Excellent post on the MMT controversy
Posted by WARREN MOSLER on February 7th, 2011
Straw Men (And Women)
By Peter Cooper
This post is for all the MMT foot soldiers out there in cyberspace, including myself and most readers (prominent MMT economists who are kind enough to drop in from time to time excepted, of course).
Come on, we know who we are. Battling it out in diverse message forums, matching wits with fellow participants who, judging from their arguments, mostly appear to read our posts with their eyes shut and their fingers in their ears to block out the sounds of our linked video presentations. This navel-gazing exercise may seem self-indulgent to the crustier MMT old-timers among us, but, hey, rationalize it, we deserve it!The post is also for readers who have not yet made up their minds about MMT. Think of this as a small taste of the kind of self-congratulatory back slapping you too will be able to enjoy at heteconomist if you decide to join the ranks of the foot soldiers. Enjoy! You also deserve it!
Straw Men in Cyberspace
On a private message forum I often visit, a regular participant – who is very bright, and a good contributor on many topics – recently posted a criticism of the MMT position on budget deficits that went something like this:Budget deficits increase demand in some areas and decrease it in others. To illustrate the point I will show an extreme example. Say Honest Annie has $10,000 in savings. Mr Lucky is given $100,000,000 to stimulate the economy. Oh look, now Annie can produce more goods because Mr Lucky can afford to buy them. Of course, look at poor Annie’s real disposition. This new demand comes with the devaluation of her hard-earned savings. What is changing is that now she has to produce more to be able to afford more goods. The government has tricked her into having to work more because her savings have been devalued due to inflation. Sure, Mr Lucky is happy because Annie is producing more goods for him, but there are two sides to the coin.
Clearly the government should not adopt such a ridiculous policy in which it randomly gives one person $100 million in an economy where a typical person has savings of $10,000. But even in terms of the ludicrous example, the poster’s logic is lacking.
If Mr Lucky spent some of the money to buy stuff from Honest Annie, and she had the available time and resources to respond to the additional demand at current prices, she would receive some of Mr Lucky’s money in payment and also have increased spending power to purchase output from Mr Lucky or somebody else. The deficit expenditure can increase demand in some areas without reducing it in others provided the economy is operating below full capacity.
The question is whether there are idle resources that people would willingly put to use if there was demand for the resulting output, and whether this additional output could be supplied in a non-inflationary manner.
No one in the MMT camp is suggesting the government should net spend more than is necessary to enable the purchase of potential output at current prices.
The author of the example is influenced by the Austrian school, so some of his reasoning is defensible within that framework. In particular, as I discussed here and here, the Austrian definition of inflation is different from the one used by other economists. For everyone but the Austrians, inflation means a persistent rise in the general price level (the weighted average of all prices of final goods and services), not an expansion of broader money per se.
This can lead to differences between Austrians and non-Austrians in their assessments of whether inflation is occurring. If there is a rise in general prices, there will typically be an expansion of broader money to accommodate it unless real potential output shrinks due to a supply shock. In this case, both Austrians and non-Austrians alike will observe inflation. But it is possible for the broader money supply to expand (inflation for Austrians) without general prices rising (no inflation for other economists) whenever the economy is operating below full capacity. This means that from the Austrian perspective, it makes sense to suggest deficit expenditure will reduce the value of money even if, for other economists, there is no inflation.
Differences such as this can be discussed as part of a healthy debate. What is more annoying is the practice of creating straw-man arguments, such as the suggestion that MMT economists are advocating mindless spending out of all proportion to the actual demand deficiency or without any thought to the allocation of that net spending. The tactic often appears to be deliberate, in that there is a wilful misinterpretation of the argument to make it easier to ridicule or criticize. No matter how many times the point is clarified, the wilful (and convenient) misinterpretation will be repeated as if nothing has changed. The result is a discussion that fails to advance beyond irrelevant mischaracterizations and attempts to set (reset) the record straight.
As a practical matter for foot soldiers, we need to balance the need to deal with such mischaracterizations with the desire to develop the argument further for those not thrown by the mischaracterizations or to present the same argument elsewhere. At some point, it is probably best to assume that intelligent readers have been provided with enough clarification to make up their own minds about the merits of the straw-man argument, and just get on with advancing the discussion, or if the point has been made, move on to other forums. There is no need to convince every person in every forum.
MMT – and heterodox approaches, in general – seem more susceptible to this kind of straw-man treatment because its proponents have to make the running. In debates with critics or skeptics, the aim of the MMT proponent is usually to explain why the current dominant understanding of the economy is lacking, and why an alternative may offer an improvement in understanding.
A skeptic who is only interested in a better understanding of the economy has no motive to mischaracterize MMT arguments. The motive for engaging in discussion for such a person would be to understand the approach to enable an informed assessment of it. But when a skeptic or critic is more interested in defending a preconceived view of the world – possibly for psychological, political, or careerist reasons – their motive may not be to understand but to obfuscate, sidetrack, or otherwise hold up the discussion in ways that at least muddies the waters enough to make it difficult for others, who may be trying to understand without prejudging positions, to separate nonsense from valid argument, especially if they do not have a training in economics.
Consider journalists who write on economic matters, for example. In a way, it is hard to blame them for erring on the side of the orthodoxy when in doubt if they don’t have sufficient confidence in their own understanding of the subject. When in doubt, it is surely safer to go with the view of a Nobel Prize recipient or Professor from an Ivy League university over the views of a heterodox economist, even if the heterodox position seems to make more sense.
