Modern Monetary Theory and the economic crisis

KyussBishop

Not sure how much time I'll be able to spare to defend these arguments in the next while (arguments which, are quite challenging of mainstream economic theory, and thus will probably get significant opposition), but worth branching them off from other threads:
For a long time, I've been (slowly) reading up on Modern Monetary Theory (MMT) in bits and pieces, which is an economic theory from the Post-Keynesian community of heterodox economists.

It's an economic theory which has been constructed at a fundamental level, to properly take into account the role of government as an issuer of fiat currency (where most previous theories have leftovers of gold-standard-era thinking), and which better fits empirical evidence regarding economies, than many other theories (particularly neoclassical/mainstream, which outright ignores a lot of empirical problems). In our case, this would have to consider the entire EU, since money creation happens at the EU level.

It's not the ultimate economic theory or anything, in fact it is viewed by some of its strongest proponents as a temporary bridge to a much greater rewriting of economic theory (which will need to solve problems such as the impossibility of neverending growth, and environmental concerns plus more), but it is a big step (in my view) towards bringing economics closer to something resembling a science, and it presents excellent resolutions to current problems, which could save the destruction/deterioration of millions of lives across the world (depending on just how bad things will get, under austerity).


The theory fundamentally rewrites common (mainstream) notions about how government goes about funding itself, and in general the governments relationship with the private sector (including the governments overall role in the economy, which becomes centered on managing inflation and unemployment); this significantly affects interpretations of the importance of deficits and public debt, the potential for inflation, the consequences of money creation, and through all of that (most important for us now) strategies for handling economic crisis (among much else, which I don't have a good enough knowledge to expand upon at the moment).

When the role of money creation in government is properly considered, it reverses the common understanding of government and taxes: Governments spend first, tax later, and can also fund budgets through money creation; this means that the purpose of tax is not for funding government, but (along with fiscal policy in general) for managing inflation instead.
Also, in order for the private economy to actually have money to spend, it must come from government spending first (note: I'm talking about money, not wealth); so with MMT, this changes the understanding of government spending/taxing, to the government 'filling up' the wider economy with spending, so that there is enough money for productive exchange, and using tax to siphon out money from the wider economy, to prevent inflation, and also as a tool for wealth redistribution (from rich to poor, i.e. progressive taxation).


The theory, in focusing strongly on governments role in money creation and spending, also dispels many myths regarding inflation (though much of this is not a new understanding, as it is part of standard Keynesian understand of inflation), which is particularly important, since it is a lot of scaremongering about inflation/hyperinflation which is keeping economies all over the world, locked in their current problems.

Inflation and it's causes, seems to be an area of economics where peoples understanding is often patchy and influenced by some common myths. The most prominent of those myths is that money creation = inflation; that the act of creating money, in and of itself, causes inflation and causes the currency to devalue, but this is not true, it is what you do with money that determines how inflationary it is, and this myth makes it very easy for people to scaremonger that any money creation is universally bad.

Inflation is usually measured, based on the price of goods in an economy; if the price of a particular set of goods goes up, the price of those goods has inflated, and if (roughly) the aggregate price of all goods (or rather, those in the Consumer Price Index) in the economy crisis, there is overall inflation in the economy.
So this means, that if government can spend newly created money in such a way that does not inflate the prices of any goods (or inflate some only a little), then that newly created money does not have to be inflationary.

This affects the role of money itself in the economy, and governments role in issuing it, which is to provide people in the private economy, the money required for productive exchange (where if there is not enough money, production must slow down). If government can provide productive use of that money (including in public sector jobs), in a way that does not compete with scarce resources in the economy (which would cause inflation), then that expenditure of money does not have to be inflationary.
So this means that in an economic downturn, that if there are surplus resources in the economy, government can use money creation to provide public jobs to use those surplus resources, without the effects of inflation (specifically demand-pull inflation), that are reached when the supply of particular resources becomes scarce.


All of this leads to a number of possible policy choices in the current economic crisis, which might otherwise seem counterproductive (if looked at in the context of flawed/outdated economic theory):
- Government deficits do not matter, they can be funded through money creation, so long as inflation is kept manageable (the only reason we have to meet deficit targets right now, is for political reasons, not economic)

- Public debt can be rolled-over (kept at current levels, and more) indefinitely, so long as interest (which government in control of their own currency, has control over) and inflation are kept manageable; the debt crisis is again, purely political

- Government can monetize part of private debt (e.g. crippling mortgages), and the primary source of inflation will be peoples dispensable income that is freed up by this (which allows a lot of debt to be paid down, without a proportionate inflationary penalty)

- Government can provide a direct once-off stimulus payment to every citizen (a 'debt jubilee'), which can alleviate debt deflation that is holding our economy down, and provide a private sector stimulus all in one go, so long as inflation is kept manageable

