unemployment by higher skilled workers. The higher engagement of the labour force and the forced capital depth improvements both drive forward productivity and output, and it is that expansion in output that ‘pays for’ the Job Guarantee.
The models show that Job Guarantee anchors prices, increases output and drives forward wage growth. https://new-wayland.com/blog/how-the-job-guarantee-fixes-mainstream-macro/
Normal taxation plays a completely different role in MMT. The job of taxation is to free up real resources that the public sector wants to use to fulfil its political programme. And that is largely the same as the traditional ‘tax and spend’ approach currently used, except you think in real terms not numbers. If you want to hire nurses you need to target taxation so it frees up nurses currently in use – and taxing millionaire’s yachts won’t do that. Taxation has to be targeted.
MMT eliminates interest rate changes, so the base rates remain at zero permanently, which leads to lower mortgages forever. It sees no need to tax if there are free resources available, so you get lower tax rates, not higher ones. The more financial saving an economy naturally does the lower the tax burden has to be.
21. March 2021 at 13:34
* Decreases during booms
He’s got himself in a bind.
What he’s saying is that if interest rates go up then that adds money to the economy and that causes inflation. But the mechanism that mainstream uses to stop inflation is putting interest rates up.
And if you don’t put interest rates up then bank lending will go bananas driving more activity and inflation.
But there is no mention there of the effects of the auto-stabilisers. As activity increases so does the amount of taxation, and withdrawal of the job guarantee wage as the private sector hires people.
It just shows how muddled mainstream thinking is when it has to go up against operational reality.
The best riposte to this thinking is Stephanie against Paul Krugman: https://www.bloomberg.com/opinion/articles/2019-03-01/paul-krugman-s-four-questions-about-mmt
21. March 2021 at 14:43
I’m not a kid — I’m 40 — but I’m pretty shocked at the use of the thermostat analogy to cover the past 20 years (my adult lifetime, essentially). I learned that analogy in college, in the last days of the Great Moderation. It made sense then. But now? Are you being sarcastic?
In the past 20 years the US has experienced three recessions. The first had a “jobless” recovery (following the gov’t balancing its budget). The second was the worst financial crash since the 1930s, after which the Employment-Population ratio fell by the greatest amount on record (following supply-side tax cuts for the wealthy). The third was Covid, which led to the sharpest increase of unemployment since the 1930s (following more supply-side tax cuts for the wealthy).
There has not been a “normal” labor market in my adult life, in other words. The Employment-Population ratio is currently at levels not seen since the Volcker Shock. Even prior to Covid, it hadn’t gotten back over Reagan levels at any point since the subprime crisis. We haven’t been anywhere near the 1990s labor market since… the 1990s.
Meanwhile, inflation has been below target for almost my entire adult life, despite the target being too low in the first place.
So the temperature has not been resting gently between 70 and 72 for 20 years! It’s been fluctuating between 50 and 68, with periodic plunges into deep freeze. As a consequence, private sector debt-to-gdp is the highest on record, 50 percentage points (of GDP) higher than in 1990.
I’m not surprised that people are looking for alternatives that don’t amount to “trust the technocrats to implement simple models that were created 50-75 years ago”? I agree that MMT isn’t very helpful, but the thermostat has pretty clearly been broken for a long time.
Given that most of the posts on this blog criticize policymakers, I don’t see why that would be so hard to understand.
21. March 2021 at 14:58
Strong argument, except I don’t understand why we’d need higher taxes in the future. What happens if we keep increasing our debt? Are we going to run out of dollars, or ability to sell bonds?
Also, if markets believe we have a near unlimited potential for growth (a.i., space exploration) it makes sense to “borrow” now from the extremely wealthy future.
21. March 2021 at 15:15
BC, Good comments. Yes, fiscal stimulus could have that effect.
Market, You said:
“I guess Scott is saying that large deficits now lead (other things equal) to either higher taxes or inflation in the future and if monetary policy is used to keep inflation low then higher taxes are inevitable.”
Yes, and BTW even inflation is a sort of tax.
Kester, Kelton’s response to Krugman is pretty weak. It’s clear she hasn’t even understood what Krugman was saying. Krugman’s response to her was pretty brutal, but unfortunately accurate.
And I gather you agree with me that MMTers believe that inflation should be cured with tax increases, not monetary policy.
Kindred, The fact that you don’t see the past 30 years of roughly 2% inflation as unusually stable shows just how young you are. Before the Fed started inflation targeting, there was nothing like this in the previous 200 years of US history. Inflation was far more volatile.
