Three Ways of Looking at Deleveraging and Monetary Policy

Friday I wrote a post trying to get a lay of the debate over how “deleveraging” impacts both the economic recovery and monetary policy, in response to two posts by Matt Rognlie.

This lead to a useful email exchange with Arpit Gupta about the matter, who then went on to write a really great blog post on the matter that you might find helpful in clarifying some of these issues.  There are, in general, three meta-arguments about the connection between deleveraging, monetary policy and the economic recovery, and he describes each of them.  Using our venn diagram of economic arguments:

Gupta on the three arguments:

1 – Balance Sheet Recession. People who think that deleveraging is real, and no amount of monetary stimulus will help.

These are people like Richard Koo. Their argument goes that the presence of excess debt is the key constraint holding back economic growth. No amount of monetary stimulus will fundamentally change the asset position of households, and so there’s no way it will alter consumption or output (or, at least, not to the degree that is necessary). Raghuram Rajan may believe something like this, as best as I can tell. The MMT folks are probably best placed here as well.

As Beckworth and Rognile point out above, this view doesn’t make sense given the conventional understanding of how monetary policy ought to operate. If we desire greater spending from households or creditors; we can always make that happen by flooding the system with money.

2 – Liquidity Trap People who think that deleveraging is real, monetary stimulus could help, but the Fed won’t deliver enough.

These are people like Paul Krugman. As Rognile points out — Krugman is careful to note how deleveraging is only an issue if you’re in a liquidity trap, but that nuance tends to be lost among many other commentators. Elsewhere, he has argued that fiscal stimulus is only worthwhile as long as interest rates are zero — at other times, he often takes for granted that monetary policy ought to handle the brunt of aggregate demand management (or at least he did in the ’90s).

In that sense, Krugman actually agrees with Scott Sumner on more issues of intellectual substance than, say, with Keynes. It’s just that Krugman believes that in this particular instance, we happen to be in some kind of liquidity trap in which monetary policy won’t be sufficient to tackle the headwinds of a deleverage cycle.

3 – Quasi-Monetarists Then; there are people who believe that deleveraging may be a concern; but monetary policy (even with a zero-rate bound) ought to handle everything.

Here are the market monetarists like Scott Sumner and David Beckworth, as well as Matt Rognile. The belief is not only that monetary policy can fix any conceivable deleverage shock; but that the Fed could do so tomorrow given the set of tools they have; involving perhaps the adoption of a price level, getting more QE, imposing interest on reserves, or offering guidance on the future path of interest rates.

These have very different implications for policy:

Many people on sides 1 and 2 agree on issues; but there’s a fundamental conceptual difference there. Suppose, as Mike Konczal likes to imagine, that we wake up tomorrow and find that interest rates are actually 2%, rather than at 0% for the short-term Treasury rate. What should we do? Some people (like perhaps Koo?) would argue that changing that rate wouldn’t do very much. But people like Krugman would argue that, if we were in an environment in which conventional monetary policy could operate, then that’s basically the only policy channel we should use to get output back.

The only difference between sides 2 and 3 is whether or not the liquidity trap proves binding. This seems like a fairly trivial issue; but it determines entirely whether or not you think that we should adopt fiscal stimulus, or simply replace Ben Bernanke with a more aggressive Fed Chair.

Indeed, Scott Sumners calls for additional action by the Federal Reserve well beyond QE and Operation Twist, yet he signed a Cato organized letter of economists against the ARRA stimulus back in 2009.  The stimulus does nothing – it can’t by definition – if the Federal Reserve was doing its job.

It explains why other disagreements have happened.  If we are in a balance-sheet recession, should the Fed raise rates to 1%?  Krugman and the monetarists would say no – the problem is that we can’t get negative interest rates, and raising rates does the opposite of that.  They disagree about whether the Fed is constrained.  People like Koo would say it doesn’t matter.  Indeed, Koo blasted Krugman recently for supporting QE2, because, since monetary policy can’t do anything, he believes it pushes investors into stocks and commodities to search for returns.

Koo is a fan of fiscal policy because he believes it is the only thing that can support private-sector deleveraging.  People like Krugman, channeling Michael Woodford, would say that it also helps because it doesn’t have to go through normal expectation channels.

It also goes to the big policy everyone is talking about: housing relief.  How would each approach handle the foreclosure waves and debt overhang?  The balance-sheet recession people would say it is essential to recovery, because the debt and subsequent uncertainty are driving the problems.  The liquidity trap people would say that housing chaos is keeping interest rates negative, below the liquidity trap, and thus making it difficult for the Federal Reserve to guide the economy back to full employment.  The monetarists would probably say it has no interesting macroeconomic consequences that a competent Federal Reserve and monetary policy couldn’t handle, and the policy should be considered on normal efficiency terms alone.

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56 Responses to Three Ways of Looking at Deleveraging and Monetary Policy

  1. Ken Houghton says:

    Krugman, like most modern Macro people, has been trained (arguably correctly) to prefer monetary policy to fiscal policy for addressing, er, “business-cycle fluctuations,”* but I don’t believe he’s doctrinal about never-use-fiscal-policy for gains in a “normal” environment. (No one who studied Japan for more than a few months could be.)

    Gedankenexperiment: Funds rate goes to 1%, but the long end of the curve doesn’t move. Does Krugman start saying, “No, don’t spend on infrastructure to stimulate the economy. It may still be free money (even more so, all else equal), but we can do this solely through monetary policy!”

    I’m not absolutely certain of the answer, but I know which way to bet.

    *You and I can discuss separately whether outsourcing your manufacturing–including production improvements–and production of many consumer products so that you need a 250% increase (as a percent of GDP) in your on FIRE profits from “intermediation” to sustain only a very slow ebb in your standard of living should be considered a “fluctuation” or suicide. (The argument may be more ambiguous than I make it sound here; check out the UK at the end of the 19th and beginning of the 20th century.)

  2. Chris says:

    It seems as though the policy responses stemming from each view are not mutually exclusive. Let’s do all three.

  3. Dan Kervick says:

    The MMT folks are probably best placed here as well.

    I don’t think so. There is nothing fatalistic about the MMT approach to household debt and deleveraging. In a sense they also want to “flood the system with money”, but are clearer about the fact that what we need in this area are money-financed fiscal operations – not simply central bank operations. Most of the MMTers defend some version of horizontalism or the endogenous creation of money, and are skeptical about the powers of the central bank. They took a generally unenthusiastic or uninterested view of QE and QE2.

    Also, they don’t support countercyclical money-financed fiscal operations and deficit expansion because they are trying to trigger a monetary phenomenon – inflation – which will then produce the desired real economic effects. Indeed, they usually resist the notion that their favored policies will be inflationary. Money is seen by them as primarily an aspect of government power – the power to command the purchase or exchange of real goods and services that rests mainly in the hands of the monopoly issuer of the currency – and the policies they endorse are viewed as expressions of latent, but unfortunately neglected, governmental power to counteract private sector failure and dysfunction by directly ordering goods and services from the private sector.