Opponents of the heterodox position can take advantage of this, knowing that they do not have to win arguments, or even engage in them in many cases, provided there is sufficient doubt over the heterodox position, whether because of perception, status, obfuscation or deliberately disruptive tactics, which on the internet can of course be done anonymously.
Straw Men in Academia
Straw-man argumentation is not limited to the orthodoxy or the internet. Heterodox schools use this tactic in disputes among themselves. For example, Marx’s theory of value was widely claimed to be “internally inconsistent” for eighty years on the basis of a straw man (the dominant dual-system, simultaneist interpretation of his theory) before a group of economists were finally able to demonstrate that Marx’s work could be interpreted in a way that not only gave it internal coherence but reproduced all of his results on value, including the long-run tendency of the rate of profit to fall, which had supposedly been “disproved” by Okishio’s theorem.
It wasn’t until the 1980s that papers began to be published by economists adhering to the so-called “temporal single-system interpretation” of Marx, demonstrating the theoretical coherence – validity, not necessarily correctness – of his theory of value when interpreted in a temporal and “single-system” way. It took another twenty-five years of persistence by these economists before Sraffians (who were the most prominent antagonists) and other critics grudgingly stopped dismissing Marx’s theory in pat phrases repeated over and over again without any authority other than the insinuation of authority.
One of the leading protagonists in this debate, Andrew Kliman, has written an accessible book for the generalist reader documenting the history of the debate and summarizing the major findings. For anyone interested in the debate over Marx’s theory of value, it is well worth reading, and eye-opening in bringing to light the extent of intellectual dishonesty in academia, including within the heterodoxy.
The straw-man tactic of the Sraffians served to discredit Marx and help to create a justification for alternative theories (e.g. Sraffianism) to replace or “correct” Marx’s theory. The tactic was also employed by developers of an array of alternative, though short-lived, value theories, such as the New Interpretation, Simultaneous Single-System Interpretation, Value Form theory, etc. A certain career benefit and “respectability” no doubt also comes from distancing oneself from Marx’s theory of value in a capitalist society.
The straw-man attack on Marx’s theory was effective partly because Marxism is outside the orthodoxy and Marxists have little to no presence in academic economics, let alone clout. Another reason for its effectiveness may be that Marxist thought is critical of the capitalist system itself. It is not merely reformist. This is not exactly the most career-savvy research program for an up-and-coming academic.
None of this is to suggest that Sraffianism or any of the other alternative theories are not valid approaches in their own right. It is simply to insist that the developers of these theories were not entitled to assert the invalidity of Marx’s theory almost like a religious mantra when the argument relied on a straw man.
The unjustified but highly successful eighty-year banishment of Marx’s theory can be contrasted with the lack of impact the Cambridge Capital Controversy has had on the dominance of neoclassical economics. This time the position of the Sraffians in theoretical terms was very strong, and their central points were conceded by Paul Samuelson and other leading neoclassical participants in the debate, yet the victory has so far had little impact on the status quo in academic economics.
The strategically effective response of the neoclassical orthodoxy to heterodox critiques drawing on the results of the Cambridge Capital Controversy has been simply not to respond through debate but rather ignore the implications, stop publishing heterodox work in the top journals, and cease hiring heterodox economists in the most prestigious universities or leading policymaking institutions (see Nobel-nomics for a polemical take on the aftermath of the Capital Debates).
When aimed at the orthodoxy, even legitimate criticism struggles to make a dent. For the heterodoxy, the very strongest arguments take a long time to break through.
Eventually, though, as MMT commentator rvm often reminds me, truth will out. Advances in understanding in many areas of human endeavor have faced the same kind of opposition throughout history. Even now, some heterodox advances in economics eventually slip in through the back door of neoclassical economics.
For example, there appears to be an increasing recognition among monetary researchers that some traditional concepts are untenable. Recent notable examples apply to the money-multiplier theory and money endogeneity. Understanding of these points has been well established in Post Keynesian economics for a long time. Now, slowly, some of the ideas are creeping in to mainstream analysis (usually without appropriate credit being given to earlier heterodox work).
All this is a longwinded way of saying that the road is uphill, but the only option is to keep plugging away. Some of the leading proponents of MMT have been grinding away for thirty years now. As internet foot soldiers, we can follow their lead. Sooner or later, perhaps long after we’re all dead, society will wake up to reality, strengthen conceptual understanding, and implement sensible policies.
Ancient historians of twentieth and twenty-first century economic thought will look back and realize that much of the truth was worked out by Kalecki, Keynes, Lerner, CofFEE, UMKC, TCOTU, etc. From their vantage point of 5000 AED (five thousand years After Environmental Destruction), orthodox historians will wonder how the clear and cogent answers of MMT could possibly have been ignored by so many experts of the era, who seemed inexplicably fond of straw men. These orthodox thinkers of the future will know with utter certainty that they could never be so close-minded!
A Comment on MMT Internet Discussions
There is one particular straw man that is repeatedly erected by critics of MMT. I’m sure most foot soldiers reading this will have noticed it. It is one that I find especially grating. The best (i.e. most irritating) phrase I’ve seen to encapsulate the nuances of this particular straw man is the refrain:MMT claims we can print prosperity.
The phrase “print prosperity” is shorthand for the common message board accusation that MMT ignores real resources and gets bamboozled by money as if it is magic. The accusation is very common. The term “print prosperity” was coined, to the best of my knowledge, by a Math Professor, no less, who happens to be keen on the kind of “fiscal conservatism” advocated by the Concord Coalition.
I consider it a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?