- Government is able to use money creation, to setup a job-guarantee program, which replaces unemployment with temporary public jobs that utilize surplus resources (thus avoiding inflation), e.g. undertaking large-scale infrastructure projects, using excess construction capacity across the EU, to provide much needed improvements to e.g. transport and power infrastructure (with fiscal policy being used, where needed, to manage any inflation)


I've not done as detailed a job explaining some of these individual policies as I have in other posts the last while, but basically what MMT shows is that our current situation where we are locked into austerity, with enormous damage being done to our economy and society, is (to a significant extent) a political problem that is solvable at the EU level (where money creation is controlled), with largely no significant economic problem which would stop us from obliterating the most harmful effects of this crisis (most significantly, unemployment, massive debt, and all the social/economic/health damage they cause), and setting us on the path to recovery immediately, when it may take the best part of a decade to get that far otherwise (with enormous damage in between now and then).


I have not gone through this myself (my knowledge overall on MMT, comes in drips and drabs, whenever I need to look stuff up to support arguments), but here is a good resource on MMT:
http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

Main site (deals with lots besides MMT, is very good):
http://neweconomicperspectives.org

A blog which writes regularly on MMT, and is one of the best resources on it (particularly, searching through past entries, for discussion on specific aspects of MMT):
http://bilbo.economicoutlook.net/blog/

Cookie_Monster

It's an economic theory which has been constructed at a fundamental level

well without even reading any more than that the initial problem is that it's an economic theory and economic theory rarely if ever does well in the real world where the assumptions all those theories are based on can be shown to be unachievable or just plain wrong

KyussBishop

Ah, this got moved from Politics; a pity, as that is where I'll be using MMT-based arguments a lot.

Cookie_Monster wrote: »

well without even reading any more than that the initial problem is that it's an economic theory and economic theory rarely if ever does well in the real world where the assumptions all those theories are based on can be shown to be unachievable or just plain wrong

Absolutely, yes; this is the fundamental problem with most economic theory today, and Steve Keen's Debunking Economics does an excellent job of deconstructing mainstream/neoclassical economics, and how it does not fit empirical evidence (plus all sorts of other theoretical problems with it), which is the basis of what most academic economics courses are based upon, as far as I know (so, much economic education today is indoctrination into the neoclassical ideology, even if those indoctrinating don't see it that way).

This is one of the big differences with MMT, in that the theory has been put together with these fundamental empirical problems in mind (well, it's really a collection of other well known concepts put together, without much new in itself), but it is much more strongly based in empirical evidence; it's a rewriting of basic economic concepts, that much better fits empirical data where other economic theories fail.

The people who are supportive of MMT, and who helped put it together, are also heterodox economists, who are much more critical of economics in general (which is kind of implicit, through being heterodox), and who are particularly critical of empirical faults in economics, and are trying to push the field more towards scientific standards; so this is an attempt to correct some fundamental misconceptions with economic theory, and make it fit observed data better.

Also, as I noted in the OP, the people supporting MMT don't view it as an end in itself, as a complete theory; many of them just view it as an intermediary economic theory, which fixes many fundamental problems in current economic understanding, to be later replaced with a more robust economic theory which also factors in the impossibility of endless growth, and other fundamental issues like that which are still unaddressed.

KyussBishop

Might as well use this thread as a place to put interesting MMT links as well.

Here is a particularly interesting take on the role of tax (in the article below), which expands somewhat on my OP; with the MMT view of money, government spending comes first (funded by money creation), and the purpose of tax can not be to fund government (that is, in fact, logically inconsistent since government can always fun itself through money creation), but plays a number of other roles instead, including inflation management, and disincentivizing undesirable activities in the economy.

This article, gives some excellent insights into how the changed MMT view on money and thus taxation, affects its role in society and the economy, and also gives some insight into just how backwards the "tax funds government" framing of argument is:
http://neweconomicperspectives.org/2012/12/a-meme-for-money-part-4-the-alternative-tax-meme.html

Justin1982

I think you'd want to take any economic theory or model with a pinch of salt.

All it takes is some massive, secretive company to make a call to some guy in the FED, like in 2007, drop a bomb shell on them and then you can throw your economic theory out the window for all its worth.

KyussBishop

^^ The thing about this economic theory, which I have found, is that once you have a good understanding of inflation, and what actually causes inflation (demand-pull, supply-shock, and built-in inflation), then the fundamental theory behind MMT seems really obvious an intuitive, in such a way that it's massively surprising it's not what economic theory is already based upon.

Once you understand the mechanics of inflation and get past all the hyperinflation scaremongering, there does not appear to be anything left which actually challenges MMT; what is additionally most surprising to me, is that Chartalism (synonymous with MMT) has been around for more than a hundred years, but for some reason it has been ignored/suppressed, without any prominent arguments that actually seem to counter it.