    FWIW, I think the recent infatuation of some progressives with inherently conservative monetarist approaches to the economy is a tragic error and massive intellectual distraction. The monetarists are just wrong about the central bank and its role in the economy.

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  5. Anders says:

    Helpful post. For those that think monetary policy works now (Sumner, Beckworth, Rognile), do they address the MMT argument that QE is merely an asset swap – ie replacing very liquid interest-bearing govt bonds with even more liquid non-interest bearing cash – and so is unlikely to spur private consumption or investment?

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  7. wh10 says:

    Nice post. Cullen just published a great response to Rognlie: http://pragcap.com/myth-or-reality-household-balance-sheets-are-as-healthy-as-2006

    “As Beckworth and Rognile point out above, this view doesn’t make sense given the conventional understanding of how monetary policy ought to operate. If we desire greater spending from households or creditors; *we can always make that happen by flooding the system with money*.”

    From the MMT perspective, that is where Beckworth and Rognlie go wrong. No need to go into it here; the arguments have been published hundreds of times over across the blogosphere and in the formal literature. But you are fair to call it the ‘conventional’ understanding rather than the necessarily ‘correct’ understanding.

    • TC says:

      These guys also don’t understand that monetary policy sucks for a variety of other reasons beyond the creation of debt slaves.

      I’ve got a list of reasons somewhere on my blog, but here are a few off the top of my head:

      1. It’s nearly all real estate. Monetary policy is about lending on real estate. Real estate transactions are large, bulky, slow, and have high fees. Cutting lending rates today causes real estate transactions in 5 months. Fiscal spending today causes transactions today.
      2. But enough lending is about other things to greatly amplify or reduce the impact of MP – until it kicks in on all sectors, which causes overshooting.
      3. It puts a middle man into every large transaction in our economy. Why is this a positive?
      4. It bankrupts people by cutting off lending to fight inflation. All lending is leverage on equity – cutting off lending by raising rates is throwing people into financial ruin to avoid inflation

      Monetary policy is inferior to fiscal policy in nearly every way. It’s slow to act, difficult to direct to the correct sectors, hard to measure, and much much more. Add it “requires more debt slavery to stimulate economy” and its not even a fair fight.

      We should be holding monetary policy relatively stable, and changing fiscal policy instead of the other way around.

  8. K. Williams says:

    The question I have, which I realize I keep asking (mainly because I can’t get a good answer) is simpler: is “deleveraging” actually happening to any meaningful degree? In other words, why do we think we’re in something unusual called “a balance-sheet recession,” rather than just a really deep, bad recession caused by the bursting of the housing bubble and the resultant disappearance of about $500 billion in consumer demand (a disappearance that has nothing do with how much debt people have, and is simply a function of the negative wealth effect).

    • Anders says:

      @K. Williams: I agree that it is hard to get an answer on what distinguishes a balance sheet recession. But deleveraging is certainly happening: every time the private sector (or any sector for that matter) lives within its means, generating a financial surplus, this means it is reducing its net debt (or increasing its net financial assets). Private sector surpluses, in most countries, have risen sharply following 2008.

      If you look at data for private debt/GDP, it is clear that it had risen far above its long term trend line through 2008, and charts indicate that this number has fallen, with govt debt/GDP rising as the natural offset.

      The Z.1 would probably give you enough data to play around with if you’re interested.

  9. Peter K. says:

    Krugman has blogged an answer and I agree with his response.

    Kervick:
    “FWIW, I think the recent infatuation of some progressives with inherently conservative monetarist approaches to the economy is a tragic error and massive intellectual distraction. The monetarists are just wrong about the central bank and its role in the economy.”

    This is completely wrong. One hundred percent. Yes Scott Sumner is conservative, yes he was against the ARRA/stimulus b/c he’s against government but at least he’s not a no-nothing Rand Paulite-Austrian. He wants the economy to grow at capacity. And what will follow from this? Full employment.

    The liberal-left has long neglected the Federal Reserve Bank and monetary policy. In the past there have been liberals who complained about the Fed being too obsessed with inflation and too intent on hard money but for the most part the Fed is ignored. There is a romantic infatuation with the glory days of FDR’s WPA and public works program (although it was World War II that pulled us out). It’s a symptom of an impotent, marginalized leftwing movement. Instead of looking at reality squarely in the face, they dream of bygone days. Right now the Senate is blocking Obama’s modest jobs bill in the face of a possible recession. Bernanke needs to show some Volckerian resolve. He needs to get medieval on the jobs recession.

    The fact is that the country didn’t plunge back into depression after World War II because inflation helped deleverage war time debts. FDR’s monetary policies like going off the Gold Standard helped end the Great Depression as well.

    • TC says:

      He’s one of the few conservatives I respect because of his clear and ongoing support of economic growth.

    • Dan Kervick says:

      Personally, I don’t think I ignore the Fed at all. As I think you you know PeterK, I have written many comments in several blogs explaining precisely what I think is defective about a lot of the monetarist thinking about the powers of the central bank, and why I think the hopes that the Fed actually has it within its powers to go medieval on unemployment are fools’ gold. I have linked to scholarly papers that help explain what I am talking about. For the most part, people who disagree with me offer no counter to those arguments. I have tried to encourage people to keep the focus on fiscal policy because I think it is the only approach that will actually work.

      The market monetarists offer weak arguments against fiscal policy initiatives that are proposed as alternative. They seem to oppose these approaches out of hand because they share the general conservative distaste for an activist government role in the real economy, and prefer that the government just stick to highly indirect methods of stimulating economic activity by modulating rates and liquidity levels in the financial sector.

      Whether Scott Sumner wants there to be growth and full unemployment – and I believe he sincerely does – are unrelated to the question of whether the policies he proposes will generate growth and full employment.

  10. K. Williams says:

    “If you look at data for private debt/GDP, it is clear that it had risen far above its long term trend line through 2008, and charts indicate that this number has fallen”

    Anders, I’m not denying that people’s willingness to borrow has fallen. I’m saying that this is not a useful diagnosis of the recession, nor does the diagnosis give us any useful advice as to how to get out of the recession, unless you think that the basic problem with today’s US economy is that consumers are spending too little relative to their income. That diagnosis makes no sense because the savings rate is only around 5%, which is well below its pre-bubble average. Unless the recipe for recovery is to reinflate the housing bubble, or create some other kind of debt bubble, blaming this recession on consumers who are restraining their spending because they have too much debt just doesn’t make sense to me, particularly when you consider that debt payments as a percentage of income are as low as they’ve been in twenty years.

    • csissoko says:

      “this is not a useful diagnosis of the recession, nor does the diagnosis give us any useful advice as to how to get out of the recession”

      These are two very different issues. A lot of us would claim that deleveraging is an important explanation of why the recession is taking place, that is, increased “savings” to pay down debt that because it’s just paying down debt (thus protecting bank balance sheets from write-downs instead of going to creditors in a meaningful way) doesn’t have the economically beneficial effects of savings in the form of investing in entrepreneurial activity. At the same time this view implies that this is a particularly difficult type of recession to get out of — mainly because there aren’t many proponents of reinflating the bubble. That’s one of the reasons for the controversy that Mike observes.

