Modern Monetary Theory discussion

[El_Machinae]

I try to mention it frequently. I think the US currently has too low top marginal taxes.

 

[Farm Boy]

Top rates should probably be looking at ninety +.

Failure there is still probably less bad than targeting the bottom with the inflation rather than the top. Minimum wage increases are bruising fights and jarring to cope with. But undoing the relative value with the mostly invisible mechanism of how money poofs in? Silent and seemingly effective.

 

[amadeus]

I try to mention it frequently. I think the US currently has too low top marginal taxes.

I’m going to say something almost antithetical to my libertarian leanings: if you’re going to raise taxes to support a welfare state, everybody should be paying in.

If someone’s not contributing in some way but receiving benefits, is there any incentive for them to think about the effectiveness of the programs they support? If someone wants to build a new sidewalk to my apartment and it costs me zero, why should I care whether the government spends $100 or $100,000,000?

 

[Lexicus]

But nobody actually advocates running big surpluses forever.

See you say stuff like this but the US government, using the neoclassical macro models, was claiming before the early-2000s recession that Clinton's surpluses would last forever and continue to increase forever. You also conveniently forget how mainstream macro actually claimed that the Great Recession was impossible before it happened!

Is it not dependent on the confidence of the people have in the government to reasonably manage the money supply? Otherwise, there is always the use of force like applied in Venezuela, but I know no one here would advocate haphazard government seizure of property in order to meet its obligations.

To some extent it is of course dependent on a political agreement by the population that the government is legitimate and that their money is worth something. Here's a hint: the fastest way to destroy people's confidence in the monetary system is to use Gold Standard-style balanced-budget thinking to unleash debt-deflation on the economy.

I don’t see them as tangible social benefits as they are a drain on the economy if the goal of an economy is to provide an increased standard of living. Every piece of steel used in a tank or gallon of jet fuel for a bomber could be used better elsewhere. We should think of defense spending as at best a necessary evil, a 5% of our incomes that go ostensibly to protect the other 95%.

I agree with you to some extent, but to spend no money on armaments would require big changes in international politics that are beyond the scope of an MMT discussion. The point here is that it is a basic macroeconomic principle that all spending is someone else's income. For the economy as a whole spending equals income. Thus, even spending on armaments (and it's important to keep in mind that not 100% of the military budget does actually go to armaments) provides tangible social benefits because the people who manufacture armaments for the government, as I said, live and thus mostly consume in the United States. They spend the money they make producing armaments on other things, providing income to other people. That is a tangible social benefit.

Anyway, I'm not here to argue that militarism is awesome. I actually think one of the reasons we have Trump is excessive militarism in the US. But that is a whole 'nother topic. I'm just here to talk a little bit about the macroeconomic impacts of defense spending.

In the aggregate, capitalism has worked exceptionally well compared to every attempt at a state-run economy.

This is the kind of analysis that results from (to channel Patine for a moment) a binary view of the world where all complexity is tossed out the window in favor of caricature. I am sure you know it is inaccurate to imply that the state plays no role in managing capitalism, and in real history, to use the US as an example, the most "efficient" period was World War II, when the economy was more-or-less managed by the state to an extent unmatched at any other time in US history!

There’s no hoodwink if we all agree to play by the same rules. I know the bank doesn’t have 100% of everyone’s deposits on hand. I know most of the money in the world is stored in bankbook ledgers.

Yeah, see, this is probably the most difficult conceptual leap to make in this whole discussion. In reality, as opposed to macro-textbook world, bank loans create bank deposits, not the other way around. This is a crucially important point and related to this question:

Forgive me but I'm still lost as to how a trade surplus affects decisions made by central banks re: money supply. Does anyone have a good link that explains the relationship between the two?

The macro accounting identity is:
Foreign Balance + Domestic Private Balance + Government Balance = 0. This is an accounting identity derived ultimately from spending = income. luiz and his ilk will tell you that this is a truism that "everyone knows" is true, but then they will make claims about policy based on magical thinking that ignores the macro accounting identity. For example, the CBO's projections in the late 1990s of surpluses forever ignored the effect of the government's surplus combined with the large trade deficit on the US domestic private sector. With both the foreign sector and the government accumulating net financial claims on the US private sector, economists working with the sectoral balances accurately predicted in the 1990s that the CBO was wrong, that the surpluses could not last forever, and indeed that is exactly what happened! Excessive private-sector leverage led to a recession and the government's budget went back into deficit, where it's been ever since.