People now make a big deal of the difference between 1.6% inflation and 2% inflation, a distinction that would have been viewed as inconsequential by previous generations.
And I’m 65, so I view 40 as very young.
21. March 2021 at 15:23
The ‘successful’ Fed?
‘If “full employment” is anything under 5% unemployment and “price stability” is core inflation below the Fed’s 2% target rate then the Fed has achieved its dual mandate a whopping 3.5% of the time since 1957 when core inflation was first tracked. Yes, you read that right. THREE POINT FIVE PERCENT OF THE TIME.* That means the Fed has failed to simultaneously achieve both its mandates 96.5% of the time. I wouldn’t call that failure. I’d say they’re not even trying. And maybe they’re not?’
https://www.pragcap.com/feds-dual-mandate-bull-sht/
21. March 2021 at 15:41
Scott,
I focused my comment on labor markets (while also noting that inflation has been under target) for a reason: that’s part of the Fed’s mandate, too. An equal part. I know the history of inflation, but that’s history. Increasingly ancient history, as you note.
It’s less clear that is because of wise thermostat management. Why? Because labor markets (and financial markets) have been volatile, despite repeated supply-side reforms intended (in principle) to reduce frictions and increase efficiency.
So how sure are we that the Fed has actually been doing its job well with respect to its mandate? Inflation has fallen all over the world in the past 20 years… is the Fed responsible for all of that? It’s signaling as strongly as it can that it wants more inflation, yet expectations haven’t budged. Or is the economy of today — with open capital markets and no fixed exchange rate regime — less susceptible to inflation but just as susceptible to labor market volatility than the economy of the 1970s? If the latter then the Fed has had an easier job to do, yet arguably hasn’t done it well at all.
21. March 2021 at 16:25
Put another way:
Bernanke told Friedman that he knew how to stop a Depression. Maybe, but he didn’t know how stop severe recessions.
Bernanke said that he had the tools to manage the housing bubble. Just adjust the thermostat a little, right? So he tried that and caused a global financial crisis.
This *bad* monetary policy is why you started blogging in the first place, if I remember correctly. And now you are telling us that actually everything was fine, the “parents” kept things in balance so the “young” must just be ignorant?
I don’t get it.
Powell increased M2 supply by nearly 1/3 in a year, adjusted the inflation target upward, and promised to overshoot. That generated no significant change in inflation rates or expectations.
And you want us to believe that these guys are just turning the knob one or two degrees and keeping everything perfectly stable?
Inflation has been anchored over the past 20 years. Nothing else has been. Do not crucify man on a cross of 2% inflation!
21. March 2021 at 16:37
Kindred, I discuss many of the points you bring up, in particular the workings of the “thermostat”, in this recent post:
https://marcusnunes.substack.com/p/debating-monetary-policy
21. March 2021 at 18:20
Isn’t this basically the genius of Ronald Reagan?
“What would happen if they begin to sniff out that the actual risk is not inflation or much higher interest rates next year, rather the risk is higher taxes in 20 years, after they’ve safely retired? How would they respond to this information?
I fear that we are about to find out.”
21. March 2021 at 20:12
if Stimulus boosts AD without fed counteracting, it’s impact on GDP Growth > Real Interest Rate on debt. It pays for itself.
21. March 2021 at 21:27
Kindred, I didn’t say the Fed was doing a good job, I don’t know where you got that from. I said they kept inflation close to 2%, which is true. And no, “globalization” has nothing to do with this. Check out the inflation rate in places like Turkey, which are just as globalized. Monetary policy determines inflation.
As for other countries with near 2% inflation, they generally also have 2% inflation targets.
Andres, You said:
“It pays for itself.”
Such a happy thought!
21. March 2021 at 22:03
I think Winecoff is making good points. It would make sense to me that younger people would look at the inflation and labor market conditions of the 21st century US and conclude that something different needs to be tried to get a better labor market, and therefore just not care much about inflation. Therefore they may not be seriously engaging in debates about future inflation in part because the people worried about inflation seem not to care about unemployment and underemployment, which have hit those 45 and under much harder than those older than that.
21. March 2021 at 22:05
To quote (paraphrase?)Sumner: “Bad policy is leading us to socialism”.
22. March 2021 at 03:11
From a monetarist inflation ‘hawk’.