      So what I view as “useful” is an understanding of the environment I’m in, whether or not it implies a clear solution. You appear to want an explanation of the recession that brings with it some clear piece of “useful advice.” If only macroeconomics were so easy! Personally, I find the debate over solutions to be valuable and probably the best advice possible.

      • K. Williams says:

        As I say below, no explanation of the recession that relies on the fact that Americans are saving 5% of their income rather than 2.5% makes sense, particularly since that rise in the savings rate is entirely predictable based on the negative wealth effect. In other words, even if all of the houses in the US were 100% owned by the people who lived in them, we would have expected a serious recession if the value of homes had fallen by $8 trillion.

        As for the contention that the problem is that ““savings” to pay down debt that because it’s just paying down debt doesn’t have the economically beneficial effects of savings in the form of investing in entrepreneurial activity,” I don’t know what to say about this. There’s no evidence in the data that people who could be putting their money into the stock market or other entrepreneurial investing are paying off their mortgages instead. No is there any evidence at all that a cause of the recession is that there isn’t enough cheap capital for businesses to expand. On the contrary, there’s a massive surplus of capital — corporations are able to borrow at extraordinarily low interest rates, and they’re sitting, as we all know, on $2 trillion in cash. If there were, in fact, all these great business opportunities out there, we would expect to see these companies using their access to cheap capital to make these investments and take market share away from those businesses who, by your account, aren’t able to borrow money because of the mortgage crisis. We don’t see that at all. You’re offering up a supply-side explanation here — because “savings” is going to pay down debt, it’s not going to fund entrepreneurial activity — when this recession is clearly, and almost exclusively, a demand-side problem.

        So no, the diagnosis doesn’t make sense, and the solution it suggests — principal reductions, etc. — wouldn’t make much of a difference, either.

      • csissoko says:

        My view is that when payments on deeply underwater homes are counted in macro data as savings, they fail to play the traditional role of savings, because (i) homeowners have little expectation of earning a future return on these “savings” as they’re very likely to be lost in a future foreclosure over the next two decades and (ii) the payments shore up bank balance sheets rather than freeing resources for new loans. Of course, I agree that there’s a demand problem and that’s affecting business demand for loans, but it seems clear that this is due to (1) failure of average income to increase and (2) the effect of doubling the savings rate on that stagnant income. How could these factors fail to cause a recession?

        Why is the recession as bad as it is? I would argue that it’s because too much of what we’re counting as savings is not leading to either additional income for savers or meaningful investment. Additional income would obviously improve aggregate demand and meaningful investment is the classic means of growing out of recession. Clearly the negative equity problem isn’t the sole cause of our economic problems. It’s just a very important aggravating factor that makes the problem particularly difficult to solve.

        “rise in the savings rate is entirely predictable” Are you saying that when something is predictable it can’t cause a recession?

        “the US economy worked just fine with Americans saving 8% or better of their income. So the explanation for why it isn’t working now can’t be that Americans are saving 5% of their income instead of 2.5%”

        We have a very different economy and a very different international context now than we did in the 1950s or the 1980s, so it’s not clear to me how we can draw any conclusions from 8% savings worked back then. Britain had excellent economic growth in the 19th century with 25 or higher bank capital ratios. Does that mean that regulators can demand 25% capital ratios for banks and have no effect on the economy? Maybe. But I wouldn’t consider the 19th c experience strong evidence of anything.

      • K. Williams says:

        ““rise in the savings rate is entirely predictable” Are you saying that when something is predictable it can’t cause a recession?”

        No, I’m saying that the rise in the savings rate would have been expected, independent of whether people had borrowed a lot of money during the housing bubble. In other words, I view the increase in the savings rate (or, better, the decline in spending) as driven almost entirely by the loss of wealth due to the bursting of the housing bubble (and the concomitant stock-market decline, particularly since many individual investors got out near the bottom and never went back in). That’s not the “balance-sheet recession” story, which is fixated on debt levels and negative equity. This is a recession driven by a sharp decline in demand, not by excessive debt.

        On the supply side, I don’t think the data really bear out your analysis. There actually hasn’t been a dearth of business investment in plant and equipment — on the contrary, it’s been one of the bigger drivers of the miserable recovery we’ve had. I just don’t see any evidence in the numbers that the negative-equity situation is having any impact on the supply of capital or the ability of business to take advantage of investment opportunities.

      • csissoko says:

        So would you agreeing that the lack of income to savers from their so-called “savings” (which is really just paying down debt) is a factor aggravating the recession? This is clearly a demand side factor.

      • K. Williams says:

        “Latest I’ve seen on deleveraging, from NY Fed:
        http://libertystreeteconomics.newyorkfed.org/2011/03/have-consumers-become-more-frugal.html

        Again, what this study shows is that consumers, in the wake of the recession, stopped borrowing at the rate that they were borrowing during the bubble years. This is unsurprising. But it’s not an explanation for why this recession has been so hard to get out of, because despite this decrease in borrowing, consumers are not spending at a lower rate than they were during the pre-bubble era. Before 2000 (or perhaps 1997, to predate the Internet bubble), the US economy worked just fine with Americans saving 8% or better of their income. So the explanation for why it isn’t working now can’t be that Americans are saving 5% of their income instead of 2.5%.

  11. Dan Kervick says:

    Following up on K. Williams’s question, I have seen some data lately floating around the internet on trends in real household income, broken down by decile. As I recall, the data shows downward trends for the bottom and middle deciles, but flat or growing trends at the top. Can someone point me to the source of this data?

    If the data I’m remembering is accurate, then here are three recession-tackling proposals I see kicked around from time to time which seem very misguided to me:

    1. Households just need time to delever, so they can go back to their old borrowing behavior. (Won’t happen if real household income has fallen, and a bad idea anyway given the fact that their old borrowing behavior was too aggressive.)

    2. We need to inflate, so that workers’ real wages can be brought down as a result of inflation, and employers can hire more people at a lower real cost. (This is just morally wrong, given that workers have already been forced to bear the brunt of years of stagnating and declining wages. It’s crazy to increase “competitiveness” on the backs of American workers while corporations are reaping strong profits due to cost-cutting, and steering the rewards of their output toward stockholders and executives.)

    3. We need to inflate, so that we can reduce the real private debt burden and help the private sector delever faster. (This will only work for those fortunate people whose nominal income rises at least as fast as the price level. For those on fixed nominal incomes, or whose nominal wages are sticky due to non-existent bargaining power in a buyers’ market for labor, inflation might hurt more than it helps. So this inflationary plan looks like a scheme for working people and the poor to subsidize the delevering of the fortunate.)

  12. Peter K. says:

    So, Dan Kervick, you’re an MMTer? As Krugman blogged MMTers seem like mirror images of “quasi-monetarists” such as Scott Sumner. Riding their hobby horses and immune to logic and evidence.