It's not that "trade surplus affects decisions made by central banks re: money supply." It's that you can't change the balance of one of the sectors without changing the balances of the other sectors. Now, where the crucial point above comes in: central banks don't actually make decisions directly regarding the money supply. Monetary targets was a central bank approach tried and then discarded in the late 70s and early 80s, because it didn't work. The central bank consistently failed to hit its monetary aggregate targets. This is because the whole story of how banks use the fractional reserve to "multiply" deposits into loans is false. Banks are in essence credit-creating bodies. They create money by issuing loans (and the reason we say bank loans create deposits is because the money people deposit in banks generally comes from loans originating from banks).

Now, before you dismiss this as crankery or whatever, here is a paper from the Bank of England saying the same thing:
https://www.bankofengland.co.uk/-/m...hash=9A8788FD44A62D8BB927123544205CE476E01654

• This article explains how the majority of money in the modern economy is created by commercial banks making loans.
• Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.

The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses. In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.(3)

Basically, banks lend out as much money as they think will be profitable (creating new money in the process, as outlined in the paper) and interface with the central bank after the fact to meet their reserve requirements under the fractional reserve system. One important point is that, as the paper mentions, "prudential regulation" can serve as a powerful check on expansion of the money supply!

Faith is the only relevant construct, and it is measurable.

Explanations for the acceptability of money in exchange that rely on "faith" or "confidence" boil down to infinite regress. Any given individual's "faith" in the acceptability of money relies on other's people's "faith" which relies on other people's "faith" and so on. At the macro level we need a better explanation. MMT's explanation is, in essence, liabilities imposed on the population by the state, which are denominated in, and can only be satisfied by payment of the tokens named and created by the state. This creates a demand among the population for the state's liabilities, which we call "money."

Here in Japan hundreds of years ago, rice was used as a medium of exchange and this developed into a system of rice warehousing. Rather than having to carry around a sack of rice, merchants would issue warehouse receipts that could then be exchanged back at the warehouse for the amount of rice written on the receipt.

I want to thank you for bringing this up: the reason rice was used as a medium of exchange in ancient/medieval China and Japan is that the state imposed liabilities on the population denominated in rice! You could use rice to pay taxes!

 

[Estebonrober]

I’m going to say something almost antithetical to my libertarian leanings: if you’re going to raise taxes to support a welfare state, everybody should be paying in.

If someone’s not contributing in some way but receiving benefits, is there any incentive for them to think about the effectiveness of the programs they support? If someone wants to build a new sidewalk to my apartment and it costs me zero, why should I care whether the government spends $100 or $100,000,000?

because very simply as an adult with agency you are capable of being a rational person and trying to actually be a functional member of something larger than yourself or your family because it necessarily benefits you and your family. Responsibility starts personally and moves out. Those who choose not to be responsible for themselves out of sloth are few and far between and easy to ignore.

 

[luiz]

I will give a more detailed reply when I have some time, El Mac and Boots.

But to keep it simple: perhaps the main reason why MMT is false, and why I call MMT bean counters, is that they don't differentiate between the different types of money that exist and that the government creates. That's why their high-school level accounting equations on sectoral balance are not very meaningful, and often outright false, as they equate different things. To be even more concrete: MMT grew in popularity following the QE operations of the Great Recession, when governments injected trillions of dollars in the economy without triggering some inflation spiral. But QE money is very different from printing cash, as in QE the government exchanges interest-bearig reserves for interest-bearing government debt, which is very different from “printing money” (money which is not interest bearing and is thus referred as "high powered money") in the classic sense, and does not provide a way of extinguishing public debt. So if the government really printed (high powered) money to extinguish its debt to a large degree (that is, exceeding 2%-4% of GDP by most estimates), runaway inflation would indeed result.

Another fundamental issue with MMT is that the profile of private and public debt matters, and just putting them on different sides of the sectoral balance equation tell you very little about the overall health of the economy. If private debt is increasing due to investment in high return stuff, which will make GDP grow faster than the debt, what is the problem? The same is true for government investment, BTW. Which is why MMT fails to explain the performance of economies we can observe in the real world.

Which is not to say everything they say is false. Strictly speaking, a country that prints its own currency can't go broke. But as my homeland of Brazil and several other countries learned, this is not a lot of comfort when you have unsustainable debt and need to print money to pay for it, resulting in runaway inflation (I remember living through inflation of 1,000% per year in the early 90's, which was a direct result of increasing the monetary base to extinguish debt, just as MMT recommends. It was not fun).

So it's the conclusions and policy recommendations of MMT which are false, because they are based on oversimplification and some ignorance on the character of money.

 

[El_Machinae]

I don't really need to be convinced that MMT is 'false', since I think they make some false assumptions. BUT, I'm trying to figure out what the breakdown in our relative understandings is.

I’m going to say something almost antithetical to my libertarian leanings: if you’re going to raise taxes to support a welfare state, everybody should be paying in.

Everyone who can, but yeah, I getcha. We 'pay in' through our labour. Who pays the taxes is just accounting. My position that the top tax rates are too low come from a libertarian bias on my end, I can assure you.