“Moreover, annual inflation rates are at present still lowered by the oil market mayhem and price falls in the months of March to May 2020. As these falls drop out of the 12-month change in consumer price indices in March to May 2021, annual inflation rates are likely to bounce up at least to 3 per cent and perhaps towards 5 per cent. Unless the Fed brings money growth down to the sort of rates found before Covid-19, the Biden presidency be blighted by the return of inflation as a major public policy problem.”
https://mcusercontent.com/78302034f23041fbbcab0ac6d/files/8155a4c4-1822-4ba6-aa79-fd6452a16e4e/2021_The_Critic_US_money_inflation.pdf
22. March 2021 at 03:15
“It would make sense to me that younger people would look at the inflation and labor market conditions of the 21st century US .. . . ”
Inductive reasoning does not apply?
‘We’ have ten years?
“ . . . our best estimate is that the net energy
33:33 per barrel available for the global
33:36 economy was about eight percent
33:38 and that in over the next few years it
33:42 will go down to zero percent
33:44 uh best estimate at the moment is that
33:46 actually the
33:47 per average barrel of sweet crude
33:51 uh we had the zero percent around 2022
33:56 but there are ways and means of
33:58 extending that so to be on the safe side
34:00 here on our diagram
34:02 we say that zero percent is definitely
34:05 around 2030 . . .
we
34:43 need net energy from oil and [if] it goes
34:46 down to zero
34:48 uh well we have collapsed not just
34:50 collapse of the oil industry
34:52 we have collapsed globally of the global
34:54 industrial civilization this is what we
34:56 are looking at at the moment . . . “
https://www.youtube.com/watch?v=BxinAu8ORxM&feature=emb_logo
22. March 2021 at 03:51
How can deficits cause higher interest rates? Deficits increase reserves in the banking system which put downward pressure on the target rate. If debt is not issued or interest is not paid on reserves, deficit spending will push the target rate to zero.
22. March 2021 at 05:45
“Yes, and BTW even inflation is a sort of tax.”
True, but do you have a preference for one (inflation vs higher taxes) over the other?
My intuition says moderate inflation has fewer negative consequences, but I really can’t say.
22. March 2021 at 06:55
I was never fully aware of your view on deficits. I assumed you believed the traditional classical liberal view. No such thing as a free lunch and deficits have a cost. I think a constant deficit target may not be so bad——but in the end it gets paid back. It must be paid back, one way or the other.
How? Many ways. Increasing budget devoted to interest payments (we really need to borrow more long now); so less money devoted to the economy per se; taxes, inflation, lower real savings——for example Fed Household Balance sheet does not count that debt must be paid back—-so it adds up households assets and net worth but ignores the debt the government owes.—-which is the debt households owe.
I would like to hear more of your views. My “general view” is less spending is good, deficits matter but spending matters more. I think this because I prefer a higher percent of economy to be private sector (standard Hayekian reasons). Like Friedman once said (I believe he did) if we are going to spend more just give money to citizens——and let them do what they want—-he thought this was least harmful..
Your views on regulation would be welcome. My bias is anti-regulation but not to zero it out. My bigger problem is bureaucratic freedom to do what they want——and this increasingly is a bigger problem as laws are big and general and implemented by government workers——-whose errors cannot be corrected naturally——private sector lives in a world of natural “‘predators”. The government is the predator——and they have no natural predators trying to stop them.
I think it was Max Weber —-who I believe was an optimist about bureaucracies——who said that bureaucracies tend to expand their mandates—-if he did not, some should have said it. They expand their mandates——this is a bad thng
What does this have to do with deficits? I think it means their impact combined with bureaucracy creates great inefficiency. But, I believe it is almost impossible to stop these trends.
Yet—-maybe a point in time—-but late 90s decreased deficits. They even believed it was permanent.
22. March 2021 at 07:23
Lizard, There’s a difference between explaining why people make bad arguments and actually justifying those arguments. I absolutely agree that tight money leads to bad Keynesian reasoning, it always has.
BTW, 21st century labor markets are no worse than 20th century labor markets.
Bob, You need to stop reading MMT. Deficits don’t boost the money supply and they don’t reduce interest rates.
Michael, I’ve done many posts on regulation and also on deficits.
TMC, Yes, but moderate inflation raises very little revenue.
22. March 2021 at 07:56
Cool! Yglesias dropped a 4-tweet response to this post!
Shorter Yglesias: “Sumner is completely right, as always, but my own part in this is always *political* economy, not economy economy.”
He’s a sharp dude. I think he’s probably right, there isn’t any point to fiscal probity in a two-party system when one of the two parties actually decides to be the Stupid Party.
(I do think his tweet about inflation and oil prices in the 70’s was a bit shocking – based on the entirety of his tweeting, I can’t believe he really believes that. Maybe we’ll get another tweet at some point walking that one back.)
