What is Modern Monetary Theory?

[astrallite]

Republicans have been practicing MMT for decades, since Ronald Reagan. Cut taxes and increase spending, leading to a rapid increase in the money supply. Generally the outcome has been asset bubbles in financial assets which then pop. Boom/bust.

 

[Estebonrober]

Republicans have been practicing MMT for decades, since Ronald Reagan. Cut taxes and increase spending, leading to a rapid increase in the money supply. Generally the outcome has been asset bubbles in financial assets which then pop. Boom/bust.

That seems like a misrepresentation of it's intent, implementation, and outcome, but I'm not really qualified to speak on it.

 

[Estebonrober]

Republicans have been practicing MMT for decades, since Ronald Reagan. Cut taxes and increase spending, leading to a rapid increase in the money supply. Generally the outcome has been asset bubbles in financial assets which then pop. Boom/bust.

The boom bust problem is a regulation issue according to MMT, read it. Essentially they are using MMT to the advantage of a select few at the top at the expense of the rest of the economy. IE it is the wild west every centrist and leftward on thinks it is. Or to put it more dramatically, they are printing money, pocketing it, and then acting like its the old system and blaming the poor for not being productive enough.

 

[Hygro]

MMT doesn’t mean deficit spending, it’s meant to be a description of empirics and corresponding modeling/theory of the modern money system.

That Republicans figured similarly on their own and use it to benefit existing wealthy folks is definitely interesting.

 

[Hrothbern]

God, I'm slow, I'll blame old age.

That must be because young children start as sea-lions:

"why is that so ?"
Papa answer A.
"why is A so ?"
Mama answers B.
"why is B there ?"
....



BTW I can't help my trivia
Sea-lion poop is very important for the environmental health of oceans, because they poop the right bacteria (living in their guts) in the oceans that help mineral recyclings that phytoplankton need as food.

 

[Hrothbern]

EXACTLY! And this is why MMT breaks with "new Keynesian" orthodoxy in saying that the least inflationary, least trickle-down type of government spending is public employment programs that literally put money in the wallets of unemployed people while also adding to real wealth by performing needful tasks and building infastructure. You let consumer spending drive investment rather than attempting to do it the other way around. Democrats and Republicans have been trying to give money to rich people to stimulate investment for seventy years in this country and all it's done is led to the current bad situation.

yes

Here is also where the scale size of your country comes into the equation.

Even if you can control money to flow into the consumers that spend money to their needs and of the type that encourages investments to produce those needs...
If your country is small and many customer needs are imports, like fossil energy, cars, TVs, electronic devices, manufacturing equipment, medicins, etc, etc... that money does not help your domestic economy and jobs (only those consumers in the one-off purchase).

One could argue that this import should be off-set by its exports.
But if these exports are produced, under control of companies that are wealth-up mechanisms, like big mining, big corporate plantations, etc for underdeveloped countries, or big corporate car, medicin, TV, electronics etc in more develope countries...
the money is in 1,2,3 steps in the wealth-up dead area.

China exports to the US function as such a wealth accumulator. But overall the US is big enough to keep most money streams inside the US.
Countries like Greece (within 1 step electronic devices, medicins etc, within 1,2,3 internal steps of the money flow, accumulating to better middle-class, it flew out of the country buying Porsces etc), the same with African countries.

A small country doing MMT on its own will see a lot of that money subsidising neighboring countries.
Unless tarif walls are introduced (on at least luxury goods).

 

[El_Machinae]

Well, the country can go from a non-MMT policy to an MMT policy. Wouldn't that create seniorage with regards to imports? And then all that would happen is that (over time) the currency would be crushed with regards to international markets. Or, in other words, it would all balance out? Hard imports need to match hard exports or else real property gets exchanged in the balance.

One area that I don't know the 'assumptions' of, is the spread between the theory and the prescription. I'm slowing figuring out what the underlying idea is, but my impression is that the theorists would all have different ideas on how the theory leads to recommendations. Not a surprise, really, given that every theory should do that.

 

[Socrates99]

The boom bust problem is a regulation issue according to MMT, read it. Essentially they are using MMT to the advantage of a select few at the top at the expense of the rest of the economy. IE it is the wild west every centrist and leftward on thinks it is. Or to put it more dramatically, they are printing money, pocketing it, and then acting like its the old system and blaming the poor for not being productive enough.

I can't remember the source, if I dig I might find it but that's basically been a behind the scene GoP strategy for decades. Tax cuts while increasing spending (specifically military) to create huge deficits while in power. Enjoy the economic bubble and hope it lasts as long as possible while pointing at the boom they created as a positive impact of their policies. Then when Democrats are in power debt shame like mad. Get them to make cuts and reduce the deficit and blame economic woes on the Democrats in power.

Trump's put this on steroids. Monster tax cut and the Pentagon budget increases he's gotten could've paid for Bernie's community college plan almost three times over. The two parties just choose different beneficiaries.

 

[Hrothbern]

Well, the country can go from a non-MMT policy to an MMT policy. Wouldn't that create seniorage with regards to imports? And then all that would happen is that (over time) the currency would be crushed with regards to international markets. Or, in other words, it would all balance out? Hard imports need to match hard exports or else real property gets exchanged in the balance.

