Modern Monetary Theory and the economic crisis

KyussBishop wrote: »

Thing is, what you're describing there, directly contradicts MMT - MMT doesn't really use monetary policy, it uses fiscal policy to manage the economy.

No. There's a very important fiscal component to Friedman (I'll call it Friedman, because the labels confuse - Friedman would complain of people taking his theory and doing their own thing, then calling it monetarism - Thatcher did something interesting in first championing him, then renouncing him.) The fiscal component is in deficits. Deficits are inflationary. People don't realise how radically different political economy was before Friedman. Too many variables were used; coal, steel production, etc. The more variables, the more chaotic the system you're trying to influence. Trying to minimise the possible levers isn't perfect, but it's more predictable (if you've pushed the lever the wrong way, you know what you've done - not like having thousands of dials and buttons, and not knowing which one you shouldn't have pressed or dialled.)

Many (most) MMTers explicitly state that the interest rate is not really a useful way to manage the economy at all, and that it should be left at zero, but with proper regulation guarding against overlending (since high interest rates are no substitute, for proper regulation).

Proper regulation is virtually impossible. Look what happened with the Anglo pair. That they got the probation act is only going to make matters far worse.

Again, I largely agree with your nuanced views on Friedman - but MMT is something different altogether to what he advocated (even if there are some interesting parallels with Friedman - who was quite an oddity/outlier)

He had a lot of theory; he was a theory machine. But, he could be very contradictory. And, most importantly, for economists working in America, if they say what a specific group of wealthy, powerful, selfish and stupid, audience want to hear, they get paid phenomenal sums for speaking engagements, etc.........And if they don't, they end up driving a beat up second hand car and hanging on to what little work they can get by their fingernails.

What I'm particularly interested in at the moment is Thomas Pikkety.

The basic thesis of his book is, that when returns on capital exceed economic growth, then it's just a transfer from labour to capital; inequality grows. It's also unsustainable; capital may be able to appropriate the higher return in the short term, but it leads to the kind of financial crisis that takes us to where we are now. And the fix that has been applied, has in fact increased capitals share of wealth by a stunning portion given how awful it's been for most people.

The Goldilocks solution for everyone would be, capital getting an average return that matches growth (no unearned transfer). Capital being sweated to produce real growth and innovation; and not profiting from the rigged inflation of assets.

The austerity is not that simple. A person may have only 100 euros, but they want to buy goods in a shop costing 200 euros. Many proposed solutions are not solutions, because they boil down to giving people that extra 100 euros they need. They will be exuberant for a moment, but if they don't hurry to the shop, by the time they get there, the goods that were worth 200, now cost 400.

KyussBishop wrote: »

See, this is an important part where MMT'ers and Post-Keynesians disagree with others: Whether or not fiscal deficits are inflationary, depends upon the level of economic activity - when you have high unemployment, fiscal spending doesn't have to be inflationary, because you can use it to mobilize the idle labour and increase economic output (this works against inflation).

Well, this is a thing with some of Friedman's arguments. If deficits increase the money supply, just a QE does, or playing with the lending rate. Why not just use deficit spending, as it's as good as any other option.

I don't believe there is a substantial difference between any of the options. But, if there is some underlying structural problem; like Pikkety's capital getting a higher return than growth. Increasing the money supply is a short term fix that may only make matters worse.

Well, that's just an example of very lax regulation; proper regulation had been practiced well in the US, for up to three decades prior to the mid/late 70's (and the ensuing Savings & Loans crisis in the next decade).

Yeah. The Anglo boys did things that would have easily seen them getting 20 years in jail in New York, even under current rules. They even put Martha Stewart in jail there.

The problem for Ireland is there was a kind of lawlessness before; in other things as well as banking. And much more of the same has now been green lighted.

I agree with you completely here, on the 'economists saying what the sponsers/patrons want to hear', and that having a career as an economist is literally dependent on touting a very narrow (and incorrect) view of economics.

I heard an economist make a joke with other economists as part of a talk recently. He said sometimes it's hard to remember what you actually believe and what your employers are paying you to believe. As part of political lobbying, economists are often sponsored to write nonsense papers to further the interests of who's paying them.

You mention an argument about the cost of goods inflating: Personally, I think inflation is one of the least-well understood parts of economics, by the general public - people seem to get the wrong idea, that "Money Supply Increase = Inflation" (ironically, a misquote of Friedman is often used to perpetuate this ), but that's not true, because you can use a money supply increase to increase economic output, and that counteracts inflation (as I mentioned at the top).

Yes, inflation is complicated - there has been long enough real world experience to know that certain theoretical solutions to problems; like price controls, do not work. And they can have perverse and paradoxical results.

Now, Friedman did believe you should increase the money supply, when needed, to increase economic output. But the distinction is, if you are getting an increase in output and consumption, that is growth - if you push too much money into that system too fast, you don't get structural growth, you get inflation - but at first it may feel like a party.

This is one of the things MMT focuses on a lot, but it's very hard to dispel the common myths about how inflation works.

There's a little bit of truth in all the myths.