If someone’s not contributing in some way but receiving benefits, is there any incentive for them to think about the effectiveness of the programs they support? If someone wants to build a new sidewalk to my apartment and it costs me zero, why should I care whether the government spends $100 or $100,000,000?

Well, your care is that there are also alternative uses of those dollars. You want a $100k sidewalk and I want a $50k beach. And then as voters, we tussle. It's not significantly different from being a shareholder, really. The shareholder (especially one who inherited their wealth) is not contributing but is receiving benefits. And we tussle over dividends or reinvestment or stock buyback.

 

[amadeus]

because very simply as an adult with agency you are capable of being a rational person and trying to actually be a functional member of something larger than yourself or your family because it necessarily benefits you and your family. Responsibility starts personally and moves out. Those who choose not to be responsible for themselves out of sloth are few and far between and easy to ignore.

Whether or not people are inherently good is a matter that is, in my opinion, maybe only tangentially related to the question of how they behave as economic actors.

 

[Estebonrober]

Whether or not people are inherently good is a matter that is, in my opinion, maybe only tangentially related to the question of how they behave as economic actors.

We need to stop expecting base greed as the normative behavior in humans. It’s been completely deleterious to society since the 80s. Humans are greedy by nature. Celebrating and extolling that trait is terrible for society. We don’t celebrate breaking up families. We don’t celebrate drug addiction. We should stop celebrating Wall Street casino gambling.

Our economic actions have been a race to the bottom for the last forty years globally without any concern about the poor here at home.

Also this is a different discussion honestly from MMT I think.

 

[uppi]

I agree with you to some extent, but to spend no money on armaments would require big changes in international politics that are beyond the scope of an MMT discussion. The point here is that it is a basic macroeconomic principle that all spending is someone else's income. For the economy as a whole spending equals income. Thus, even spending on armaments (and it's important to keep in mind that not 100% of the military budget does actually go to armaments) provides tangible social benefits because the people who manufacture armaments for the government, as I said, live and thus mostly consume in the United States. They spend the money they make producing armaments on other things, providing income to other people. That is a tangible social benefit.

Anyway, I'm not here to argue that militarism is awesome. I actually think one of the reasons we have Trump is excessive militarism in the US. But that is a whole 'nother topic. I'm just here to talk a little bit about the macroeconomic impacts of defense spending.

Those benefits are there, but from an economic point of view, you would have a better macroeconomic impact if you gave the money directly to the people without getting armaments in return. Those people would have income and you would not be wasting resources and polluting the environment without improving the lives of the people. Even better, you could take the spending and use it on something useful, like roads, education or healthcare. If all those subjects were covered and you have still unemployment for which you desperately need to find work, then sure you can let the military employ them (directly or indirectly). But until then it is a misdirection of resources.

 

[Estebonrober]

I will give a more detailed reply when I have some time, El Mac and Boots.

But to keep it simple: perhaps the main reason why MMT is false, and why I call MMT bean counters, is that they don't differentiate between the different types of money that exist and that the government creates. That's why their high-school level accounting equations on sectoral balance are not very meaningful, and often outright false, as they equate different things. To be even more concrete: MMT grew in popularity following the QE operations of the Great Recession, when governments injected trillions of dollars in the economy without triggering some inflation spiral. But QE money is very different from printing cash, as in QE the government exchanges interest-bearig reserves for interest-bearing government debt, which is very different from “printing money” (money which is not interest bearing and is thus referred as "high powered money") in the classic sense, and does not provide a way of extinguishing public debt. So if the government really printed (high powered) money to extinguish its debt to a large degree (that is, exceeding 2%-4% of GDP by most estimates), runaway inflation would indeed result.

Another fundamental issue with MMT is that the profile of private and public debt matters, and just putting them on different sides of the sectoral balance equation tell you very little about the overall health of the economy. If private debt is increasing due to investment in high return stuff, which will make GDP grow faster than the debt, what is the problem? The same is true for government investment, BTW. Which is why MMT fails to explain the performance of economies we can observe in the real world.

Which is not to say everything they say is false. Strictly speaking, a country that prints its own currency can't go broke. But as my homeland of Brazil and several other countries learned, this is not a lot of comfort when you have unsustainable debt and need to print money to pay for it, resulting in runaway inflation (I remember living through inflation of 1,000% per year in the early 90's, which were a direct result of increasing the monetary base to extinguish debt, just as MMT recommends. It was not fun).

So it's the conclusions and policy recommendations of MMT which are false, because they are based on oversimplification and some ignorance on the character of money.

See there might be parts of this that I disagree with but the response is of a much higher level. Thanks!