One area that I don't know the 'assumptions' of, is the spread between the theory and the prescription. I'm slowing figuring out what the underlying idea is, but my impression is that the theorists would all have different ideas on how the theory leads to recommendations. Not a surprise, really, given that every theory should do that.

The problem with a weaker currency as "natural" tariff wall, is that it does not discriminate between essentials and non-essentials regarding imports.
And the level of prosperity developed countries have in general, does force smaller countries/economies to import many essentials 9for more complex economies having more synergies and higher productivity)
The often mentioned advantage that a lower currency leads to more export has only a limited truth. (what would a small stand-alone economy as New Zealand or Greece have to export in greater amounts ? more lamb ? more olives ?)
The natural balance does not (I guess) lead to an abstract new lower currency rate, but to a new lower prosperity rate.

 

[Hygro]

Strong and weak currencies are temporary phenomena. They are only strong or weak for the period that the recent price changes drive a change in economic activity. After that it’s just two currencies that have different numbers to mean “money”.

 

[Hrothbern]

Strong and weak currencies are temporary phenomena. They are only strong or weak for the period that the recent price changes drive a change in economic activity. After that it’s just two currencies that have different numbers to mean “money”.

yes and no
rough example
Say a country sees its currency go to a 50% value compared to a neighbor and then it stabilises.
If wages would go up with 100%, rents, housing prices, etc, would go up with 100%... nothing really happened.
What I experienced in Europe is that the countries with a currency weakening all the time, and now also in Turkey... existing houses do not follow the wage increases, and wage increases do not counter the currecy weakening.
The PPP factor is bigger and the relative values in the country are different compared to what they were.
Absolute prosperity goes down and relative prosperity (in PPP) goes stil down.

It ends up in less purchasing power to buy consumer goods like TVs, cars... and more worrying, it makes importing of new techs more expensive (Turkey has lots of second hand outdated equipment for its industry)... causing fundamentally lower productivity.

The yes on what you say still there because I do guess that after enough time it should indeed rebalance.
And it could be that the time needed for that depends on how much essentials you do need to import (which will be a higher % to GDP in a smaller country).

 

[El_Machinae]

The international value of the currency with mmt only seems to differ from normal policy once inflation is targeted? Or does mmt have different implications right from the get-go when it comes to International purchasing power?

 

[Estebonrober]

The international value of the currency with mmt only seems to differ from normal policy once inflation is targeted? Or does mmt have different implications right from the get-go when it comes to International purchasing power?

It didn't seem to have a different policy on this front, other than its a consideration in which inflation is adjusted. So if the value of your currency relative to others becomes inflationary you would tamp down on that inflation with increased taxes, or reduced lending. Seems very similar to current policy, but I'm not expert just a curious reader.

 

[Hygro]

yes and no
rough example
Say a country sees its currency go to a 50% value compared to a neighbor and then it stabilises.
If wages would go up with 100%, rents, housing prices, etc, would go up with 100%... nothing really happened.
What I experienced in Europe is that the countries with a currency weakening all the time, and now also in Turkey... existing houses do not follow the wage increases, and wage increases do not counter the currecy weakening.
The PPP factor is bigger and the relative values in the country are different compared to what they were.
Absolute prosperity goes down and relative prosperity (in PPP) goes stil down.

It ends up in less purchasing power to buy consumer goods like TVs, cars... and more worrying, it makes importing of new techs more expensive (Turkey has lots of second hand outdated equipment for its industry)... causing fundamentally lower productivity.

The yes on what you say still there because I do guess that after enough time it should indeed rebalance.
And it could be that the time needed for that depends on how much essentials you do need to import (which will be a higher % to GDP in a smaller country).

Currency depreciation is not inflation. You shouldn’t expect domestic prices to adjust in tandem as it doesn’t necessarily reflect domestic purchasing power. Currency exchange value is a funny beast. A 50% drop compared to a neighbor’s could be or mean anything. If it dropped compared to a basket of all the other currencies we’d have to ask why, which would tell us if it was just a currency thing or a real economy thing. But from a long run perspective if a currency drops 50% and stays there and domestic prices remained the same I would imagine there was a lot of growth expectations that weren’t met and the real economy is doing worse than the pre-devaluation period. And that change in economy is what values the currency, which in the long term makes the currency neither weak nor strong, just a poor economy behind it.

 

[Lexicus]

If there's any simple takeaway from MMT regarding foreign exchange and currency depreciation it's that targeting arbitrary balances (like maintaining a government budget surplus or imposing a maximum deficit) is at best misguided. If you want to keep your currency "strong" you want to keep your national economy strong. You don't do that by targeting arbitrary balances while allowing unemployment (of capital and people) to "float".

 

[TheMeInTeam]

Republicans have been practicing MMT for decades, since Ronald Reagan. Cut taxes and increase spending, leading to a rapid increase in the money supply. Generally the outcome has been asset bubbles in financial assets which then pop. Boom/bust.