MMT shows clearly that if we have the resources, money is no obstacle to a government that issues its own flexible exchange-rate fiat currency. It is not saying that creating money magically creates goods and services. It is saying that it is nonsense – superstitious nonsense – to think affordability for such a government could be about money rather than resources.
Obviously, anyone is entitled to disagree with the MMT position. But they are not entitled purposefully to misrepresent MMT as suggesting that it is oblivious to real resource constraints when it is alternative theories that attempt to obfuscate matters by conjuring up fictitious “financial constraints” (e.g. the neoclassical “government budget constraint” framework).
Take the debate over how to address the aging population for example. It should be obvious – and is obvious in MMT – that the only way to address this issue is to increase future productive capacity. This involves the application of real resources now to research, infrastructure development, education (including in areas relevant to servicing an aging population), etc.
Clearly, MMT is not, as many internet critics claim, saying that creating money solves the problem. It is really the MMT critics who are falling into the trap of thinking money rather than the application of real resources is the solution, despite their frequent protestations to the contrary. They are the ones who think that if the government “saves” money now, this will somehow help to address the needs of the aging population in, let’s say, twenty years time.
Yet, these same people also stress that you can’t “print prosperity”. Well, if you can’t “print prosperity” – and we all agree on that – what good is that money the government supposedly should stash away going to be twenty years from now? It won’t help to provide the infrastructure and technological knowledge that was not developed in the preceding twenty years because governments preferred to “save” money for the future rather than apply resources to the real task of raising productive capacity.
Oh well. We shrug and move on. Such are the trials and tribulations of an internet foot soldier.
February 7th, 2011 at 12:55 pm
Fantastic Post Peter! Keep up the good work.
brinn
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February 7th, 2011 at 1:43 pm
Bump up to mandatory readings!
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February 7th, 2011 at 1:47 pm
You can’t “print prosperity,” but neither can you get to it through the Aztec Economics of “human sacrifice.” the Republicans should change their name to the “space cadet” party after Sarah Palin, Michelle Bachmann, Glen Beck, and Rush Limbaugh, and their fact-free narratives of how the world works.
And the Democrats should change theirs to the Aztec Party after Barack Hoover Obama, the “blue dogs,” and the constant calls for “shared sacrifice,” by which they mean: “We (the rich and ourselves) won’t sacrifice a thing, but the rest of you patriotic fools can share in the honor of protecting our ill-gotten gains by making sure that we never have to pay our fair share of taxes, decent wages to people who work for us, or take any risks that the dollars we’ve previously acquired become any less valuable, because folks like you get some dollars from the Government too.
The two parties both have us on the road to poverty traveling at more than 100 mph. We really need to take them both down, and send them the way of the Whigs. We need two or more MMT Parties arguing over whether spending increases or more tax cuts are better for the economy, rather than these two arguing whether less spending or higher taxes are better.
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The Banker Reply:
February 7th, 2011 at 2:36 pm
Letsgetitdone,
I hate to draw attention away from Peter’s outstanding article or to distract from the wisdom of your response however, I posed a follow up to one of your articles on Corrente and have yet to get response. It may be that the article is older or that you simply don’t have time to respond to all inquiries however I thought I might take this opportunity to ask you a question that often comes up in debate. As a fellow internet foot soldier I have often been asked for a citation or source referring to the requirement that the US government must issue debt to cover the deficit on a dollar-for-dollar basis. I’ve attempted to find references to this mandate but have found nothing. I know you have authored a few articles on Corrente about this topic and I was hoping you (or possibly anyone else who is reading this comment) would have info regarding the source of the mandate that you would be willing to share.
Thanks in advance.
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LetsGetItDone Reply:
February 7th, 2011 at 8:23 pm
Hi Banker, Sorry I didn’t see your comment at Correntewire. I try to reply to all questions, but that one seemed to have slipped. My answer is that I’m sure there is such a mandate, since if one did not exist the debt limit would not be a constraint on deficit spending. However, I haven’t been able to find the USC site.
I’ve asked some of the MMT officers, rather than other foot soldiers like myself if they had the cite. The closest I could get to a cite came from Professor Stephanie Kelton, UMKC who mentioned in an e-mail that she has actually read the mandate but didn’t have a reference for me.
I hate to rely on authority, but I until I can find the cite, Stephanie’s word that she’s seen it is good enough for me.
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The Banker Reply:
February 7th, 2011 at 9:44 pm
Thanks for the info LGID. I’m sure you’re correct. I’ll keep digging merely out of curiousity.
Regards,
The Banker
aka brinn
Matt Franko Reply:
February 7th, 2011 at 10:00 pm
Hi Banker,
IDing that requirement in a law per se has been a bit elusive. You can try the Title 31 USC here:
http://www.law.cornell.edu/uscode/usc_sup_01_31.html
but you may not even find it there (i cant). I think it comes down to the fact that the US Treasury uses the FRS as it’s fiscal agent, and the FRS does not want anyone in the system (that includes the UST)to be able to run an overdraft in their account. So that means the UST has to keep balances in it’s Fed accounts that get there as deposits either thru taxes or bond sales (or a very large coin it has been opined!). These deposits have to happen in advance of any withdrawals I believe because the Fed wants it that way.