(I also think the Substack kerfluffle has been good for Yglesias in reminding him that the Stupid Wing of his own party really is genuinely stupid – processing the simplest of economic concepts seems to be utterly beyond their ken).
22. March 2021 at 08:02
Were politicians wrong for 250 years? Were their fears right then but no longer valid today? If the latter, what caused the change? It seems to me that switching from a regime that gives you quick feedback for reckless policy but can cause more short term pain, to a regime that offers less short term pain but provides no feedback in an actionable timeframe for reckless policy thus risking much greater long term pain is not a great trade off.
22. March 2021 at 10:07
Perhaps politicians are not applying the “peacetime budget” rules because we are actually at war (declarations notwithstanding) and have been since 2003?
22. March 2021 at 11:56
America is an energy intensive consumer spending economy which is why oil shocks can lead to inflation. So contrast our economy with Germany and Japan which are export economies…so during periods of high oil prices they include the cost of oil in exports AND export more products to oil producing nations. So in the 1980s we tackled high energy prices by using more natural gas for electricity and using oil more efficiently. After those gains America didn’t really have a viable solution for high energy prices prior to fracking (the dysfunctional W Bush economy was the result of an underlying energy crisis). Now with fracking as energy prices rise our economy will direct more capital at fracking which will lead to more production and eventually lower prices which is what happened from 2010-2014.
And once again—MMT only works if the MMTers correspond in secret in a Google group while in public they hold themselves out as orthodox Keynesians. So every several years they should propose a new federal program and not worry about paying for it. Apparently Congressman Henry Waxman expanded the social safety net that very way in a very slow and measured way that went under the radar…so maybe he is a secret MMTer??
22. March 2021 at 14:01
anon/portly, good policy is good policy and bad policy is bad policy. It seem Yglesias is just making a fancier-sounding version of a tu quoque argument. If your primary goal is to win (or for your party to win) rather than make good public policy, and you’re willing to pass bad policy in order to win, then you’re already a nihilist and I don’t see what the point of all of this is, may as well just watch sports instead.
22. March 2021 at 15:50
From Tymoigne’s 2016 Camb.J.Econ article on government monetary operations quoting St Louis Fed president William Poole’s House testimony from 1978:
“When, the Treasury draws down its cash balances at the Fed, new reserves are pumped directly into the banking system as the balances spent by the Treasury are transferred on the books of the Federal Reserve to the member bank reserve accounts. The member banks, therefore, have larger reserve balances. … [T]he new reserve balances are entirely in excess of the requirements … [so] banks … put the balances up for lending on the Federal funds market. But since banks in general have excess reserves, the demand for Federal funds is low and so the interest rate on Federal funds is bid down to very low levels. The Federal Reserve, not wanting to see interest rates bid to low levels, comes into the market to absorb the excess reserves and to prop up the interest rate. The process, of course, works exactly in reverse when the balances flow from the banks into the Treasury as, for example, when taxes are paid or payments are made for newly sold Treasury securities.”
Was Poole, who is certainly no MMTer, wrong?
22. March 2021 at 21:08
Anon, You said:
“He’s a sharp dude. I think he’s probably right, there isn’t any point to fiscal probity in a two-party system when one of the two parties actually decides to be the Stupid Party.”
I’m not sure that would make him “right”, as that’s not his core argument. He seems to think the stimulus makes sense even apart from the politics.
Even so, I sympathize with his frustration over macro policy, as the hawks have been pretty consistently wrong for 12 years. I just think he’s taking it too far.
Amasa, You might want to look at a time series of defense spending as a share of GDP and rethink that argument.
Bob, That has nothing to do with the claim that deficit spending reduces interest rates.
23. March 2021 at 05:57
Increased AD has heretofore led to higher interest rates. As more commercial bank deposits are shifted into savings’ deposits, contrary to the 1961-1981 period, velocity falls. Why? Banks are black holes. Banks do not loan out deposits. Deposits are the result of lending. That is the accounting error. Banks are not intermediaries as universally posited. All commercial bank-held savings are lost to both consumption and investment, indeed to any type of payment or expenditure.
The only way to activate monetary savings is for their owners, saver-holders, to otherwise invest outside of the payment’s system, or to spend directly or indirectly. So, as AD falls, CAPEX hurdles will rise, and the outcome is an excess of savings over real investment outlets. Thus, we get Alvin Hansen’s secular stagnation. Keynesian economists have achieved their objective, that there is no difference between money and liquid assets.