    Many people have proposed mild inflation (not wheelbarrow Germany or Zimbabwe inflation) as a way to help the economy recover. Krugman, Bernanke in the context of Japan, Chicago Fed’s Charles Evans recently, etc. They do not describe it the way you do. Evans says we should have our hair on fire over the job recession. Hard money advocates at the Fed are not concerned about the jobs situation. Inflation would prod people who have no debt to spend and invest and add demand to the economy. It would help people with debt deleverage as their debt loads shrink and they can pay it down more quickly, bringing the day closer when they an add their demand to economy. With more demand added to the economy, employment levels would rise, as would wages.

    Inflation helps debtors and hurts creditors which is why Bernanke probably won’t attempt an experiment that would prove you wrong in real time. Right wing conservatives are preventing him via political pressure. They don’t want anything that could help the economy. Maybe he’d do it with Romney in office, but Romney has vowed to replace Bernanke. Obama’s Job Act would help but currently the Senate is blocking it. So much for fiscal policy.

  13. Peter K. says:

    Anyway good post and I enjoy the venn diagrams.

    Here’s the Atlanta Fed’s President on deleveraging from Aug. 31st.
    http://www.frbatlanta.org/news/speeches/110831_lockhart.cfm

  14. Mike, why do you label group 3 “quasi monetarists” ? Is it because pure-monetarists believe that flodding the market with liquidity and the huge buildup of reserves/base money is automatically “hyper inflationary”, in effect not believing in the liquidity trap or balance sheet recession? Under that analysis, are the pure monetarists and Austrians more or less in the same camp?

  15. Dan Kervick says:

    I don’t consider myself an MMTer, Peter K. One reason why is that I am not convinced by chartalism. I think government power to impose tax liabilities denominated in the official currency is only one component of the combination of forces that sustain people’s willingness to accept that established currency in exchange for goods and service. But there are other important forces as well, and so I don’t attribute to that taxing power the overriding importance the MMTers do.

    I also have reservations about MMT that can best be put by saying that there are things they say that are strictly speaking correct, but only when one takes an extremely abstract view of the economy and the government, and that tend to break down in usefulness when one pays more attention to institutions.

    MMTers have a doctrine which they express by saying things like “government spending is not funded or financed by taxes and borrowing; spending is one operation, and taxing and borrowing are other operations.” I think they are right at an abstract level, and it can sometimes be useful to look at things from that level, but that this way of viewing things is often much more misleading than helpful from an institutional and policy-oriented point of view. As a matter of institutional accounting fact, the proceeds from certain funding streams are dedicated to particular spending programs.

    I think they also make too much of the distinction between what they sometimes call “operational contraints” and “voluntary constraints.” They like to say things like “a government that is sovereign in its currency is never operationally constrained when it comes to paying its debts; there is no real default risk for such a government.” I think that is also true strictly speaking, taking an extremely abstract and non-institutional view of government and its “operations”. But the additional constraints to be considered besides these abstract “operational” ones are hardly voluntary in any ordinary sense. The responsible officials subject to these constraints are not free to change them, and the “government” as a whole can sometimes only change them with a large and coordinated political effort which it is unrealistic to expect from a political point of view. Also, the non-operational constraints include policy constraints such as the need to mange the price level, which I do not believe MMTers talk enough about.

    But I do take a very favorable view of their fiscal activism, and the need for government in regulating the economy and supporting aggregate demand through spending. I also tend to think they have a much clearer views about the functioning of banking and financial systems than do the quasi-monetarists, and other mainstream economists and pundits who employ very much oversimplified views of the “money supply” and inflation, and the role of the central bank in each. I especially recommend the papers of Scott Fullwiler on this topic. I also think MMTs general approach to issue of public sector deficits and debt is correct, as well as description of of sectoral balances, and coherent stock-flow accounting, and that understanding this material is very useful for seeing what is wrong with a lot of conventional thinking on public policy.

    Many MMTers are also strongly influence by Hyman Minsky, who described inherent destabilizing processes in the very nature of capitalist financial systems, processes that require for their stabilization active government regulation at all times. I share with them a strong admiration for Minsky.

    You say, “inflation helps debtors and hurts creditors”, and I agree that this is true on average. But the details depend on such things as bargaining power and household debt service-to-consumption levels, and an inflationist program could very easily end up helping the economy on average by hurting the least fortunate and helping the more fortunate. I am also very skeptical about the paradigm of raising both inflation and inflation expectations through central bank actions alone. I think a lot of these proposals suffer from some very bad monetarist thinking.

    • TC says:

      Dan,

      Nice comments and critiques.

      The initial demand for currency is given by taxation, but by no means is this the dominant demand playing out in the market. The MMT story is that people demand to use government script because it can extinguish tax liabilities, but after that script is widely adopted, the demand for savings in different forms of money dominates the demand for money.

      Your critique about MMT ignoring the institutions in place is a good one. I’d counter that most MMTers are fighting a battle of comprehension first and foremost. Most people – even really smart people like Paul Krugman, Rognlie, and Rowe – are getting basic facts about money wrong. Their math literally doesn’t add up, or they are relying on assumptions that aren’t “even even wrong”.

      I’d love to have the luxury of debating how this flows through the institutions we have in place. I don’t have that because I need to spend about 90% of the time combating simple mistakes like the usefulness of the no-Ponzi assumption, or stating basic facts like the United States cannot become insolvent in such a way people understand them.

      We MMTers changed the debate this year. Bond King Bill Gross was going around saying “The U.S. is going broke.” in March. By June, he was saying, “Well the U.S. cannot go broke, but it can have inflation.”

      The threat of insolvency is used over and over again to threaten inflation or doom or something – I really can’t tell what the exact threat is supposed to be. So I need to send my time writing diatribes about that stupid topic instead of how money flows through our institutions – and how understanding the accounting will help us and our economy.

      Measuring what we’re doing is hugely important. The only way to measure what’s happening accurately in a money economy is through accounting!

      The inflation idea – well, that’s tough. There are winners and losers at every level of inflation or deflation. MMT’s idea is to maximize real growth. The only way to do this is to have everyone working. As people point out over and over, the difference between 3% growth and 4% growth is huge over 100 years. Even small differences in long term growth have gigantic long term wealth differences.

      3% growth results in being 18 times richer in 100 years. 4% growth results in 49 times richer.

      All that matters in the long run is real growth.

      • Dan Kervick says:

        The inflation idea – well, that’s tough. There are winners and losers at every level of inflation or deflation.

        I agree wholeheartedly with this TC. I have just been trying to get people to think the inflation issue through more carefully, especially in connection with fiscal and wage policies that can help with the debt deflation, but be targeted more finely at specific groups of people, instead of just taking a top-down, blunt instrument, central bank oriented approach of inflating by increasing the “money supply” in accordance with some textbook curve or formula.

        And I understand the point about it being difficult to develop the institutional details when you’re busy refuting crude fallacies, like the insolvency terrors which were all the rage last year.

        I have a little bit of skepticism about the idea that taxation always or usually accounts for the initial demand for money. I’m weak on the history of money, but my sense is that the use of money in exchange is an enduring social practice in which new forms of money typically evolve out of older forms of money, without their being any clear inception point. Some new transferable financial instrument is created by markets that is initially offered as a promise of redemption for some other monetary good. People ultimately grow comfortable with the new instrument and start trading it as though it were money itself. After a while, the frequency of redemptions grow less frequent and the promise of redemptions less important, and people begin to trade the new instrument as virtual money. The government then makes it official and codifies the monetary status of the instrument. The role of state power comes in because the codification includes not just the permission to retire tax liabilities with the new instrument, but also almost all other legal debt obligations. The government also assumes regulatory control over the issuance of the instrument, and punishes attempts to create and issue other forms of money.