So while you're right that people should be skeptical, should take new economic theory with a pinch of salt, this has been around for a hundred years, and yet, there is no prominent argument against it.
The primary problem brought up with it is inflation, but with a decent understanding of the causes of inflation, it can be seen clear enough, that it has ample room for avoiding inflation, particularly in an economic downturn.

andrew

KyussBishop wrote: »

The primary problem brought up with it is inflation, but with a decent understanding of the causes of inflation, it can be seen clear enough, that it has ample room for avoiding inflation, particularly in an economic downturn.

I havn't read enough about this (though I'll read some more and maybe get answers there), but the first few questions that come to mind are:

1) Governments don't create money, independant central banks do; does MMT suggest that governments get into the job of money creation?

2) If the answer to (1) is yes, then how does MMT deal with the idea that governments, subject as they are to political pressures, would just continually create money to serve short term political goals? (as an example,the only instances of hyperinflation have been when governments have created money (by pressuring the central bank) in order to fund current expenditure.)


3) More generally, what makes MMT think that the government is the right institution with which to manage inflation and money creation and fiscal policy, again given the political incentives governments face?

4) Your posts seem to indicate that you/MMT think there's no relationship between the money supply and inflation, when as far as I know it's pretty well established that there's a strong relationship between the two in the long run and that other factors (the ones you mentioned above, like cost push inflation) are operative in the short run.

Also, going by the wiki page, other problems of MMT that I've spotted include the fact that it only deals with situations in which exchange rates are floating, which makes it pretty limited. Also, the sentence " Exports, on the other hand, are an economic cost to the exporting nation because it is losing real goods that it could have consumed" seems to make no sense given the whole idea of trade is about producing things you're good at producing and then using them to pay for the other things you're not good at making yourself; how could exports possibly be bad? I read the linked citation and it still makes no sense to me

KyussBishop

Excuse the length of this; trying to deal with the points as thoroughly as I can manage.


1/2/3: Those are good points; central banks are heavily intertwined with government, so while they have heavy (often democratically unaccountable) independence, they are still part of the state, and have an enormous influence over politics; good article on it here: http://www.bbc.co.uk/news/business-16413230

Central banks can still stay independent, but their role changes slightly under MMT, with much greater emphasis on inflation management, where they might need to negotiate what programs to fund with government, based on how inflationary they would be; there are multiple ways you can configure a central bank under MMT, and one potential reconfiguration, may put central banks in control of how much public debt is allowed to be accrued.

Central banks in MMT isn't a topic I've looked at in much detail, but they don't need to cede power to government, and depending on how you decide to configure things, government may cede power to the central bank.

For sake of practical discussion, may as well consider 'government' to be government + central bank, because policy is so intertwined between the two, that it's not really useful to distinguish between them, unless specifically talking about how things will operate between the central bank and government.


4: This is critical to an understanding of MMT, and it seems to be the primary area where people get confused on it (for a long time, I was wary myself, due to fuzziness over inflation): MMT does not think inflation is not a problem, it unties the taboo surrounding the assumption that money supply = inflation, which is extremely easy to show that this is empirically false (any look at QE shows this immediately), and it looks at how inflation is caused by the way created money is spent.

It's really important to look at the actual mechanics of inflation, surrounding demand-pull, supply-shock and built-in inflation (these are not ideas of inflation based on MMT, these are Keynesian ideas).


The condition where inflation is definitely a problem, and where money creation does lead almost directly to inflation (thus where MMT specifically would restrict the money supply to prevent inflation), is when the economy is at full private sector employment, and at full economic capacity, because straight away the supply of labour is constrained, and industrial capacity is also at or near its maximum (so supply in general, is near its capacity), so any extra injection of money into the economy (and thus consumers hands, creating extra demand), causes demand-pull inflation from too much money chasing too few goods, i.e. too much demand chasing inadequate supply.

However, you need to look at an economy with high unemployment and reduced economic activity, to understand how MMT can use created money without causing inflation (or where inflation is heavily ameliorated); in this economy there is a lot of surplus supply, you have surplus labour, and a lot of industry has slowed down with a lot of excess capacity (and surplus supply chains), which can take on workers.
This means that if you put newly money into combining surplus labour with excess industrial capacity (and the surplus supply chains there), you can avoid inflation.

Worker wages from that, increasing demand in the private economy overall, can potentially cause inflation, but fiscal policy (increased taxes) can be used to control that. This is what the job guarantee MMT policy is, and it can be understood without using MMT at all; it combines temporary public sector jobs, with fiscal policy, to provide a very powerful inflation-management mechanism.