23. March 2021 at 06:17
Yes, it is difficult to deal with a party that can win with a minority of votes, and is dishonest enough to push for austerity when Democrats are in the White House, but spend like “drunken sailors” when they control the White House and Congress. They beat up Democrats on spending when they pass “stimulus” bills, and then beat them up for austerity when Democratic Presidents push major deficit consolidation later in the cycle. In 2012, one Republican talking point was that Obama wanted to cut Social Security!
Let’s not forget that the last two Democratic Presidents, before Biden, actually cut deficits. Clinton signed bills to create a surplus and Obama signed bills to cut the deficit by roughly half. Reagan, both Bush Presidents, and Trump signed bills to spend like there was no tomorrow.
23. March 2021 at 14:05
Michael:
I lack your confidence in the fiscal rectitude of Democrats. The only federal fiscal discipline I know of since Calvin Coolidge came as a result of moderate presidents (Eisenhower and Clinton) who faced Congresses run by the other party.
23. March 2021 at 15:48
end the fed, especially sumner’s version of it, with prejudice.
23. March 2021 at 18:49
But Michael, Obama and Clinton only oversaw reductions in deficits *because* Republicans’ hypocritical support for austerity prevented them from spending like they wanted to. The main thing Republicans useful for is inhibiting Democratic presidents. Hypocrites are generally half right, and that’s the half they’re right about, so I’d complain about the other half.
24. March 2021 at 03:52
>(Deficits do cause higher interest rates, but only slightly higher in a country like the US.)
Why do deficits only cause slightly higher interest rates in a country like the US?
24. March 2021 at 06:06
@Arilando re: “Why do deficits only cause slightly higher interest rates in a country like the US?”
The repression of interest rates has been determined by the supply of and demand for loanable funds. Demand is being suppressed by chronically deficient AD, secular stagnation. Supply is suppressed by the FED’s LSAPs, which in some years has supplanted all fiscal Treasury issuance.
AD is further suppressed by the sterilization of interbank demand deposits, FOMC remuneration rates that exceed money market funding rates, in the borrow short – to lend longer, savings-investment paradigm (which destroys the velocity of circulation).
24. March 2021 at 10:39
Mark, You said:
“But Michael, Obama and Clinton only oversaw reductions in deficits *because* Republicans’ hypocritical support for austerity prevented them from spending like they wanted to.”
Didn’t the Dems control Congress during Clinton’s first two years? I don’t recall any spending surge.
24. March 2021 at 12:39
“And I gather you agree with me that MMTers believe that inflation should be cured with tax increases, not monetary policy.”
Government spending automatically decreases during prosperity with the Job Guarantee, as people are hired off it.
24. March 2021 at 19:16
I’m not claiming that Democrats are as committed to deficit reduction as they once were, but I’m convinced Clinton and Obama were serious about it. Clinton ran on deficit reduction in ’92 and Obama was pushing hard for deep cuts to the deficit in the aftermath of the Great Recession. Obama was calling for it independent of Republicans.
24. March 2021 at 19:22
Democrats care about the country more than Republicans. That’s obvious. Republican leaders only practice either realpolitik (Mitch McConnell), or fascism, like the Trump cult and its sycophants.
Democrats are not always correct, nor even virtuous, but they haven’t engaged in a lot of realpolitik or indulged the fringe ignorance and lunacy on the left. This allows Republicans to hold the welfare of the country hostage to get what they want, as they they threaten to shutdown the government.
That said, the party is drifting left, but not in intelligent ways. I’m very concerned that the next big crazy movement(s) could come from the left. I’m very concerned about the country increasingly resembling Argentina, economically and politically.
24. March 2021 at 19:29
From Scott:
“Didn’t the Dems control Congress during Clinton’s first two years? I don’t recall any spending surge.”
In his first two years Clinton tried his best to surge spending with Hillary Care. I remember all the fancy and obviously confusing charts Hillary presented. Even the dems were not quite ready for this disastrous policy. When the dems lost the congress after two years, Clinton figured out the people were not on the side of big government. To his credit, in the last 6 years of his administration, he governed wisely.
25. March 2021 at 01:42
Do ‘deficits’ get ‘paid back’?
“From 1946 to 2021 is 75 years. In 63 of those years the UK government borrowed. In 12 it repaid debt. Total borrowing will have been £2,174bn. Repayments have been £38bn. So, for every £1 borrowed 1.7p has been repaid. In that case what is the debt repayment obsession all about?”
https://twitter.com/RichardJMurphy/status/1366746422872338434?s=20
25. March 2021 at 10:36
Scott,
I’ve always wondered, if MMT works as advertised, why would there even be a need for the Job Guarantee? At pretty much constant full employment, frictional unemployment should be de minimis.