        I should read your blog more often. I just bookmarked it!

      • “Your critique about MMT ignoring the institutions in place is a good one. ”
        Baloney. It’s about as far off as could be. Only someone who doesn’t understand MMT says something that ridiculous–I don’t care how much MMT someone claims to have read, saying something like that is simply a fundamental misreading of MMT. Sorry to be blunt, but we’re INSTITUTIONALISTS for heaven’s sake. Seems like some people need to re-read my “primer on the operational realities of the monetary system,” if they’ve read it at all, before being taken seriously about MMT again–this is all just a basic lack of understanding of what “operational” does and does not mean.

      • TC says:

        Hi Dan K,

        Thanks for the kind words on the blog.

        I think that MMT makes a distinction between the government script used and “money” – the script is just an instance of money that gains preference because of taxes. After that, the impact of taxes on demand for money is gravitational.

        And all of those factors you mention – they are all part of the demand mosaic. I am pretty sure that taxes are the major factor that forces people to choose which script they want. But those other factors shouldn’t be ignored. People don’t usually have only one reason to marry their spouse – they have a whole slew of reasons why they made the choice.

        I’d also say that there is a demand for “Money” separate from the demand for “script” – these are things like liquidity preference and savings demand. MMT tries to separate those two issues. It’s a complex and wonderful topic. I’d ask why the euro was accepted so rapidily by the populations involved.

        I’ve created MMT based models for money that seem to match real world demand quite well. I won’t share them. They are valuable trading tools that give real insight into our economy.

        You can look Cullen Roche’s recent article called “MORE UNFORTUNATE MATH BEHIND OUR ECONOMIC PLIGHT” for thinking about how to make MMT/accounting models for the economy.

        Comment anytime over at the blog – I try to respond to most comments.

      • TC says:

        Also, I don’t have space here for a disussion on inflation- after all, this is Mike’s blog. I didn’t even get to his excellent post.

        The more I think about it, the more measurement matters. Simply laying out the land – where people stand – is hugely useful to understanding the debate.

        Do you find it funny that cowen isn’t on the map, or Cochran

    • Peter D says:

      Scott: “Sorry to be blunt, but we’re INSTITUTIONALISTS for heaven’s sake.”

      I think you mean a different thing by “institutions” than what Dan/TC had in mind. Dan says “The responsible officials subject to these constraints are not free to change them, and the “government” as a whole can sometimes only change them with a large and coordinated political effort which it is unrealistic to expect from a political point of view.”
      I understand this to include, for example, the actual separation of the FA and the CB, despite the fact that MMT says they should be consolidated and to a large extent already are. But the small extent to which they are not is not trivial.

      • Dan Kervick says:

        Thanks Peter D. That is indeed one of the institutional separations I had in mind.

      • Sorry, Peter, but you’re missing the point, as is Dan. The “institutions” we are both talking about are the same. Please find for me anywhere in MMT literature that specifically argues that “responsible officials” subject to legal/regulatory constraints are free to change them. Please find for me anywhere in MMT literature where it’s suggested that it’s politically easy to make these changes. In both cases we’ve repeatedly stated the opposite. Suggesting these constraints are “self-imposed” is not the same thing as saying they can be ignored by those bound legally or regulatorily by them, and it’s not the same thing as saying they are easy to get rid of politically speaking.

        Again, you’re both misunderstanding what MMT is and is not. It is an explanation of how the monetary system works for a currency issuer under flexible exchange rate in general terms. The point then is to move toward macroeconomic policy aimed at full employment and price stability that is consistent with this system, rather than imposes upon itself constraints based on a flawed understanding of this system. And while there are self-imposed constraints, there are also imagined constraints that do not exist regardless of laws, regulations, etc–such as fears about bond vigilantes–or mistaken understandings of how policy actions are transmitted–as with QE–that MMT clears up.

        As I explained below in a hypothetical example, much like engineers trying to explain the physics of bridge building to regulators or policymakers that hypothetically require bridges to be built poorly via codes/regulations, etc., MMT’ers explain the “physics” of how the monetary system works; and just as engineers would understand perfectly well the legal/political/regulatory constraints involved in bridge building, MMT’ers understand perfectly well the same constraints in poilcy making. But you both are confusing the point, as if somehow an engineer explaining the physics of bridge building didn’t realize that bridge builders and their regulators weren’t allowed to build sound bridges or that changing building codes or laws about bridge building might be politically rather difficult to accomplish. No. It’s precisely because the engineer understands these constraints and political limits currently exist and ALSO understands the physics of bridge building that he speaks up to try and bring change.

        As before, sorry to be blunt, but your line of reasoning and criticism shows a stunning lack of understanding of MMT. Those of us writing MMT just shake our heads in amazement when these sorts of criticism are written of us.

      • Peter D says:

        I don’t know whether I can pick on anything to disagree with you Scott, because there are no concrete things mentioned in your post. But, for example, I remember a discussion either on NEP or on Warren’s blog involving the usual subjects like Ramanan, Anon, Randy Wray (?) and yourself (?) on whether it is indeed true that Treasury auctions cannot fail and I don’t think it was proven they can’t (I think it went along the lines of: the fact that PDs would be required to bid in normal times doesn’t guarantee that they would in abnormal times, even if that entailed forgoing the PD privileges). MMT sometimes glosses a bit over things like this. And I actually have little problem with this: the scenarios for breakage seem very far-fetched to me under current circumstances. Which is why I support MMT wholeheartedly. But I understand why some people would be a least a little bit wary.
        The analogy with building a bridge is helpful but just a bit misleading. Economics is a social science (non-Austrian economics, that is) and as such the underlying “laws” are often subject to human behavior. Example: MMT would say that the Fed can bring any rate down by committing to buy unlimited quantities of bonds at the given maturity. And while in a “mechanical” sense it is true, what would happen if the Fed indeed needed to monetize too large quantities of govt debt is not certain. Large swaths of population not initiated in MMT might freak out and cause some sort of self-perpetuating panic. Note that I am not saying MMT is oblivious to such concerns, but that the analogy to the laws o physics is just slightly off.

      • OK, I hope this gets put in the correct place–it’s a response to Peter D on 10/14 at 7:34.

        Hi Peter (and Dan),

        “But, for example, I remember a discussion either on NEP or on Warren’s blog involving the usual subjects like Ramanan, Anon, Randy Wray (?) and yourself (?) on whether it is indeed true that Treasury auctions cannot fail and I don’t think it was proven they can’t (I think it went along the lines of: the fact that PDs would be required to bid in normal times doesn’t guarantee that they would in abnormal times, even if that entailed forgoing the PD privileges).”