So, given that example of avoiding inflation in a downturned economy, and given how that shows the way demand-pull inflation can be avoided, it gives you a basic idea of how all these other policies (quoted from OP), can be engaged with in a downturned economy, while having a minimal inflation cost: (keep note of the constant disclaimer: so long as inflation is kept manageable)

- Government deficits do not matter b]except in an economy at full capacity[/b, they can be funded through money creation, so long as inflation is kept manageable (the only reason we have to meet deficit targets right now, is for political reasons, not economic)

- Public debt can be rolled-over (kept at current levels, and more) indefinitely, so long as interest (which government in control of their own currency, has control over) and inflation are kept manageable; the debt crisis is again, purely political

- Government can monetize part of private debt (e.g. crippling mortgages), and the primary source of inflation will be peoples dispensable income that is freed up by this (which allows a lot of debt to be paid down, without a proportionate inflationary penalty)

- Government can provide a direct once-off stimulus payment to every citizen (a 'debt jubilee'), which can alleviate debt deflation that is holding our economy down, and provide a private sector stimulus all in one go, so long as inflation is kept manageable

- Government is able to use money creation, to setup a job-guarantee program, which replaces unemployment with temporary public jobs that utilize surplus resources (thus avoiding inflation), e.g. undertaking large-scale infrastructure projects, using excess construction capacity across the EU, to provide much needed improvements to e.g. transport and power infrastructure (with fiscal policy being used, where needed, to manage any inflation)

When you say in the long run the money supply affects inflation, what that means, is that when full private sector employment, and full economic capacity is reached, inflation becomes a problem; that is perfectly correct, and MMT does not ignore that, it specifically addresses that and will tighten up fiscal policy to deal with that.

Here is a good article, countering a very similar inflation argument from Paul Krugman:
http://bilbo.economicoutlook.net/blog/?p=15683


The floating exchange rate part does not seem to be an issue, so long as the currency itself has a floating exchange rate; let me elaborate on that a bit:
The Euro has a fixed exchange rate between countries, but overall the Euro exchange rate with the rest of the world is not fixed; this is perfectly fine, any MMT policies will need to be undertaken at an EU level while we are still in the Euro.

I'll give the exports bit you quoted a look in a bit.

Justin1982

KyussBishop wrote: »

^^ The thing about this economic theory, which I have found, is that once you have a good understanding of inflation, and what actually causes inflation (demand-pull, supply-shock, and built-in inflation), then the fundamental theory behind MMT seems really obvious an intuitive, in such a way that it's massively surprising it's not what economic theory is already based upon.

Once you understand the mechanics of inflation and get past all the hyperinflation scaremongering, there does not appear to be anything left which actually challenges MMT; what is additionally most surprising to me, is that Chartalism (synonymous with MMT) has been around for more than a hundred years, but for some reason it has been ignored/suppressed, without any prominent arguments that actually seem to counter it.


So while you're right that people should be skeptical, should take new economic theory with a pinch of salt, this has been around for a hundred years, and yet, there is no prominent argument against it.
The primary problem brought up with it is inflation, but with a decent understanding of the causes of inflation, it can be seen clear enough, that it has ample room for avoiding inflation, particularly in an economic downturn.

I'm not necessarily arguing for or against any economic theory. I just think its a waste of time talking about inflation and economic growth when there is more important things which economists should be considering, yet as far as I can see they seem to be neglecting them altogether.

Sustainability medium and long term is very questionable. As in, most theories seem to assume infinite available resources and the ability for the earth to cope with the vast increase in pollution, population growth and CO2 output. Then there is the availability of oil which by all accounts is finite. Maybe all these factors I've mentioned will not be a problem for 50 years plus or maybe more but they will have a major impact in economic policy in the next few years.

I'd also view the large increase in consumer debt, national debt and inequality in society as major problems which will be spanners in the works for any economic theory which will cause economic predictions to be worth pants into the future.

I'd view economic shocks as becoming more of the norm rather than once in a lifetime events which we presume that they are.

KyussBishop

Yes I agree with your there totally, that sustainability is the most important issue going forward, and is going to be causing a lot of trouble very soon (due to upcoming oil supply shocks).

Those who have developed and support MMT, do not view it as a final/complete economic theory, because they recognize that those serious issues of sustainability and such, must be considered.

MMT is viewed by them, as an intermediate economic theory, to take the place of current mainstream theory that led us into this economic crisis, but they want to see MMT itself replaced in the future, with a sustainable economic theory; MMT solves a lot of the problems inherent in mainstream economics, so is a very good short-term alternative to it, but which does not solve the sustainability issues.

Another Post-Keynesian economist, who speaks favorably of (but I'm not sure if he is supportive of) MMT, is Steve Keen, and he has a good blog; he is working on trying to build a new model of economics, to properly take into account the issues of sustainability, which there is an interesting video on here:
http://www.debtdeflation.com/blogs/2012/11/16/energy-production-and-entropy/

KyussBishop

Finished up checking that point on exports.

andrew wrote: »

Also, the sentence " Exports, on the other hand, are an economic cost to the exporting nation because it is losing real goods that it could have consumed" seems to make no sense given the whole idea of trade is about producing things you're good at producing and then using them to pay for the other things you're not good at making yourself; how could exports possibly be bad? I read the linked citation and it still makes no sense to me

I've read through that article relating to exports and MMT, but I've not hugely read up on international trade yet, particularly regarding MMT.