26. March 2021 at 10:21
gofx, Good question, but it’s not something I spend time thinking about.
26. March 2021 at 10:39
“I’ve always wondered, if MMT works as advertised, why would there even be a need for the Job Guarantee? At pretty much constant full employment, frictional unemployment should be de minimis.”
In the normal job selection process, first a job is created and then the matching system looks for people to match to that job. Once you get to the margins you end up with jobs that cannot be filled and people that cannot get jobs.
You have a matching problem.
That can only be resolved a little bit via training, job redesign, sanctions, etc. and you always end up with a list of vacancies and a list of people who want a job.
Always.
The job guarantee is different.
You take the person as they are and you find/build a job for them as they are.
You are guaranteeing a match because you are helping the person to become employed as a function of the programme. Coming up with jobs is part of the process.
Think of a bespoke suit made specifically to fit from a selection of templates, rather than trying to squeeze into an off the peg affair.
The result is that the list of people who want a job becomes empty. That is the key difference that makes a Job Guarantee a Job Guarantee.
Standard employment, workfare schemes, and even normal public sector employment can only provide people for the jobs.
It takes a Job Guarantee to provide Jobs for the People.
26. March 2021 at 18:05
Keep in mind that Yglesias wants the Dems to increase the debt to the point we have to decide between entitlement spending and taxes. Which he believes will severely undermine the Republican party. It’s an idea.
27. March 2021 at 21:23
@mpowell. So, Yglesias’ “idea” for the Dems to run up debt because it will harm Republicans sounds like the basic Democrat strategy on everything. Who cares if it also harms the country, as long as it cements their power or harms their opposition. They have applied this to: border chaos, free speech restrictions, impeachments, expanding the Supreme court, taxation, the filibuster, mail-in identity-free voting, etc. I’m sure Matt will get the Medal of Freedom for this wonderful idea.
27. March 2021 at 22:04
@Kester Pembroke. Kester, I don’t think you really answered the question on the necessity of the Job Guarantee. I did not ask “What is the Job Guarantee?”. Many readers know what it is, but I’m glad you defined it. The question is, given MMT’s postulates and predictions, why would this be necessary? If MMT keeps you at or near full employment over time, structural unemployment is likely to be extremely low. We’re not talking Depression-era unemployment and the WPA, we’re talking repeated full-employment.
Further, in a continuing full-employment economy, many people will have what are known as savings. So should they fall into a skills mismatch, they might be able to find a way out. They might even create their own job. These are called entrepreneurs. They also end up creating jobs for others.
But more importantly, the Job Guarantee takes one mismatch and turns it into another. By “creating” a job (BTW, Who does this? Who knows what it should be? Who knows its value? Who knows how long it should last?) that the market does not want, you are now mismatching both inputs and outputs vis-à-vis the economy/market. Far better to have a temporary assistance program or Friedman’s Negative Income Tax than to mess up labor and product markets. To sort of leverage off your bespoke suit example, let’s say the market/economy wants shoes, but I can only make suits. So if you give me and other’s like me “suit making” jobs, eventually you will have a lot of people walking around barefoot in suits.
I don’t agree with MMT, but it would be more coherent without the Job Guarantee. The Job Guarantee always felt artificial to me, but I think it reveals that, in my humble opinion, MMTers don’t understand markets, human behavior, monetary policy, exchange rates, and freedom. MMTers have fallen into the “Fatal Conceit” and seem to want to control a lot of things that they probably can’t or probably shouldn’t.
28. March 2021 at 01:21
MMT.
‘Fighting’ yesterday’s ‘battles’?
Usually the ‘economists’ who use ‘macroeconomic models’ ‘believe’ that the solution to the current macroeconomic problem is the implementation of the ‘correct’ type of demand side policies. That is, how to increase income/output {‘growth’}.
Increase M0, M2 or M3, cut r, or make it negative. Increase G and finance it by ‘borrowing’ from the central bank or by borrowing from the private sector. Or ensure that private credit is extended only for GDP transactions.
All that is lacking is a ‘sufficient’ increase in effective demand!
The neoclassical/Austrian economists, who believe that income/output is ‘supply determined’, will argue that all that is required to generate a large increase the growth of the underlying productive potential of an economy is for taxes to be cut and more ‘competition’, etc be introduced!
Aside from the negative externalities of ‘growth’, what they ignore is the ‘energy supply side’?
It’s ‘too late’?
‘We’ have ten years?