I don't buy that Republicans have "cut taxes for decades", how much have taxes actually gone down? Obama didn't exactly break the spending trend, so we have some similarity in this regard.

There comes a point where increasing taxes stops generating more revenue. Increasing taxes beyond that point is the kind of comedy that isn't funny.

 

[Socrates99]

I don't buy that Republicans have "cut taxes for decades", how much have taxes actually gone down? Obama didn't exactly break the spending trend, so we have some similarity in this regard.

There comes a point where increasing taxes stops generating more revenue. Increasing taxes beyond that point is the kind of comedy that isn't funny.

The top marginal tax rate used to be 91%. Every Republican president since Reagan except for GHWB has cut taxes. I'd say 40 years constitutes decades.

Under MMT taxes do not "create revenue" for the government, merely take excess money out of circulation. It's a long thread but it's been explained ad nauseam.

 

[Estebonrober]

I don't buy that Republicans have "cut taxes for decades", how much have taxes actually gone down? Obama didn't exactly break the spending trend, so we have some similarity in this regard.

There comes a point where increasing taxes stops generating more revenue. Increasing taxes beyond that point is the kind of comedy that isn't funny.

Decreasing spending and leaving unused labor on the table beyond a certain point is the kind of comedy that isn’t funny.

 

[El_Machinae]

Under MMT taxes do not "create revenue" for the government, merely take excess money out of circulation. It's a long thread but it's been explained ad nauseam.

People understand that taxes are not what create the revenue, functionally it doesn't matter. Taxes are what allows the government to spend without causing inflation. Or at least, that's part of the tools that a government has. Except at the margin, it doesn't matter if a dollar is spent after taxation, or is destroyed and a new dollar created.

There is a deeper bias being expressed, which is that the private Market is what creates things that people want to buy. That it is the market that generates dollars that the government then taxes. And that the two concepts are interchangeable.

If the government didn't spend sufficiently, but only taxed dollars generated by the market, the economy would spiral into depression very quickly

 

[Hrothbern]

People understand that taxes are not what create the revenue, functionally it doesn't matter. Taxes are what allows the government to spend without causing inflation. Or at least, that's part of the tools that a government has. Except at the margin, it doesn't matter if a dollar is spent after taxation, or is destroyed and a new dollar created.

There is a deeper bias being expressed, which is that the private Market is what creates things that people want to buy. That it is the market that generates dollars that the government then taxes. And that the two concepts are interchangeable.

If the government didn't spend sufficiently, but only taxed dollars generated by the market, the economy would spiral into depression very quickly

yes indeed

A question:
"....private Market is what creates things that people want to buy"

And consider our great economical boom in the war time WW2 economy where demand was higher than any capacity we could build up in that short time... and we had in reality a supply driven economy, building up "stocks" financed by the government, until the moment was there that military action could finally take place and the "stocks" could be "consumed".

That "people want to buy" fits to the general thought that our consumption is "demand driven"
now... I am not suggesting that we should go to the USSR economy of "supply driven" consumption....
(with people buying toilet paper stocks when toilet paper was on the shelves of the supermarkets, and buying the next week stocks of shampoo because you never knew when the next time would be that you could buy shampoo... etc)
A lot of this coming from bad logistics and planning towards shops...

But the general effect was that the production facilities, their resources employees and fixed assets, could produce at continuous high utilisation and therefore high efficiency.
=> Whereby citizens as consumers took the stocks... and in their role of employees were all the time productive.

Our western system is based on "just in time", is based on minimising "working capital" (and therefore minimising company stockpiles).
This is combined with short delivery times to customers (we "demand" instant delivery after our choice being taken by us).
And these two demands have to be combined (in manufacturing) with high time utilisation of the physical assets.
Our modern system capability to "handle" these as such conflicting demands is highly developed indeed (car assembly lines are technical miracles in that respect... the time that Ford produced cars (more the "supply" type) long behind us).

=> Our western system is allergic for stocks... and as consequence employees are not all the time productive
(whereby noted that the unemployment % should be seen as a proxy... there is also a lot of underemployed effect that is not that visible).

When it is about food production, the farmers... many western systems secure that farmers keep producing at max utilisation of their soil, their equipment, their time.
This "max continuous utilisation" happens in fact all the time in many other economical activities, from government owned utility companies, to small private companies.
A water company is all the time active in upgrading-repairing the system. The "backlog" of work to do like a negative stock.
Every small company will make sure that there are besides the direct productive activities, enough "background" activities, that are picked up as soon as there is a dip in "demand" of direct activities. Keeping your skilled employees utilised all the time.
Now... I do recognise that such background activities can blossom pretty fast into the "nice to have area". Managing those background activities in an effective rational way is part of your real performance as company. But my opinion is that doing this not enough is mostly just lazy and short term thinking behaviour of less capable management ending up with on average less skilled employees and lower productivity.
The Lean Manufacturing hype has done a lot of good, but imo has also caused a lot of damage by a too narrow view on the total efficiency of resources.


What a long intro...

Considering all said above... is it not so that MMT will only function really good when it is aimed at increasing continuous utilisation of resources, especially employees ?