My impression of the argument, is that it is not exports that are bad, it is net exports, where you export more than you import.
While some exports are obviously necessary in order to exchange required goods (such as for oil), without running too much of a spending deficit (which you need to when imports exceed exports), net exports send more of the fruits of production outside of the country, than is needed.

Exports in general put production into goods that go out of the economy, and which benefit someone else (another country), whereas putting production into goods which stay in the economy, benefits people in the local economy instead.
For this reason, importing more than you export (or having balanced trade) provides more benefits for the local economy, in terms of goods (both availability of essential and of luxury goods), providing a benefit to the local standard of living.

I don't advocate imports exceeding exports though, as I'm not yet certain of the full implications of that, as the way that affects international trade and a whole host of other stuff, is a bit complicated.


All the arguments surrounding this in that article, and international trade in general, are kind of complicated and could do with better explaining; I read that entire article, and it is hard to properly get my head around, but is the kind of thing where my understanding will slowly sink-in over time, as I read more on that specific topic.

KyussBishop

Here is an ok article on the inflationary effects of using money creation, in comparison to using public debt for the same purpose, in the context of the US: (platinum coin seigniorage is basically money creation)
http://neweconomicperspectives.org/2012/12/platinum-coin-seigniorage-issuing-debt-keystroking-deficit-spending-and-inflation.html

This picture is a good summary of it:
https://farm9.staticflickr.com/8359/8278730043_d023a21d83_b.jpg

Funding through public debt is generally more inflationary than just straight out money creation, because of the interest payments on the debt.

andrew

KyussBishop wrote: »

Here is an ok article on the inflationary effects of using money creation, in comparison to using public debt for the same purpose, in the context of the US: (platinum coin seigniorage is basically money creation)
http://neweconomicperspectives.org/2012/12/platinum-coin-seigniorage-issuing-debt-keystroking-deficit-spending-and-inflation.html

This picture is a good summary of it:
https://farm9.staticflickr.com/8359/8278730043_d023a21d83_b.jpg

Funding through public debt is generally more inflationary than just straight out money creation, because of the interest payments on the debt.

I still need to read a bit more about this, but I think that the line 'if government spends past full employment then there'll be demand pull inflation' is very significant.

What MMT seems to do is just trust that the government won't spend past full employment. But history has shown that, when given the power to create money (or having obtained it through pressuring the central banks), then governments will regularly spend beyond full employment. That's why central banks and central bank independence is so important.

As far as I can tell, MMT just wants to augment a part of the monetary transmission mechanism, which seems to make sense given the transmission was (and to an extent still is) broken. Right now, the central bank uses open market transactions to increase banks' reserves, and then just has to hope that banks will lend these excess reserves. If they don't, like when they hold excess reserves because they're worried about the economy, the transmission mechanism doesn't work (partially). MMT just wants the government to be able to create money and spend it itself, without having to rely on banks lending money.

But this brings at least two problems:

1) The aformentioned fact that governments have regulary spent beyond full employment equilibrium even when they know they have reached this point.

2) It's not ideal to rely on the government to allocate resources. Fiscal policy is useful from a 'getting money into the economy' point of view. But I wouldn't trust government to ensure that money gets put to the most productive use possible. (But then again, you could probably argue that it doesn't really matter where the money goes, so long as AD is increased so that people can still convert their notional demand into effective demand.)

I think the first problem is more real; do MMT theorists give any explanation as to what mechanisms will prevent the government from creating too much money?

KyussBishop

I don't think there is a principle reason why central banks can't be retained, and still have the ability to hold back the supply of money; it would just involve central banks being able to have a 'yes/no' decision over fiscal policy that requires money creation, like the job guarantee and such, and provide funding for it when it is needed (i.e. piecemeal, rather than giving the whole sum in one go, so they still have control over inflation and can cut off the funding at any time if needed to curb inflation).

Still, I haven't directly seen MMT theorists write on this point (and can't find anything specifically addressing it after searching, but will try asking about it); I'm not sure such a configuration is preferred, or whether the central bank would come under government power. I would assume the above is what would be done, because I haven't seen any writing about a bigger reform of central banks.


The platinum coin seigniorage is, I think, a stopgap measure to resolve the crisis; I'd certainly be in favour of a more robust system, that adds a proper mechanism for money creation, rather than using that, but it's good enough for the short-term, preceding a bigger reform.

On point 2 there, the principal problem now is that the private sector just isn't providing the jobs, so government has to step in to relieve unemployment.