“ . . . our best estimate is that the net energy
33:33 per barrel available for the global
33:36 economy was about eight percent
33:38 and that in over the next few years it
33:42 will go down to zero percent
33:44 uh best estimate at the moment is that
33:46 actually the
33:47 per average barrel of sweet crude
33:51 uh we had the zero percent around 2022
33:56 but there are ways and means of
33:58 extending that so to be on the safe side
34:00 here on our diagram
34:02 we say that zero percent is definitely
34:05 around 2030 . . .
we
34:43 need net energy from oil and [if] it goes
34:46 down to zero
34:48 uh well we have collapsed not just
34:50 collapse of the oil industry
34:52 we have collapsed globally of the global
34:54 industrial civilization this is what we
34:56 are looking at at the moment . . . “
Louis Arnoux.
https://www.youtube.com/watch?v=BxinAu8ORxM&feature=emb_logo
28. March 2021 at 08:57
The mainstream is mistaken. I have a point of agreement on no interest rate targeting with Scott Sumner.
If Interest rates go up, a mortgage goes from a 25 year mortgage to a 40 year mortgage – thanks to the ever increasing retirement age. The monthly payment stays the same – as does the amount lent. Prices of assets stay elevated.
Savers then get a boost to their income via increased interest rates with no offset on the other side. Which then drives more borrowing to service the increased spending.
The problem with the mainstream is they have never run a bank. Warren has, and retired to the US Virgin Islands on the proceeds.
As Stephanie puts it.
Deficits don’t automatically drive interest rates higher, and higher interest rates don’t automatically translate into lower private spending.
28. March 2021 at 09:01
The Job Guarantee is essential to MMT. Without a JG its not MMT.
“By “creating” a job (BTW, Who does this? Who knows what it should be? Who knows its value?”
Social entrepreneurs. The probation services can create work for criminals to do for nothing, think how much work can be done for those down on their luck at minimum wage!
If you just want list of JG Jobs I can give examples: open source programming, social care, environmental work (e.g. stabilizing sand dunes), teacher assistants, musicians, community handyman, gardening in old people’s homes, tour guides, mothering and starting own business (similar to Enterprise Allowance.)
28. March 2021 at 09:02
The Job Guarantee is the ability to sell your 8 hours of labour for a fixed price, and to make your labour available on the “volunteer list”, which can then be deployed, if necessary, against private sector entities that try to respond to the Job Guarantee by putting their prices up. That threat changes expectations which will stop the price rise from occurring.
The approach I would take in the UK is here. The default job is looking for a position: https://new-wayland.com/blog/#From%20Furlough%20to%20Full-Employment%20-%20Part%20Deux
What people do on the JG can be left to social entrepreneurs in the social market, or as a pool for local councils to use. The probation service is able to come up with things that need doing. If we can do that for criminals being forced to work for nothing, we can do it for people that want to work for a wage.
Here for example: https://www.gov.uk/nominate-community-payback-project
29. March 2021 at 06:19
I’m a banker. The client in front of me can afford £1000 per month and I can see how. I alter the terms of the loan so they pay the bank £1000 per month. That way I get to write the loan, rather than not write the loan – and earn the bank a profit with which they pay my wages.
Banks don’t write loans based upon interest rates. They write loans depending upon the amount of money the punter is willing to pay and how much their collateral is worth.
Banks earn by lending. They want to do as much of it as possible constrained only by ensuring those loans don’t go bad. A bad loan wipes out the interest differential earned on hundreds of other loans.
is saying that lower interest rates will drive down inflation
Lower interest rates eliminates income in the same way. Savers get squeezed so they don’t spend as much. Since people aren’t spending as much prices will decrease.
Higher interest rates = more government spending. Lower interest rates = less government spending. The alleged control effect of interest rates on ‘Domestic Credit Expansion’ isn’t as Pavlovian as the mainstream economics profession believes. Largely because they have never written a loan in their lives.
MMT just allows Domestic Credit to float where it will, constrained only by a potential proscription list on what loans can be written for – because you can’t control it in any sensible way. Hence why MMT ends up at the permanent zero interest proposal
29. March 2021 at 10:28
Interest rates?
“Abstract
The rate of interest – the price of money {credit} – is said to be a key policy tool. Economics has in general emphasised prices. This theoretical bias results from the axiomatic-deductive methodology centering on equilibrium. Without equilibrium, quantity constraints are more important than prices in determining market outcomes. In disequilibrium, interest rates should be far less useful as policy variable, and economics should be more concerned with quantities (including resource constraints). To investigate, we test the received belief that lower interest rates result in higher growth and higher rates result in lower growth. “Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan”
https://www.sciencedirect.com/science/article/pii/S0921800916307510
29. March 2021 at 12:04
Regarding deficits and interest rates, or as Dick Cheney said “deficits don’t matter” the US is a bit of an exception from the rest of the world in that the US debt markets are huge and Treasury debt is only a small part of the total debt market. The corporate debt markets, the mortgage markets, the consumer debt markets, etc. are each just as large. A doubling of government debt is less debt issued relative to total debt in the US compared to the doubling of government debt in other countries.