        I really don’t see the issue here. Obviously auctions can fail in theory, and actually have in the past. When you do Treasury auctions and legally connect them to the Treasury’s ability to spend via legislation (as opposed to simply issuing them at some fixed price relative to the cb’s target rate to drain reserve balances, or not issuing them at all), then you’ve got a self-imposed constraint and you’ve moved out of the general case MMT is describing for a currency issuer in terms of how interest rates might be set on the national debt in extreme circumstances. This seems again like a misunderstanding of how to situate MMT in discussions of current policy issues rather than a critique of MMT.

        “MMT sometimes glosses a bit over things like this.”

        Again, no we don’t, if you understand how to use the paradigm. We’ve always acknowledged self-imposed constraints and the effects those might have particularly if markets ever doubt the govt’s willingness to service its debt. There are things the CB can do even in those instances, but for political or even legal reasons might not. This isn’t a shortcoming of MMT—it’s MMT describing the general case and applying it to a specific situation.

        “The analogy with building a bridge is helpful but just a bit misleading. Economics is a social science (non-Austrian economics, that is) and as such the underlying “laws” are often subject to human behavior.”

        Yes, I understand the difference quite well. But recognize what “operational realities” entails—the “accounting logic” and the “tactical logic” of monetary operations under alternative monetary systems. The analogy to engineering is quite close—I’ve studied both quite a bit.

        “Example: MMT would say that the Fed can bring any rate down by committing to buy unlimited quantities of bonds at the given maturity. And while in a “mechanical” sense it is true,”

        And that’s precisely the point.

        “what would happen if the Fed indeed needed to monetize too large quantities of govt debt is not certain. Large swaths of population not initiated in MMT might freak out and cause some sort of self-perpetuating panic.”

        And where have you ever seen us say this couldn’t happen? Precisely because MMT is not understood is why it is most definitely in the realm of possibility. We saw this quite clearly with QE2, and Warren called it in real time—markets expected QE2 to be inflationary and for future fed rates to therefore be higher, so Treasury rates were actually bid up, not down as most expected. We saw gold go way up. We saw equities probably do a mini-bubble. Cullen was calling this in real time, too. It’s because we understand the monetary system we can call these things what they are and understand why they happen, while the Bill Gross’s of the world short Treasuries in anticipation of QE2’s end.

      • Peter D says:

        “This seems again like a misunderstanding of how to situate MMT in discussions of current policy issues rather than a critique of MMT.”

        Look, Scott, MMT is not really a well defined concept from where I and most people sit. I know you, being one of the major developers of it, might have a different view, but the fact is, most people get exposed to MMT thru blogs and comments, not thru scholarly papers. This is in fact the driver of its pretty astonishing spread over the last couple of years. And these blogs and comments can sometimes be a little bit sloppy. I’ve seen you and Stephanie admit as much at times. So MMT is now larger than just the Levy Institute papers and such. Enough of that, we’re not really arguing about anything substantial, I feel.

        “what would happen if the Fed indeed needed to monetize too large quantities of govt debt is not certain. Large swaths of population not initiated in MMT might freak out and cause some sort of self-perpetuating panic.”

        And where have you ever seen us say this couldn’t happen?

        Nowhere. In fact, in my very comment I said “Note that I am not saying MMT is oblivious to such concerns, but that the analogy to the laws o physics is just slightly off.” I was stressing that the example was to point a slight flaw in the analogy, not as a critique of MMT.

  16. Dan Kervick says:

    Peter K., you say that “Right wing conservatives are preventing him [Bernanke] via political pressure” from inflating. I don’t think that’s what is going on at all. Right wingers are indeed preventing the political branches of the government from enacting a much-needed fiscal program. But I don’t think Bernanke really gives a shit about grand-standing letters from Republican presidential candidates and politicos. I think he is an experienced central banker, who, having seen the disappointing effects of QE and QE2, and having kept up with ongoing research on the tools and mechanisms of monetary policy, has modified some of the monetarist views he once had about the impact of such quantitative measures on investment, employment and other real-economy activities. I suspect he also doesn’t believe in the naive and extravagant doctrines held by people like the quasi-monetarists and Matt Yglesias, apparently grounded in so-called “rational expectations” theory, about the grand powers of the Fed chairman to set the national economic agenda just by saying things and announcing “commitments”. He appears to have a more modest and realist view of the Fed Chairman’s powers.

    In his Senate testimony, Bernanke called in surprisingly frank terms for renewed and stepped up fiscal action by Congress and the President. If Bernanke were just being a partisan Republican, he would have poured cold water on fiscal action as well. But he didn’t. I don’t understand why more liberals didn’t pick up on that part of his comments and run with them, instead of assuming that he is a just a Republican hack. The so-called “helicopter drop” he is famous for defending in the past are predominantly fiscal operations, and so require the active participation of the Congress and the president. My guess is that he wants these government officials to start doing their job and authorize such a helicopter drop, for which the Fed stands ready to participate with the necessary monetary role.

    • Peter K. says:

      I disagree about Bernanke. There isn’t any evidence that what your saying is true. His comments to the public don’t reflect what you’re saying. The reason he is not more outspoken about fiscal policy is that it would make the Fed even more of a lightening rod. Having 3 dissenters on the committee is very unusual. The tell is that all of the dissenters’ reasons are ad hoc and arbitray. They don’t make sense. Bernanke has already done a lot to prevent a Greater Depression which is why you have Presidential candidates calling him treasonous and leaders of Congress writing him threatening letters. Romney says he won’t reappoint him. You seriously don’t believe that had an impact? You have no evidence that QE1 and 2 didn’t work. It’s like when conservatives blithely assert that Obama’s stimulus didn’t work.

      • Dan Kervick says:

        QE and QE2 possibly did have some helpful effects. But there were very high hopes for these programs among their proponents, and it’s pretty obvious that with the unemployment rate barely budging and real GDP still miserable, quantitative easing has turned out to be a massive disappointment. These programs also appear to have distorted prices in the commodities markets, leading to unwelcome cost push inflation that is making it harder for ordinary people – including many of the most vulnerable in our society – to get by.

        Edward Harrison reported back in May on Richard Koo’s critical take of QE2, and added some criticisms of his own. Do you think Koo counts as a conservative?

        http://www.creditwritedowns.com/2011/05/qe2-drives-speculation-not-real-economy.html

        How about Jamie Galbraith? Is he a conservative?

        http://www.bloomberg.com/video/64160764/

        Here’s a column by Randall Wray. Wray seems to agree with the inflationists in thinking it would be good to have some mild inflations. But he skewers the idea that the Fed can engineer the desired inflation:

        http://neweconomicperspectives.blogspot.com/2011/01/pressures-on-paradigm-fall-of-new.html

        The market monetarists or quasi-monetarists, however, are mostly quite conservative and laissez fairist economically, as you will see if you stroll through their blogs from time to time and see how they respond to comments in their comments sections. There doesn’t seem to be a single exercise in fiscal activism they are willing to endorse. And yet, nice young liberals like Matt Yglesias are desperately following them down their frequently failed Friedmanian path now studded with new wrinkles like “NGDP targeting”, and their absurd conceptions of the vast power of the central bank over the money supply, real growth and unemployment.