[Jackass]

An accountant, an engineer and an economist were travelling through the rain forest when they came upon a crocodile infested river that they could not pass.

The accountant suggested that they could tie some vines together and the tort of the combined fibers should be enough to hold their individual weight, and they can sling it over a tree and clear the water to get across.

The engineer butts in and says no, they can use the felled wood around them to build a bridge, he just needed a few minutes to do the calculations.

Before he can though, the economist steps in and says "lads, lads, what are you doing?? Why waist your time when I have the perfect solution! Now, supposing we had a boat...."

And therein lies the answer. Economics is all theory. It is never an exact science that can be applied to the real world, as your dealing with human behavior, which is too unpredictable and there are too many variables.

KyussBishop

That doesn't attempt to address any of my arguments or the arguments surrounding MMT, or provide new ones, and isn't even on-topic.

andrew

[Jackass] wrote: »

An accountant, an engineer and an economist were travelling through the rain forest when they came upon a crocodile infested river that they could not pass.

The accountant suggested that they could tie some vines together and the tort of the combined fibers should be enough to hold their individual weight, and they can sling it over a tree and clear the water to get across.

The engineer butts in and says no, they can use the felled wood around them to build a bridge, he just needed a few minutes to do the calculations.

Before he can though, the economist steps in and says "lads, lads, what are you doing?? Why waist your time when I have the perfect solution! Now, supposing we had a boat...."

And therein lies the answer. Economics is all theory. It is never an exact science that can be applied to the real world, as your dealing with human behavior, which is too unpredictable and there are too many variables.

Please keep posts like that to this thread.

KyussBishop

An interesting MMT article, about MMT and compatibility with environmental sustainability i.e. the impossibility of neverending growth:
http://bilbo.economicoutlook.net/blog/?p=22222

One particularly interesting part of the article, is of the difference between Cost Benefit Analysis and Cost Effective Analysis; it sounds a kind of dry, but is actually quite interesting:
'Cost benefit' type calculations prioritize economic benefit above all else, whereas 'cost effective' type analysis is more tied into politics, putting higher prioritization on moral concepts like avoiding child labour and such.

Here's how it's put in part of the article:

In cost-benefit analysis (of which Pigouvian and Coasian analyses are particular forms), the ends of policy are determined by the (economic) analysis itself. The amount of pollution to be emitted, the amount of a resource to be depleted, or wetlands to be preserved, will be the amount corresponding to the equilibrium. In cost-effectiveness analysis, on the other hand, the ends are determined outside the economics, say by a democratic political process informed by scientific information regarding the biophysical limits. Economics is then employed to try to find the most cost-effective means for attaining those independently determined ends. This is a huge difference. To get the point across, for some it may be more useful to mention that cost-benefit analysis can be used to derive the optimal level of child labor, the optimal level of slavery, or the optimal level of crime.

Cost Effective Analysis is a good example of a more pragmatic approach to economics/politics (which ties into empiricism/scientific-thinking), whereas Cost Benefit Analysis seems to be a good summation of the kind of approach, that would more likely dominate in the idealized 'free market' economic frameworks, where the immediate economic benefit is the prime consideration.

jere57

In MMT taxes are not used to fund the Government per se. There are two main reasons for taxes and I will only get into one right now - to regulate inflation. When an economy is near full employment and capacity and begins overheating (inflation) taxes are raised and/or spending cut. As an economy improves and most people interpret that as inflation.

I will use an analogy to illustrate the difference between an increase in price levels and real inflation using motel rooms. During the off season the cost of a motel room is at its lowest and there are many rooms available. As the peak season approaches prices rise but there are still some rooms available. During the peak season the price is highest. Now if every person who wants a room can find one and there are no vacancies we have reached the optimal price equilibrium. If one more guest enters the equation the game of musical chairs - too many dollars chasing too few rooms - and the price is bid up, inflation. The solution in the short term is to take money out of the economy. However, in the longer term MMT would consider supply side tax cuts for the production of motels.

Admittedly very simplistic, but you gotta start somewhere..

ezra_pound

KyussBishop wrote: »

An interesting MMT article, about MMT and compatibility with environmental sustainability i.e. the impossibility of neverending growth:
http://bilbo.economicoutlook.net/blog/?p=22222

One particularly interesting part of the article, is of the difference between Cost Benefit Analysis and Cost Effective Analysis; it sounds a kind of dry, but is actually quite interesting:
'Cost benefit' type calculations prioritize economic benefit above all else, whereas 'cost effective' type analysis is more tied into politics, putting higher prioritization on moral concepts like avoiding child labour and such.

Here's how it's put in part of the article:


Cost Effective Analysis is a good example of a more pragmatic approach to economics/politics (which ties into empiricism/scientific-thinking), whereas Cost Benefit Analysis seems to be a good summation of the kind of approach, that would more likely dominate in the idealized 'free market' economic frameworks, where the immediate economic benefit is the prime consideration.