If the government did something like take over the student loan market, that might change this dynamic.
29. March 2021 at 14:32
Michael, George W. Bush also ‘talked seriously’ about reducing the budget deficit, just like Obama. Budget control is popular rhetoric (or was, at least). Are you really disputing that Paul Ryan’s austerity did not constrain the Obama admin’s spending? Every other Democrat in the world (including Obama) disagrees and thought he was causing armageddon because of it, so it’s news to me that Obama actually didn’t even want to spend a cent more. When Clinton was campaigning, budget deficits were already falling because of the post-cold war reduction in defense spending.
30. March 2021 at 06:52
Mark Z,
Paul Ryan made his priorities clear in his last couple of years as Speaker. I like the corporate rate cut and some of the flattening, but if it means more deficit spending. And Ryan accepted huge spending increases at the same time, so don’t talk to me about Paul Ryan. He was always a fraud.
Obama demanded sizable deficit reduction and signed it into law. He was genuinely concerned about it.
30. March 2021 at 06:54
I meant to say I mostly like the tax cuts, but not at the expense of higher deficits.
30. March 2021 at 08:41
Kester, MMTers used to tell me I needed to really study the idea, not just rely on media stories. So I read an entire 600 page book on MMT, written by leading experts on the subject. It was completely unconvincing, full of basic fallacies. So what do I do next?
30. March 2021 at 09:31
re: “the price of money {credit}”
No, the price of credit is the inverse of the price level. Interest is the price of loan funds.
30. March 2021 at 14:35
“So what do I do next?”
I don’t like MMT either, I just support the Job Guarantee for justice for the unemployed. I have read lots of MMT type stuff.
What is your view on the Job Guarantee. Ban all bank lending except capital development lending (no mortgage lending), 0% overdrafts capital development lending agency business deliver state funds monetarist debt. Counter deflationary effect of bank regulation implement Job Guarantee.
31. March 2021 at 00:19
Allow bank lending only for ‘real’ transactions that are part of GDP?
“Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power – something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”
http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf
31. March 2021 at 09:43
Kester, I favor NGDP targeting plus deregulation of labor markets. The two in combination are the best jobs guarantee.
31. March 2021 at 15:53
“Kester, I favor NGDP targeting plus deregulation of labor markets. The two in combination are the best jobs guarantee.”
With a JG in place, you can abolish minimum wage laws etc and greatly deregulate Labour markets.
You can either have employed or unemployed buffer stocks. MMT says the employed buffer stock is superior. All stemming from the evil conspiracy 🙂 of NAIRU keep 5% unemployed at all times. It is easier to hire employed people than unemployed for example.
31. March 2021 at 15:57
Also, please don’t drift into jobism. Capitalism is our system.
The private sector no longer has to go into areas it doesn’t really belong, or want to go, in a misguided attempt to try and “create jobs”. It can be left to do its thing of eliminating jobs with innovation and automation via capital investment. That drives up productivity and leads to an increased standard of living for all.
In fact, the private sector can be encouraged down the route. Controlling labour supply makes labour expensive which shifts the capital/labour ratio towards using more capital. You can ensure competition is intense because you’re no longer terrified about firms going bust or moving abroad; the Job Guarantee ensures there are always jobs in a locality that people can take.
31. March 2021 at 16:03
I have a question for you: who gives the central bank wonks implementing NGDP targeting the Wisdom of Soloman?
The Job Guarantee is an advanced auto-stabiliser which implements ‘Spatial Keynesianism’. ‘Spatial Keynesianism’ is just a fancy way of saying that spending happens in the locations that need it. More in some areas and less in others depending upon the level of other activity at the time.
So as the economy moves out of recession and into growth what do we need to do to stop overheating?
Well, firstly, you implement a Job Guarantee which injects additional spending into the economy where it is needed at precisely the right amount — all completely automatically. “Precisely the right amount” means that it is withdrawn progressively and spatially as private economic activity increases. People hired away from the Job Guarantee start being paid with private funds, not public funds, so you get a swap of spending power, rather than an increase.
Over the cycle people come on and off the Job Guarantee which grows and shrinks government spending automatically. All without any politicians or central bank ‘experts’ making any discretionary changes.