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beowulf Reply:
February 7th, 2011 at 10:36 pm
US Code Title 31 (Money and Finance) used to but no longer provided Tsy an overdraft or “cash draw authority”. In its last iteration (from 1979 to 1981 before Congress repealed it), Tsy’s draw authority was limited to $5 billion for up to 30 days. The issue is discussed in this post-9/11 GAO report.
http://www.gao.gov/htext/d061007.html
Since Tsy is no longer authorized to overdraft, its required to have money in its General Fund (plus a valid congressional appropriation) before it can spend. It can put money into General Fund by one of two ways (with a third way, as we’ll see, possible with a minor statutory change). 1. It can issue interest-bearing bonds, notes or bills per Title 31 sections 3102-3104 (subject to the statutory debt limit established in 3101) and spend the public debt proceeds.
http://www.law.cornell.edu/uscode/31/usc_sup_01_31_08_III_10_31_20_I.html
2. Tsy can mint coins which it can sell to the Fed at face value (the federal reserve notes or reserves passing through Mint Public Enterprise Fund to Tsy General Fund as miscellaneous receipts). By the terms of the Mint PEF Act, coin seigniorage revenue would appear to reduce the deficit, however Tsy accounting system doesn’t allow it too. However even under current Tsy rules, coin seigniorage could be used to pay down existing debt,freeing up room under the statutory debt limit to borrow more (platinum coins, curiously, may be issued by the Secretary in any quantity or denomination). We had a long discussion about coin seigniorage a couple of weeks ago you can dig through if you’d like read more.
Finally, if Congress deleted Section 5115(b), Tsy could again issue interest-free “Lincoln Greenbacks” without limitation.
http://www.law.cornell.edu/uscode/31/usc_sec_31_00005115—-000-.html
US Notes are sort of the duckbill playtpus of “lawful money”. The Fed doesn’t buy them at face value like coins, they’re public debt issued into circulation by Tsy itself (so while coin seigniorage should reduce the deficit, it doesn’t appear US Notes do). On the other hand they’re like coins in that Tsy does not include them in statutory debt limit (probably because of their interest-free nature). Tsy could probably issue US Notes in electronic form, which is for the good, we’ll save the idea of “electronic coins” for the distant future, after the singularity. :o)
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Sergei Reply:
February 8th, 2011 at 5:29 am
It is typically included in every budget where it says something along the lines “Sources of financing”. And every budget is signed into law.
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LetsGetItDone Reply:
February 8th, 2011 at 3:00 pm
Sorry Sergei. What is “it?” Also, please provide a link.
Sergei Reply:
February 8th, 2011 at 5:49 pm
The requirement to issue debt is typically included in the budget under the sources of financing of deficit.
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/tables.pdf
Check table S-14.
Once the budget is signed this requirement becomes a law.
beowulf Reply:
February 9th, 2011 at 10:15 pm
Sergei, Table S-14 is descriptive, not prescriptive, The President proposes (and as in S-14) and produces estimates, but Congress sets the rules for Money and Finance in Title 31 of US Code.
WARREN MOSLER Reply:
February 10th, 2011 at 12:41 pm
agreed
and let me suggest you can ‘unprint’ your way to depression.
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February 7th, 2011 at 2:31 pm
What Tom said…
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February 7th, 2011 at 4:15 pm
I second for mandatory readings. One of the best posts ever.
Full of great points.
If you can’t print prosperity, you can’t save it either. Sums up one of the most important conclusion of MMT pretty well.
“Affording” something is such a loaded term. We were able to afford to build a few million new homes, but we cannot afford to pay for them after they are already built? How is this possible in the real world?
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February 8th, 2011 at 10:52 am
yeah, the whole “printing our way to prosperity” red herring is rubbish since people are actually working to produce the goods and services purchased by the federal govt. MMT critics would have a point if the govt was crediting individual bank accounts in excess of what people are paying in taxes. Ultimately, the money is not given away.
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ESM Reply:
February 8th, 2011 at 11:02 am
You’re completely missing the point actually.
It is probably better for the government to give the money away and let real resources be allocated by billions of individual decisions motivated by self-interest (i.e. by the private sector) than by government bureaucrats with distorted incentives.
Perhaps the fundamental point of MMT is that there is an asymmetry between inflation and deflation. Deflation is much, much worse than inflation and is much more likely to lead to the idling, disuse, and ultimately the destruction of real resources. It’s not clear that moderate inflation has any bad effects at all, although I suspect that when it gets into the double digits, people waste a lot of time and effort trying to dig gold out of the ground, only to rebury it later.
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ESM Reply:
February 8th, 2011 at 11:07 am
I should probably be more accurate. MMT is about accounting and operations ultimately. But I think most MMT proponents would agree that the reason we run into trouble when the people in charge don’t understand MMT is that deflation is dangerous — falling prices do not self-correct (by stimulating demand) until harm to the real economy is done.
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Greg Reply:
February 8th, 2011 at 10:31 pm
You make a GREAT point about deflation. Too many people see falling prices as a positive and dont understand the defaults, income loss and crushing of productive capacity that would arise.
Joe Reply:
February 8th, 2011 at 12:05 pm
I get your point but the reality is that no such give-away would ever take place without bureaucratic corruption. The money would go to the politically-connected, whether it be the defense sector, public unions, “green” tech, or other business subsidies.
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ESM Reply:
February 8th, 2011 at 3:00 pm
Agreed. That is a big problem, but there are easy solutions. The first stimulus package under Bush came pretty close to giving each household a check for a fixed amount. That was pretty fair, although I would have preferred a check for each human being legally residing in the us rather than each household.
WARREN MOSLER Reply:
February 10th, 2011 at 12:48 pm
i would have preferred a fica suspension which is what i suggested to andy card at the white house in early 2003.