This sounds like OK theory but makes no practical sense for appraisal of two different motorways, for instance, or for most projects that the state uses cba for.

ezra_pound

jere57 wrote: »

In MMT taxes are not used to fund the Government per se. There are two main reasons for taxes and I will only get into one right now - to regulate inflation. When an economy is near full employment and capacity and begins overheating (inflation) taxes are raised and/or spending cut. As an economy improves and most people interpret that as inflation.

I will use an analogy to illustrate the difference between an increase in price levels and real inflation using motel rooms. During the off season the cost of a motel room is at its lowest and there are many rooms available. As the peak season approaches prices rise but there are still some rooms available. During the peak season the price is highest. Now if every person who wants a room can find one and there are no vacancies we have reached the optimal price equilibrium. If one more guest enters the equation the game of musical chairs - too many dollars chasing too few rooms - and the price is bid up, inflation. The solution in the short term is to take money out of the economy. However, in the longer term MMT would consider supply side tax cuts for the production of motels.

Admittedly very simplistic, but you gotta start somewhere..

If taxes aren't used to fund the government then what do they fund?

KyussBishop

jere57 wrote: »

In MMT taxes are not used to fund the Government per se. There are two main reasons for taxes and I will only get into one right now - to regulate inflation. When an economy is near full employment and capacity and begins overheating (inflation) taxes are raised and/or spending cut. As an economy improves and most people interpret that as inflation.

I will use an analogy to illustrate the difference between an increase in price levels and real inflation using motel rooms. During the off season the cost of a motel room is at its lowest and there are many rooms available. As the peak season approaches prices rise but there are still some rooms available. During the peak season the price is highest. Now if every person who wants a room can find one and there are no vacancies we have reached the optimal price equilibrium. If one more guest enters the equation the game of musical chairs - too many dollars chasing too few rooms - and the price is bid up, inflation. The solution in the short term is to take money out of the economy. However, in the longer term MMT would consider supply side tax cuts for the production of motels.

Admittedly very simplistic, but you gotta start somewhere..

Indeed, that is a good analogy; this redefining of the purpose of taxes, also significantly changes political discourse about economic issue as well, because no longer does anyones "hard earned taxes" pay for welfare recipients or the like, or any other public services, and the public service themselves become a vital role in the economy for reintroducing money to the wider economy as well.

Government spending is now only limited by the potential for inflation as well, which makes the call for a balanced budget in times of deflation or inadequate inflation nonsensical as well, since it's exactly the time government should net-spend.

KyussBishop

ezra_pound wrote: »

If taxes aren't used to fund the government then what do they fund?

When taxes are collected, the money is removed from circulation i.e. effectively destroyed, so it doesn't fund anything.

Its remaining purposes, are for inflation management, and for managing incentivies/disincentives within the economy, such as: taxing pollution in order to disincentivize that, discouraging destructive short-term profit seeking (thus encouraging longer term thinking), and other stuff like that (I haven't a full overview of all of the disincentivizing roles taxes would then take though).

ezra_pound wrote: »

This sounds like OK theory but makes no practical sense for appraisal of two different motorways, for instance, or for most projects that the state uses cba for.

It would allow for consideration of a lot of things that would impact health or quality of life in the area, such as noise pollution, local amenities that would need to be demolished to make way for the motorway, and other situations with different value (but with non-monetary value), such as archeological sites (like the controversy over Tara hill a while back).

ezra_pound

KyussBishop wrote: »

When taxes are collected, the money is removed from circulation i.e. effectively destroyed, so it doesn't fund anything.

Its remaining purposes, are for inflation management, and for managing incentivies/disincentives within the economy, such as: taxing pollution in order to disincentivize that, discouraging destructive short-term profit seeking (thus encouraging longer term thinking), and other stuff like that (I haven't a full overview of all of the disincentivizing roles taxes would then take though).


It would allow for consideration of a lot of things that would impact health or quality of life in the area, such as noise pollution, local amenities that would need to be demolished to make way for the motorway, and other situations with different value (but with non-monetary value), such as archeological sites (like the controversy over Tara hill a while back).

Yes but it already assumes that you are spending your money building the m3. Cba determines which projects to develop and which to abandon. Your proposal assumes the project is to be done and then world out how to do it.

How would it determine whether or not to develop metro north or the western corridor? In practice it cannot replace cba.

re first point above, this is completely at odds with one of your main arguments in many of your threads. Tax income is either spent by government or else it is surplus to government spending I.e. Surplus. In this case government is taxing more than spending which is completely at odds with your main argument that we should run large deficits and print money to cover shortfall.

KyussBishop

Well, no; cost effective analysis doesn't assume the project is to be done, it just measures additional factors other than monetary cost, in deciding if it should be done.