 

[Lexicus]

Those benefits are there, but from an economic point of view, you would have a better macroeconomic impact if you gave the money directly to the people without getting armaments in return. Those people would have income and you would not be wasting resources and polluting the environment without improving the lives of the people. Even better, you could take the spending and use it on something useful, like roads, education or healthcare. If all those subjects were covered and you have still unemployment for which you desperately need to find work, then sure you can let the military employ them (directly or indirectly). But until then it is a misdirection of resources.

In principle, I agree with this completely. However, I would not agree that the US military budget is a "misdirection of resources" from the point of view of the US itself. Our military budget is what allows the US to account for five times our "fair share" of world consumption (fair being defined as when a country's share of world consumption equals its share of world population).

I actually think there is zero doubt the US could realize all the tangible benefits of defense spending, and more, by directing those investments into other, more useful things (including roads, education, and healthcare)! I think that it's morally unacceptable that the US uses military force to sustain a consumption five times its fair share!

I am simply pointing out that the left often speaks as if defense spending is poured into a black hole, which is not the case. I would agree that it is poured into a black hole to a greater degree than many other forms of spending but I think the left could benefit politically from changing the way they talk about defense spending. But anyway I don't want to stray too far from the topic of the thread.

 

[luiz]

In principle, I agree with this completely. However, I would not agree that the US military budget is a "misdirection of resources" from the point of view of the US itself. Our military budget is what allows the US to account for five times our "fair share" of world consumption (fair being defined as when a country's share of world consumption equals its share of world population).

I actually think there is zero doubt the US could realize all the tangible benefits of defense spending, and more, by directing those investments into other, more useful things (including roads, education, and healthcare)! I think that it's morally unacceptable that the US uses military force to sustain a consumption five times its fair share!

I am simply pointing out that the left often speaks as if defense spending is poured into a black hole, which is not the case. I would agree that it is poured into a black hole to a greater degree than many other forms of spending but I think the left could benefit politically from changing the way they talk about defense spending. But anyway I don't want to stray too far from the topic of the thread.

This is actually all correct (except the bizarre parts about fair share of consumption - if the US directed its military investment to other more productive areas, its share of global consumption would increase, not decrease).

But the gist of it is correct. While military spending obviously does stimulate the economy, like any other spending, and it has a large investment component, so it even helps long term economic growth, its far from the investment with highest return, as "military keynesians" seem to think. The US could and should direct a part of its defense budget to other more productive areas.

 

[Lexicus]

except the bizarre parts about fair share of consumption - if the US directed its military investment to other more productive areas, its share of global consumption would increase, not decrease

If the US military budget was zero it seems likely that China and Russia, among others, would step into the vacuum thus created and that their share of world consumption would grow at the US' expense.

 

[Farm Boy]

Military spending isn't "high actualized return" because it's essentially insurance investment for self/friends. The Long Peace holds on but wealth, lacking security, is not a positive attribute.

 

[Patine]

Unlawful? The law is what we choose it to be. I have no idea what you think you are saying. Maybe rephrase this point?

Laws within laws within laws at different layers and entrenchments of lawmaking. Like those wooden Ukrainian dolls.

 

[civvver]

Basically, banks lend out as much money as they think will be profitable (creating new money in the process, as outlined in the paper) and interface with the central bank after the fact to meet their reserve requirements under the fractional reserve system. One important point is that, as the paper mentions, "prudential regulation" can serve as a powerful check on expansion of the money supply!

I have a cousin who's job is to advise banks on reserves. Basically so they can lend out the maximum possible on as little reserve as possible and be as profitable as possible. He makes a crap ton of money.

 

[Patine]

Here in Japan hundreds of years ago, rice was used as a medium of exchange and this developed into a system of rice warehousing. Rather than having to carry around a sack of rice, merchants would issue warehouse receipts that could then be exchanged back at the warehouse for the amount of rice written on the receipt.

Everyone see where this is going? The merchants discovered that the claimants didn’t all come at the same time, so the merchants could issue more receipts than rice they had on hand. They created their own fractional reserve system based on rice.

So, what happened if there was a drought, or a bad harvest, or insect pestilence in the fields, and the stored rice has needed IMMEDIATELY?

 

[Naskra]

So, what happened if there was a drought, or a bad harvest, or insect pestilence in the fields, and the stored rice has needed IMMEDIATELY?

Wealth consumption. And other macro-biotic gags.

 

[Kaitzilla]

One of the major points of MMT is that monetary policy alone is insufficient to maintain economic policy goals like full employment.



lmao what? MMT is literally all about how policy and spending decisions are made by human actors. It's neoclassical economics which handwaves all of this with the Market Fairies magically dropping money into the most efficient investments and the myth of an independent central bank.

All these economic arguments are tiresome!


Let's just switch to 100% electronic currency with all transactions monitored by the government.

Then economists can use the meta-data to construct 100% accurate economic models.