February 8th, 2011 at 8:50 pm
ESM, I agree. I think Alaska’s annual Permanent Fund dividend is a good plan, worth upscaling nationally (perhaps make the payments quarterly to spread out the fiscal impact).
http://www.pfd.state.ak.us/
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February 9th, 2011 at 11:27 am
Pity you feel need to cover basic honest accounting and operations with Marx
there goes your credibility with anyone who has brain. good jobs!
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ESM Reply:
February 9th, 2011 at 2:15 pm
I agree.
One of the reasons I spend time here is to stop MMT from being tainted by Marxist crap.
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Tom Hickey Reply:
February 9th, 2011 at 2:45 pm
And one of the reasons I come here to keep MMT from being tainted by neoliberal (capitalist) crap. As Bill Mitchell says, it’s not easy shaking those neoliberal tendencies. :)
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ESM Reply:
February 9th, 2011 at 3:00 pm
Yes, but you have to admit my job is harder. Believers in big government are attracted to MMT like flies to .. um .. honey.
MMT tells them that there is tremendous untapped potential for the government to spend and to grow without causing inflation or fiscal ruin. It’s like being offered a nanny for free.
Tom Hickey Reply:
February 9th, 2011 at 4:09 pm
That may be true. At the same time, avoiding those neoliberal tendencies that are deeply embedded is pretty difficult. :)
Here is another problem. Neoliberals often spout “free market” ideas but “free” just means government delivering the booty to them or else baling them out when they overreach. There is a lot of double-speak going down.
The major problem now is not so much that workers (‘poor people”) have their grimy little hands in the till as it is the pseudo-capitalists driving trucks into the Treasury and loading up in broad daylight. See James K Galbraith, The Predator State (2008), for instance. Hereis a review of The Predator State by Randy Wray (h/t Mark Thoma).
beowulf Reply:
February 9th, 2011 at 10:28 pm
It’s like being offered a nanny for free.
Right, this isn’t France. :o)
And in France, the government will pay not only for health costs but for nannies [for mothers of newborns]. They’ll even cook for you, and do your laundry. If Sicko doesn’t win over the audience at tonight’s black-tie world premiere, Moore’s francophilia should do the trick.
http://www.time.com/time/arts/article/0,8599,1623337,00.html
Neil Wilson Reply:
February 9th, 2011 at 4:06 pm
At least then the debate moves to whether aggregate demand increases should come from lower taxation or increased government spending.
Or a bit of both – such as with the job guarantee and the FICA cut.
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Tom Hickey Reply:
February 9th, 2011 at 4:12 pm
This is a debate that needs more detailed attention — just what fiscal would different MMT’ers enact. While I agree in principle with a FICA cut and JG, what would an MMT budget look like under present circumstances in the view of different MMT’ers?
WARREN MOSLER Reply:
February 10th, 2011 at 12:53 pm
could be anything, but let me suggest this would be well received:
for a given size govt taxes would be at the right level for something a lot closer to full employment and price stability.
Scott Fullwiler Reply:
February 10th, 2011 at 12:26 am
For what it’s worth, I would add a number of automatic stabilizers:
1. All spending currently indexed to the CPI would instead be indexed to an inflation target–say 2%.
2. Index all tax brackets to the inflation target instead of CPI.
3. Index many other items, such as the max household value receiving tax deduction for mortgage interest, to inflation target instead of CPI.
4. Permanent policy of block grants to states during recessions. Caveat is that in order to receive the grant they must demonstrate–via criteria set by CBO or some other entity that can confirm compliance–a balanced budget under full employment. Inability to demonstrate that full employment budget is balanced results in significantly reduced block grant, if any. Thus, states have an incentive to budgets such that they would be balanced in full employment economy AND at the same time state budgets and balanced budget amendments contribute far less to macro swings.
Many other things could be done, but those are near the top of my list.
WARREN MOSLER Reply:
February 10th, 2011 at 1:00 pm
I like that inflation target idea a lot, young Scott!!!
WARREN MOSLER Reply:
February 10th, 2011 at 12:52 pm
that’s because i’m a libertarian
ESM Reply:
February 10th, 2011 at 1:46 pm
@Scott:
That’s a great idea, but indexing benefits to something other than inflation is going to meet tons of resistance, particularly from Democrats and the AARP. I can just hear the argument now: “You want to stop indexing social security to CPI now? — just as we’re running $1.5T deficits and inflation is about to explode?”
Might have had a chance to put it in place two years ago when inflation was negative and Obama was giving seniors their COLA anyway.
Tom Hickey Reply:
February 10th, 2011 at 2:23 pm
Indexing to COLA creates an incentive to understate core inflation on the false premise that government “can’t afford” spending increases.
However, I think that there has to be some provision for taxation of economic rent in this mix, or the system will continue to be tilted toward wealth accumulation at the top through parasitical extraction instead of productive contribution. There is already a perception on the left that MMT concedes to the present system of funneling money to the top when only the monetary ops are taken into consideration, and a lot of people consider MMT to be only about monetary ops.
WARREN MOSLER Reply:
February 10th, 2011 at 7:41 pm
what are your favorite economic rent taxes? property taxes? others?
zanon Reply:
February 10th, 2011 at 5:21 pm
your “economic rent” is garbage tom hickey. just other words leftists always use as the arrogate power to themselves. their lustfulness and greed is even more disgusting to me than their lies.
Peter D Reply:
February 10th, 2011 at 5:27 pm
Zanon, not fun reading your comments. Not because I am a “leftist” but because they have little substance beyond invective. When I read that something is “garbage” I’d like to know why. Otherwise, you’re just spitting at everybody.