As the original article put it, using cost benefit analysis alone, you can justify using slave-labour/child-labour if it provides significant enough monetary savings; cost effective analysis factors in more political/moral/societal valuations, such as measuring the impact on human health and quality of life, and deciding a price can't be put on those, so impacts on them should be avoided.

It replaces cost benefit analysis, and incorporates it; it just considers valuations other than money as well.


My first point isn't at odds with any of my arguments, I don't advocate government taxing more than spending, I argue government should net-spend into the economy until full employment is reached (using taxes to manage inflation); also, for a government with sovereign control over its currency (which we don't have but the EU overall does), tax is never spent and is never surplus, it is destroyed, and new money recirculated through government spending.

ezra_pound

KyussBishop wrote: »

...tax is never spent and is never surplus, it is destroyed, and new money recirculated through government spending.

Is this one of your empirically proven points of Mmt? Give me one example of a state that does this. How is the money destroyed?

KyussBishop

Money not in physical cash form is destroyed just through accounting balances, and physical money is destroyed with a shredder; it's basic accounting:
http://www.theatlantic.com/business/archive/2011/04/the-destruction-of-money-who-does-it-why-when-and-how/236990/

ezra_pound

Sorry but that article says nothing about destoying money raised through tax. It also says nothing about creating money for government spending. It discusses two things: control of money supply by central bank and central bank creating new banknotes to replaced old damaged ones.

KyussBishop

I didn't say that's what the article is about, it gives an example of money that is physically destroyed, and which requires money creation to recirculate.

The rest (since most money is in non-physical form) is just basic accounting; when money is collected through taxation, it is removed from circulation (effectively destroyed), and when government adds money back into the economy through spending, new money is put into circulation.

That is all just electronic accounting balances within government; for a government with sovereign control over its own currency, there is no difference between:
1: Crediting the government capital account with taxes as they come in, and
2: Subtracting collected taxes from the money supply itself, and crediting the government capital account using money creation, by the same amount.

Both of those function in exactly the same way, giving precisely the same end result, the second just rearranges how the accounting is done in a way that makes it extremely obvious how taxation and government spending are unlinked, for fiat currencies.

The next step then, is just subtracting taxes from the money supply as they come in, but only crediting the government capital account on demand, as money is needed; the rate of taxes and government spending then become just a matter of inflation control.

ezra_pound

KyussBishop wrote: »

I didn't say that's what the article is about, it gives an example of money that is physically destroyed, and which requires money creation to recirculate.

The rest (since most money is in non-physical form) is just basic accounting; when money is collected through taxation, it is removed from circulation (effectively destroyed), and when government adds money back into the economy through spending, new money is put into circulation.

That is all just electronic accounting balances within government; for a government with sovereign control over its own currency, there is no difference between:
1: Crediting the government capital account with taxes as they come in, and
2: Subtracting collected taxes from the money supply itself, and crediting the government capital account using money creation, by the same amount.

Both of those function in exactly the same way, giving precisely the same end result, the second just rearranges how the accounting is done in a way that makes it extremely obvious how taxation and government spending are unlinked, for fiat currencies.

The next step then, is just subtracting taxes from the money supply as they come in, but only crediting the government capital account on demand, as money is needed; the rate of taxes and government spending then become just a matter of inflation control.

Why did you post it then. Is it a strawman?

Yea well we all know that old cash is replaced and that central banks control the money supply so I don't see why you bothered posting a link to that article. Please provide either academic citation or empirical evidence that there is no link between taxation and government sending.

Ps your argument assumes government control of central bank. Most central banks in the west have independent central banks. Do you want government controlled central banks?

KyussBishop

ezra_pound wrote: »

Why did you post it then. Is it a strawman?

Eh, I said exactly why I posted it in the bit you quote:

KyussBishop wrote:

I didn't say that's what the article is about, it gives an example of money that is physically destroyed, and which requires money creation to recirculate.

ezra_pound wrote: »

Yea well we all know that old cash is replaced and that central banks control the money supply so I don't see why you bothered posting a link to that article. Please provide either academic citation or empirical evidence that there is no link between taxation and government sending.

Ps your argument assumes government control of central bank. Most central banks in the west have independent central banks. Do you want government controlled central banks?

Again, I explained in my previous post:

KyussBishop wrote:

That is all just electronic accounting balances within government; for a government with sovereign control over its own currency, there is no difference between:
1: Crediting the government capital account with taxes as they come in, and
2: Subtracting collected taxes from the money supply itself, and crediting the government capital account using money creation, by the same amount.

That is true simply as a matter of basic accounting; there is no difference in the end result between the two.

Central banks don't have to be incorporated into government to allow that either (it could be done that way as well though), as they could have taxes passed on to them to be extinguished, with control over crediting governments capital account.

Again, all such reconfigurations of the financial system are political issues; there is no fundamental economic issue behind it all.