        Now what is my evidence for thinking Ben Bernanke wants fiscal policy-makers in Congress to be more aggressive? Well, for one thing, he just say before a joint committee of Congress on October 4th, and after laying out the miserable state of the economy, said this:

        Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain.

        Translation: “You guys in the legislatures are making the situation worse (“an increasing drag”) by implementing austerity in the face of a crappy economy, and are creating uncertainty by not putting forward and passing a viable fiscal package. Pass something!”

        Then he said:

        A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term.

        Translation: “Cut the deficit in the long-term, but by no means implement austerity now in the near term in the middle of a crap economy. I’m with Obama on this!”

        Then in his closing remarks he said, “fiscal policy is of critical importance.”

        Translation: “It is critically important that the country gets some kind of fiscal action out of you jerks.”

      • Peter K. says:

        @ Dan

        “But there were very high hopes for these programs among their proponents, ”

        Not true. Straw man on the Internet – big surprise. It’s like with the stimulus. Proponents thought they worked, just that they were not large enough. As with the Stimulus.
        Dan:
        “Now what is my evidence for thinking Ben Bernanke wants fiscal policy-makers in Congress to be more aggressive? ”

        That was not what you said.

        You said
        “I think he is an experienced central banker, who, having seen the disappointing effects of QE and QE2, and having kept up with ongoing research on the tools and mechanisms of monetary policy, has modified some of the monetarist views he once had about the impact of such quantitative measures on investment, employment and other real-economy activities. ”

        See the difference? Bernanke is solely concerned about avoiding deflation, not about the jobs recession. He advocates Congress do fiscal policy to help the jobless but he must have know as everyone in the world did that the Senate would block Obama’s American Jobs Act.

        From the Fed’s minutes, the 3 dissenters on the board are again the same ones, all appointed by the banks, carrying the banks water, voting in the banks interest. And you’re just echoing what they’re saying.

  17. David Cox says:

    FLIPP Explainers are a far clearer way than Venn diagrams to graphically explain complex things. They make child’s play of explaining and understanding extremely complex subjects. They are inconvenient to create, however. Check the web site.

  18. JW Mason says:

    this view doesn’t make sense given the conventional understanding of how monetary policy ought to operate. If we desire greater spending from households or creditors; we can always make that happen by flooding the system with money.

    I’m not convinced this is true. The term “flood the system with money” suggests a fluid that flows freely, but that’s not always a good metaphor.

    In a monetarist story, we have a demand shortfall for currently produced goods because there is excess demand for money. Sell additional money in return for some other asset, and you fix the problem. If the unit receiving the money (a bank, say) doesn’t itself have excess demand for money, it trades it to some unit that does, in return for a claim on that unit’s future income, i.e. it lends it. We can add a twist to this story by saying it’s not money exactly that is in excess demand, but some other kind of assets, like safe debt, without changing the logic. (THat’s what DeLong does.)

    But now imagine that the shortfall in demand for currently produced output takes the form not of excess demand for money, but of balance sheets constraints. We could just as well call these excess demand for non-indebtedness. Units are trying to purchase less goods and services, and more lower-debt-to-income-ratio. Just as with excess money demand, this universal effort to purchase more lower-debt-ratio reduces current expenditure and current income and thus largely or even completely frustrates itself, since incomes fall along with debt. So far it’s just like the excess money demand story. But there’s one key difference: You can’t borrow not-being-in-debt. A unit that with excess money demand that incurs a debt in return for money today has solved its problem. But a unit that wants to reduce its indebtedness that incurs a debt in order to pay down debt has not.

    So in this story, just like the other one, we have units that are in their intertemporal budget constraint, and units that face a current financial constraint — there, a target minimum money holding, here a target maximum level of debt to income. But the difference in the second case is, there’s no mechanism by which changing the balance sheets of the unconstrained units relaxes the constraint on the constrained ones. If I am already satisfied with my debt-to-income ratio, then buying an asset from me doesn’t change my current demand, even if the asset sale allows me to pay down debt further. And there’s no way I can transfer my excess borrowing capacity to some other unit that’s trying to reduce debt. Well, except by purchasing current output from them — but since I’m already on my intertemporal budget constraint, changing my mix of assets and liabilities is not going to do anything to my current demand.

    OK, that was a longer comment than I intended. But I’ve been thinking about these issues a lot lately, and I’m increasingly convinced that “the conventional understanding of how monetary policy operates” makes an important unstated assumption about the capacity of the financial system to transmit policy changes smoothly through the economy. The balance story is one possible explanation for why that might not hold.

  19. JW Mason says:

    Another way of putting this is that transactions in the asset markets can never change a unit’s net indebtedness, and they can only change its gross indebtedness insofar as it possesses marketable assets. Since monetary policy operates on asset markets, it cannot help relax a constraint in terms of net indebtedness, and probably cannot help relax a (more realistic) constraint in terms of gross indebtedness. (Except for banks and the wealthiest stratum of households, most assets are not held just for income, but because they are necessary for the unit’s normal operation — houses, fixed capital, etc.) That’s why fiscal policy, which operates on the market for currently produced output, is needed.

    The monetarist argument and its variants confuses the issue by collapsing the goods market and the asset market in an implicit one-period model. There are no flows in the monetarist world, just two sets of stocks, of real goods and financial assets.

  20. DeusDJ says:

    Dan Kervick,

    Do you know that MMT comes out from the Post-Keynesian horizontal viewpoint of money? Do you know Post-Keynesians care about institutions? DId you know about a school of economic thought called “institutionalism”, and that PostKeynesian thought is influenced by it? I mean seriously, when you’re discussing this with neoclassicals that is quite possibly the most outrageous thing you could say about MMT, that it works only in abstract thought if you ignore institutions. Thats what neoclassicals do, not us. It would have been better if you had said nothing. This is why we belong to a “heterodox” school of economics, because we don’t like orthodoxy for a reason. What is that reason? They ignore institutions, they ignore reality.

    • Dan Kervick says:

      DeusDJ,

      I have read a great deal of the MMT literature and follow their blogs very closely. I read Bill Mitchell’s blog every day, and he remains my favorite of all the MMT writers. And yes, I am aware that they are one part of a broader school of Post-Keynesian thinking, which shares much in common with the institutionalists. However, after reading much of this MMT literature, I am of the opinion that they do often not pay enough attention to institutions, policy constraints and policy detail, and sometimes make policy suggestions that reveal little thought about the details of implementation, legalities and the practicalities of government administration and politics. For example, during the debt ceiling debate, it seemed to take quite a while for the MMTers to come around to directly confronting the fact that, even though the US government as a whole could not be forced into a default, it was still possible for a “voluntary” default to occur with one branch of the government – the legislative – forcing the Treasury into a situation in which the latter could not meet its commitments. Only late in the game did they come down out of the clouds and begin offering analyses and suggestions that made contact with the actual institutional structure of the US government. There are some other areas in which I think their picture of the “operational” realities of government and the modern monetary system could stand improvement by incorporating a greater level of detail.

  21. Dan,

    Your understanding of MMT is very porous. This is just one in a series of misrepresentations or misinterpretations that I’ve seen from you.