Scott Fullwiler Reply:
February 10th, 2011 at 5:43 pm
Warren . . .thanks. Also, I turn 42 next week–not so young anymore. Just immature.
ESM . . agree that it might be a tough sell. But I wasn’t going for that as much as what I’d like to see. One thing to note is that during the latest recession, 2% would have been better than they got with COLAs. Also, this combined with the other points I mentioned would reduce the likelihood of just such an explosion of inflation that they are worried about.
WARREN MOSLER Reply:
February 10th, 2011 at 7:49 pm
the concept is ground breaking- using the target rate of inflation to directly set variables that cause the inflation- whether one agrees with any of the applications or not.
Let’s call it the Fullwiler effect. Or the full Wiler effect. or something like that?
and happy birthday! Young Scott is how Charles Goodhart once affectionately referred to you.
beowulf Reply:
February 10th, 2011 at 7:06 pm
Tom, you should clarify what you mean by economic rent, what you would tax? Would those taxes be additive or be used to replace other taxes? To clarify a couple of things, prior to 1972, Social Security benefits were increased on annually on an ad hoc basis. Nixon made it an automatic increase tied to CPI-U (Urban worker, there’s also a CPI-E tied to the higher costs, medical inflation mostly, of elderly retirees but Congress hasn’t tied SS to it, no doubt for budgetary reasons).
Sometimes CPI-U will be higher than inflation target and sometimes it will be lower. I thought that CPI and inflation targeting are usually for the same rate (after all I-bonds are tied to CPI, no?). My question for Scott is, who do you want to bear the risk of unanticipated inflation, the Treasury (peg it to CPI) or beneficiaries (peg it to inflation target)?
What Tom is talking about with “indexing to COLA” is about something else all together. After you start collecting Social Security, your initial benefit amount increases annually with a COLA (which is the same as CPI, for the last couple of years its been flat). However your initial benefit is actually established by looking at the Average Wage Index (AWE) for the 50 years or so that you paid payroll taxes, multiplied by a complicated and extraordinarily progressive formula. How progressive? Your income between $45,000 (in current dollars) and $106,0000 is reduced by 90% in order to subsidize lower wage workers. That Nixon was a hippie, I guess. Basically, if we uncapped SS FICA so wages above $106k were taxed, we could make SS trust fund solvent forever even if we went ahead and uncapped benefit levels at the same time. With an effective 90% marginal tax on the backend benefits, Tsy wouldn’t lose that much money. Anyway, the Catfood Commission and other budget hawks aren’t about the uncap their own SS taxes, so their preferred way to “save” Social Security is by replacing pre-retirement Average Wage Index with the same index as post-retirement CPI, that’s very much a bad deal because AWE rises faster than CPI. A few weeks ago, I mentioned that Australia, with a per capita GDP similar to ours (and whose dollar currently is trading at par with ours) recently increased its minimum wage to $15.00/hr, vs. our $7.25/hr min wage. Our peak minimum wage in purchasing power was 1968′s $1.60/hr. Increase by AWE change (9.1 X), US minimum wage would be $14.65/hr. If the 1968 minimum wage had merely increased by CPI (6.3 X), it would be $10.08/hr.
I guess maybe we should be thankful that the budget hawks aren’t lobbying to tie Social Security initial benefits to the increase from 1968 minimum wage (4.53 X). :o)
WARREN MOSLER Reply:
February 10th, 2011 at 7:52 pm
the trust fund can’t be solvent or insolvent, it’s after the fact record keeping (redundancy for effect)
the federal govt can’t gain or lose dollars
:)
Matt Franko Reply:
February 10th, 2011 at 7:36 pm
Beo,
That minimum wage analysis is really striking. (15/hr x 2,000 hrs =30k/yr= much better) This development probably contributed to the middle class destruction. It increases inter-generational animosity. All kinds of bad things. Thanks for this.
BTW, you often post many interesting things about Nixon, scrapped gold standard, now indexed SS to CPI, youve posted many others… the Democrats ran him out of town why???
Resp,
Tom Hickey Reply:
February 10th, 2011 at 9:28 pm
Didn’t mean to suggest that there is any connection between COLA and economic rent. The comment on COLA was in response to what Scott brought up. The comment on economic rent was added in order to address what I have seen as a consistent objection to MMT coming from the left.
I think that the issue of economic rent is central to tax policy in the same way that negative externalities are. Taxes can be tightly targeted to manage negative behavior.
Attempting to legislate or regulate perverse behavior that generates negative effects is generally ineffective and inefficient, when the behaviors are not criminal. It is simpler and more direct to tax it away.
I see taxing rent-seeking as a disincentive in the same way that taxing negative externalities like pollution works. Rent-seeking not only contributes nothing to the economy since it is unproductive, but it also distorts the economy because it is parasitical.
How to tax economic rent? That is a question for economists working in this field, like Michael Hudson. I believe his position is that land rent is the place to start. He aso holds that fictitious profits from financialization should also be addressed as a high priority. Both of these areas were involved in the GFC, and if they had been addressed, it is conceivable the crisis might have been be mitigated or even avoided.
Prof. Hudson lists three areas of economic rent — land rent, monopoly rent, and financial rent. He contends that the investor class is using its influence and political clout to shift the tax burden of rent onto income because the top of the town gets most of its gains from rent, historically, land rent and workers would be hit by taxing income. I have not seen anything he has said about how this would be distributed.
MH recommends taxing rent in order to discourage rent-seeking and encourage productive investment. So what aspects of economic rent would depend on conditions in the economy at any given time. With the economy becoming increasingly financialized, that is an obvious area to target. Targeting economic rent through taxation provides an incentive based approach to regulation that is much more likely to be successful than “reform,” which the influential always manage to subvert, as we are already seeing.
So the answer to how to tax economic rent is to “follow the money” in order to determine whether gains accrue from productive investment/activity or rent-seeking. The line may be somewhat obscure at the margin, but there are areas that are quite clear. It doesn’t take a genius to see that many CEO’s salaries are way above what is necessary to maintain output when, for example, POTUS is willing to do a much more complicated and demanding job for a quite modest salary in comparison to their compensation packages.
So my view would be to go after the most egregious first, and work down from there. But I defer to people who study this.
The Michael Hudson Series – Part 4 Economic Rent
Higher Taxes on Top 1% Equals Higher Productivity
WARREN MOSLER Reply:
February 11th, 2011 at 7:34 am
I agree on the use of a federal property tax to replace most federal taxes.
As for financial rent, my proposals for the financial infrastructure eliminate most of what you’d be taxing, hopefully making that moot.
And as for monopoly rent, that’s all about effective anti trust regulation, etc.
So the only economic rent that ultimately lends itself to taxation is real estate?
beowulf Reply:
February 10th, 2011 at 9:45 pm
Warren, you’re right of course. I was speaking only towards the political reality (not to be confused with reality reality). As a legal requirement, the SS trust funds are not to draw on general revenue but are to be paid only from SS taxes + T-bond interest. Of course, any problem that Congress can fix in an afternoon is not really a problem. Congress could eliminate SS taxes and guarantee continuous benefits simply by funding SS benefits the same as they already fund student loans (28 USC 1071(b)(6), any MMT legislation should include this). :o)
there is authorized to be appropriated, and there are appropriated, out of any money in the Treasury not otherwise appropriated, such sums as may be necessary for the purpose of carrying out section 1072 (c)(7) of this title.
Matt, I think Nixon was, at heart, a New Dealer and a Keynesian. Google his 1971 State of the Union– a full employment budget, more parks and green space, revenue sharing. Except for Kucinich, who in DC talks like that today? What Nixon understood (what Democrats have never learned) is the more liberal the reform, the more conservative it must be framed to be politically palatable. I think his problem was that he was too good at it, the Democrats were convinced he was a heartless bastard and if Nixon was for it, it must be bad. His most radical provision (even more so than his universal healthcare plan that makes Obamacare look like weak tea) was his negative income tax proposal, providing every working American with a guaranteed income and a job guarantee he dubbed “workfare” for the unemployed.
The income of poor people living in the South would be tripled, and the welfare rolls themselves would double in size. According to not a few economists, 60 percent of all indigent people would be brought above the poverty line immediately were this proposal to be enacted into law. Lyndon Johnson never dared go so far. Both architects of the programs– dubbed the Family Assistance Plan (FAP)– and correspondents, not to mention historians, have recognized the boldness of Nixon’s proposal.
http://books.google.com/books?id=J9oZ2yTlR_kC&lpg=PA287&pg=PA287
It was defeated in Congress by an odd coalition of idiot Northern liberals who didn’t think it wasn’t generous enough and racist Southern conservatives who didn’t cotton to the idea of poor black families having money in their pocket.
Tom Hickey Reply:
February 11th, 2011 at 12:08 pm
Warren: So the only economic rent that ultimately lends itself to taxation is real estate?
Basically agree with this if it can be done with regulation. Like you, I would prefer to see most of the egregious stuff just go away.
The principle is to incentivize productive contribution through the for-profit private sector and quality of life enhancement through government expenditure for public purpose and tax-advantaged activity of charitable and non-profit orgs, while disincentivizing parasitism through extraction without a corresponding contribution, whether than be through legal means or criminal, either through regulation or taxation.
Since there is innovation wherever there is money involved, it is not a problem that can be solved once and for all. New ways of extracting wealth legally crop up, just like new criminal schemes, and often there is an overlap, as in the present crisis. Vigilance is required to head off problems before they fester, like the recently rampant mortgage shenanigans, which included some fraud at the margin and pervasive control fraud at the top.
WARREN MOSLER Reply:
February 11th, 2011 at 10:24 pm
So we agree at the actual proposal level, and agree it’s all a work in progress,
which, functionally is all that matters…
:)
ESM Reply:
February 11th, 2011 at 2:35 pm
I have absolutely no faith in the government’s ability to distinguish between productive economic activity and unproductive (what you call parasitical) economic activity. In fact, I bet for every form of “parasitical” economic activity you can come up with, it is possible to find a particular set of circumstances where that economic activity is actually productive. Conversely, within any discipline that you deem as productive, it is possible to find examples of parasitism.
Any job that’s unionized, for example, is parasitical to some degree, since the workers have increased their compensation through coercion.
WARREN MOSLER Reply:
February 11th, 2011 at 10:32 pm
the govt doesn’t necessarily have to do that.
the military, legal structure, and that type of public infrastructure can serve public purpose without venturing all that much into that issue.
so can establishing a payments system utilized for provisioning the govt via taxation and spending. And then (very narrow) banking along the lines of my proposals.
Public education becomes more problematic, where, in today’s world I lean towards a full voucher system.
I like social security for a variety of reasons, not the least of which is the good feeling of independence it gives to seniors vs other, ‘charity based’ outcomes, as well as the good feeling I get knowing our seniors are being supported at a level that makes us proud to be Americans- not too high and not too low.
I like my health care proposal for the institutional structure and incentives it provides.
But I’m just repeating what’s printed elsewhere on this website.