    For instance, you write: “For example, during the debt ceiling debate, it seemed to take quite a while for the MMTers to come around to directly confronting the fact that, even though the US government as a whole could not be forced into a default, it was still possible for a “voluntary” default to occur with one branch of the government – the legislative – forcing the Treasury into a situation in which the latter could not meet its commitments. Only late in the game did they come down out of the clouds and begin offering analyses and suggestions that made contact with the actual institutional structure of the US government. ” Apparently you didn’t see THIS from MARCH of this year (not to mention it’s the sort of thing we’ve been saying for over a decade–somehow you missed that, too): http://moslereconomics.com/2011/03/25/the-ratings-agencies-should-downgrade-the-us-government/

    Regarding institutions, legalities, etc., you obviously haven’t seen these (again, just a few of many): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198 and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1874795

    • Amazing coincidence, Dan . . . you actually commented at the Mosler link I provided above (I just looked out of curiosity at the comments), yet you still saw fit here to state that MMT says precisely the opposite.

    • Dan Kervick says:

      Scott, I actually have your paper on central bank operations in my briefcase and take it with me everywhere I go. I consult it frequently, and it is my chief source for the arguments I rely on to rebut claims. I also have your writing on coin seignorage idea for dealing with the manufactured debt ceiling crisis this summer.

      You’re a trained economist. I’m not. I’m a person who is mainly interested in the policy debates that rage in the public sphere, and I look to economists both to help me understand what is going on, and as a source for evidence and arguments I can take into these debates to help advance the values I think need to be advanced.

      Your papers are obviously very rich in institutional detail. But some of the other MMT writers do not always go into the same level of detail, and make broader claims about what “the government” can and cannot do. Perhaps that shouldn’t matter that much, as different levels of detail are appropriate for different contexts, but I have found it frustrating at times.

      Example: for many months, as the Republicans in Congress were preparing their debt ceiling showdown, I was trying to get more information on what the political options were for progressives in dealing with this political battle. For quite sometime, I encountered a lot of complacent responses from progressives, drawn it seemed from some of the MMT bloggers. These answers consisted of kneejerk repetitions of sentences like “A government that is sovereign in its currency cannot default,” and “Government spending is just crediting accounts”, along with the suggestion that there was therefore nothing to worry about. The Republicans had no leverage. I tried to make the point that the Congress actually does have leverage, because the Treasury is not “the government” and neither is the Fed. These agencies are just part of the government. The Treasury cannot credit its own accounts at the Fed; the Fed cannot permit treasury overdrafts; the Fed cannot unilaterally credit a Treasury account as an independent monetary operation. The system has been set up legally so that the only way the treasury can monetize its spending is to first issue debt, which the Fed can subsequently buy up. And by interposing the debt limit, Congress had effectively roadblocked this step. Congress was thus in a strong position to force a voluntary default, if it was willing to go to the brink to do it.

      Now I am perfectly aware that the mere slogans that get kicked around the blogosphere by amateurs like myself do not represent the full, detailed institutional story. I asked my questions about the political options on several occasions on Warren’s blog, and got a lot of confusing and mutually inconsistent responses from the commenters there, many of whom seem to be among the best informed and respected in the group. The most maddening is the standard, “You just don’t understand modern monetary system.” But of course I already knew I didn’t understand many things about the modern monetary system. That’s why I was asking questions. I also sometimes received paranoid-seeming responses from a very defensive stance, where people assume my purpose is to launch an attack rather than get answers.

      Your coin seigniorage discussion was very interesting. But it seemed to come late in the game. Unfortunately, it also struck me as politically impractical give the accommodativge pose that had been struck by the White House. This debate pissed me off, because The House effectively strong-armed and outmaneuvered progressives into further austerity and the “supercommittee” business, and to my mind the reason was that a lot of progressives did not understand the leverage possessed by the Republicans until it was too late.

      • Hi Dan,
        Sorry for my tone last night–it was late and I should have gone to bed and written those this morning instead. Let me say a few things in response, though I find much to agree with in your remarks.

        I can understand some of your desire for more institutional detail–some of my research was as a result of the same desire. At the same time, be aware what the point of MMT generally is–an analogy of politics/laws/regulations and MMT might be the former and engineers building a bridge. Politicians might hypothetically set out laws/regs for how bridges can be built that are inconsistent with what engineers know to be both true as a result of the laws of physics and also best practices. Consequently, the bridge will be subpar, and may even collapse catastrophically. Note, though, that it makes little sense to criticize the engineers as they try and explain how physics works and how that should relate to building a bridge for not basing these explanations in the political realities, laws, etc (though they would be expected to critique the latter). The physics are what they are, even if the policymakers require bridges be built inconsistent with this.

        Similarly, MMT’ers explain how monetary systems in which a currency issuer operatioes under flexible exchange rates work–yes, laws can be and are written that require govt agencies to operate as if they were functioning in a different type of regime, and we are quite aware of that, but that doesn’t change how the current regime works at its most fundamental level. The latter is what MMT is about, and it’s just as relevant under different sets of laws as physics is under different sets of laws. As an example, even though politicians worry about “bond vigilantes” raising US rates, MMT’ers understood that that couldn’t happen under our particlar monetary regime–even though the laws require the Treasury to act as if it was under a different monetary regime, the outcomes are still consistent with the MMT description of our own regime. Interest rates haven’t risen in the US, UK, Japan, or others under similar regimes, but have for those with large deficits operating within different regimes like the Eurozone, etc. Indeed the coin seigniorage proposals (which incidentally Joe Firestone and Beowulf started in January) arose precisely because we understood the legal constraints put on the Treasury’s operations. There would be no need for coin seigniorage if such self-imposed constraints did not exist.

  22. Pingback: Three Ways of Looking at Deleveraging and Monetary Policy « Economics Info

  23. Why do you take Scott Sumner seriously ? His arguments make no sense. He said that he never read up on IS-LM so he doesn’t have the expert knowledge to critique it http://bit.ly/mPEDYP. He hasn’t published much in the peer reviewed literature (IDEAS-Repec does not list him in the top 10% of economists on their list — he is on the list just lower down). He isn’t employed by a top department.

    Why does anyone take him seriously ? I ask for information. I have asked again and again and never received any sort of answer.

  24. JW Mason says:

    He isn’t employed by a top department.

    Good lord, I hope that’s not the standard. If it is, we had all better shut up.

  25. DeusDJ says:

    Mr. Waldmann,

    I would hope that you realize that as bad as Sumner is in terms of having no coherence in arguing for Monetary policy but not fiscal(well this isn’t really why you dislike him, you just think anyone who’s a nobody should never be discussed), you are making similiarly ignorant remarks by stating that only those at top departments with top names should have their names listed anywhere. I would hope you realize that your own neoclassical economics has no coherence whatsoever and has been thoroughly debunked by the likes of Mirowski, Lee(especially Lee), and Steve Keen. So why does a man of your age continue to follow it?

  26. Pingback: The New, and Old, Attack on Elizabeth Warren’s Congressional Oversight Panel | Rortybomb

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