Are there any of my proposals you specifically do not agree with?
Tom Hickey Reply:
February 11th, 2011 at 3:42 pm
OK, so you hold that the concept of economic rent is bogus. Maybe you should write a paper on that.
February 9th, 2011 at 11:43 pm
I hate both marxists and capitalists. Which I hate more depends on the day
Either way, what Warren call “excellent” I call garbage because Peter Cooper was not able to control desire to assume position and tell comrade Stalin he is ready for pleasure time
Brilliant
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Mr. E Reply:
February 10th, 2011 at 10:34 am
I don’t hate Capitalists. I like Capitalists.
I don’t like people who think that the medium of exchange should be a better store of value than anything ever created by mankind or nature.
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Tom Hickey Reply:
February 10th, 2011 at 11:38 am
Actually nature and mankind create the optimal stores of values — material resources and human artifacts. Financial assets including money are poor stores of value in comparison. Which is why real terms of trade favor the net importers, for example. And it is also why productive investment needs to be encourage and rent-seeking discouraged.
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ESM Reply:
February 10th, 2011 at 1:17 pm
“I don’t like people who think that the medium of exchange should be a better store of value than anything ever created by mankind or nature.”
That’s a strange statement. Do you dislike people who think Microsoft is a good investment? If you are bearish on the dollar, or merely think that its value will be volatile, there are many ways you can express that position in the marketplace. Nobody is preventing you from doing that …, yet.
Also, I’m not sure you can really disentangle “medium of exchange” and “store of value.” In order to be useful as a medium of exchange, money must also be a store of value. If it is too volatile, or even just depreciates too quickly, then it doesn’t work well as a medium of exchange.
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Tom Hickey Reply:
February 10th, 2011 at 2:33 pm
What I am saying is that when money is regarded primarily as a store of value, as the investor class does, then the tendency is to seek “sound money” and deflationary policy. Check out a lot of the controversy at Zero Hedge, for example. These people are always seeing inflation as the monster under the bed. ” If it is too volatile, or even just depreciates too quickly,” is their big fear and they see the worst every time government spends or the Fed “prints.”
The point is that thinking of money as a store of value emphasizes stock and thinking of money as a medium of exchange emphasizes flow. Economies are about flow. Stocks emerge from flows. When people think chiefly about stock, then often the consequence is reduced flow. In unequal societies, wealth accumulates at the top and just sits there, although some gets spent in Manhattan, London, Paris, or on the Riviera.
WARREN MOSLER Reply:
February 10th, 2011 at 7:42 pm
and the existence of the stocks largely traces back to the deadly innocent fraud that we need savings to have funding for investment
WARREN MOSLER Reply:
February 10th, 2011 at 7:37 pm
right, like in that sense bus tokens are a store of value, and frequent flyer miles. not a negative, but not their primary function per se.
February 10th, 2011 at 4:51 am
“For example, there appears to be an increasing recognition among monetary researchers that some traditional concepts are untenable. Recent notable examples apply to the money-multiplier theory and money endogeneity. Understanding of these points has been well established in Post Keynesian economics for a long time.”
Truth to be told, understanding of monetary economics has been lacking in post-keynesian school until recent times. For example, Hyman Minsky in his 1984 magnum opus stabilizing unstable economy clearly did not understood governments status as an currency issuer, Basil Moore released his path-breaking work on endogenous money in 1988, and L Randall Wray released his work in 1998. So, this gives some hope to think that only reason MMT is not more widely accepted is that it is developed so recently. Economic crisis presents natural opportunity to re-examine some long-held doctrines.
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Pz Reply:
February 10th, 2011 at 5:05 am
I should add that Wynne Godley’s book Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth came out as recently as 2007.
“This book challenges the mainstream paradigm, which is based on the inter-temporal optimisation of welfare by individual agents. It introduces a new methodology for studying how it is institutions which create flows of income, expenditure and production together with stocks of assets (including money) and liabilities, thereby determining how whole economies evolve through time.”
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Calgacus Reply:
February 10th, 2011 at 6:31 am
Recently? MMT in various names has been around for centuries, some concepts being laboriously rediscovered many times. Read Schumpeter’s or Pribram’s histories for antecedents in addition to ones usually adduced. The mainstream view in economics in 1930 was that “loans create deposits” – somehow this and much else was forgotten in “mainstream” economics.
In a way, the works of Abba Lerner on Functional Finance – the most recent previous major incarnation of MMT – are profoundly depressing. Such beautifully written and reasoned work! How could anyone disagree? But it was forgotten and buried under mounds of sh*t – barbaric pseudomathematical charlatanism – which I think you need to be a mathematician to feel the appropriate level of disgust for.
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Matt Franko Reply:
February 10th, 2011 at 7:58 am
Calg,
do you know of the best consolidated volume/book for me to get that contains most of Lerner’s Functional Finance work/writings? I’d like to purchase/obtain… did someone do a consolidation/collective review? Resp
Mr. E Reply:
February 10th, 2011 at 10:40 am
Even though there were clear historical precedents, MMT is a recent idea. No economist ever bothered learning the accounting- it was below them or something.
As soon as you look at the accounting, it is pretty obvious. But the idea to look at the accounting is a big, bold, and difficult idea. Nobody thought it should be that important, even if they thought money supply was paramount.
Just the idea that we can accurately measure how much net money is in the system is very powerful. I am surprised the Austrians haven’t run all over with this one – some of them fetishize money supply. You’d think they would apply some of this to this new measure of money supply and determine the outcome.
July 24th, 2011 at 7:52 am
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