Why Read Old Books?

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Trumpalooza 2020 and DemFest are over, the actual campaign is beginning, and I am overwhelmed by the crazy and stupid. I’ve been asking myslef whether it makes sense to continue this project of trying to understand our current morass and what we should do about it. Are old books worth reading in a time of troubles like ours?

One aspect of our current morass is the unwillingness of so many people to rethink any belief they hold. This is an old problem. There is no reason to think we can’t find helpful answers in the works of our ancestors from all times and places. Did Confucius know less about human nature than Aristotle? Did Sophocles understand people less well than Jane Austen?

Charles Sanders Peirce

With these considerations in mind, here’s an extended quote from The Fixation of Belief by Charles Peirce, perhaps the earliest American Pragmatist, published in 1877.

If the settlement of opinion is the sole object of inquiry, and if belief is of the nature of a habit, why should we not attain the desired end, by taking as answer to a question any we may fancy, and constantly reiterating it to ourselves, dwelling on all which may conduce to that belief, and learning to turn with contempt and hatred from anything that might disturb it? This simple and direct method is really pursued by many men. I remember once being entreated not to read a certain newspaper lest it might change my opinion upon free-trade. “Lest I might be entrapped by its fallacies and misstatements,” was the form of expression. “You are not,” my friend said, “a special student of political economy. You might, therefore, easily be deceived by fallacious arguments upon the subject. You might, then, if you read this paper, be led to believe in protection. But you admit that free-trade is the true doctrine; and you do not wish to believe what is not true.” I have often known this system to be deliberately adopted.

Still oftener, the instinctive dislike of an undecided state of mind, exaggerated into a vague dread of doubt, makes men cling spasmodically to the views they already take. The man feels that, if he only holds to his belief without wavering, it will be entirely satisfactory. Nor can it be denied that a steady and immovable faith yields great peace of mind. It may, indeed, give rise to inconveniences, as if a man should resolutely continue to believe that fire would not burn him, or that he would be eternally damned if he received his ingestaITAL otherwise than through a stomach-pump. But then the man who adopts this method will not allow that its inconveniences are greater than its advantages. He will say, “I hold steadfastly to the truth, and the truth is always wholesome.”

And in many cases it may very well be that the pleasure he derives from his calm faith overbalances any inconveniences resulting from its deceptive character. Thus, if it be true that death is annihilation, then the man who believes that he will certainly go straight to heaven when he dies, provided he have fulfilled certain simple observances in this life, has a cheap pleasure which will not be followed by the least disappointment. A similar consideration seems to have weight with many persons in religious topics, for we frequently hear it said, “Oh, I could not believe so-and-so, because I should be wretched if I did.”

When an ostrich buries its head in the sand as danger approaches, it very likely takes the happiest course. It hides the danger, and then calmly says there is no danger; and, if it feels perfectly sure there is none, why should it raise its head to see? A man may go through life, systematically keeping out of view all that might cause a change in his opinions, and if he only succeeds — basing his method, as he does, on two fundamental psychological laws — I do not see what can be said against his doing so. It would be an egotistical impertinence to object that his procedure is irrational, for that only amounts to saying that his method of settling belief is not ours. He does not propose to himself to be rational, and, indeed, will often talk with scorn of man’s weak and illusive reason. So let him think as he pleases.

Peirce calls this the method of tenacity. Underlying it is Peirce’s view, which seems right to me, that when we begin to think for ourselves, when we become individuated, we already have a set of beliefs about the world. As we take in new data, we try to incorporate the new information into our existing set of ideas. Or maybe, as the ostrich, we don’t.

Obviously tenacity has some value. Our beliefs are hard-won assets, and we don’t want to give them up without a good reason. I think our first response to new data is often to apply the method of tenacity. The more dense our web of knowledge and belief, the harder it is to adjust, and the more tightly we cling to our existing beliefs.

There is a problem with the method of tenacity. Peirce says that it’s hard to hold to this method when you rub up against other human beings who don’t hold to the same beliefs.

But why exactly do people change their minds? Peirce says we like our beliefs to be internally consistent and coherent with what we observe. He thinks we are more likely to improve our outcomes if we do this. That makes sense in the context of science and academics, but not so much in day-to-day life. Does Jane Austen have something to add?

Jane Austen, portrait by her sister Casssandra.

In Pride and Prejudice, two of the characters, Darcy and Elizabeth, actually change in crucial ways and for the better. [1] Austen makes it clear that the characters change themselves using the method Peirce approves, careful observation of the external world and intentional incorporation of those observations into or in place of previously held views of the self.

The context is that the two have been jousting with words over several meetings. Darcy’s admiration for Elizabeth is growing, but she is only interested in the battle of wits, and is unaware of his growing infatuation. Then Darcy proposes marriage in a wonderful scene. Elizabeth is shocked, and insulted by the form of the proposal. They fight. Here’s the conclusion.

Elizabeth felt herself growing more angry every moment; yet she tried to the utmost to speak with composure when she said:

“You are mistaken, Mr. Darcy, if you suppose that the mode of your declaration affected me in any other way, than as it spared me the concern which I might have felt in refusing you, had you behaved in a more gentlemanlike manner.”

She saw him start at this, but he said nothing, and she continued:

“You could not have made the offer of your hand in any possible way that would have tempted me to accept it.”

Again his astonishment was obvious; and he looked at her with an expression of mingled incredulity and mortification. She went on:

“From the very beginning—from the first moment, I may almost say—of my acquaintance with you, your manners, impressing me with the fullest belief of your arrogance, your conceit, and your selfish disdain of the feelings of others, were such as to form the groundwork of disapprobation on which succeeding events have built so immovable a dislike; and I had not known you a month before I felt that you were the last man in the world whom I could ever be prevailed on to marry.”

Darcy is one of the wealthiest men in England, and as we see later is a man of taste and discrimination, versed in business and society. Elizabeth is a gentlewoman, but she has no future if she doesn’t marry. Rejecting Darcy is a very serious step.

The next morning Darcy hands her a letter explaining his actions in the two matters that formed the basis for her rejection. Elizabeth reads the letter, and considers carefully the new information against the beliefs she holds about the events. In each particular raised by the letter she sees that Darcy’s explanation offers a better, more coherent and more likely accurate view.

“How despicably I have acted!” she cried; “I, who have prided myself on my discernment! I, who have valued myself on my abilities! who have often disdained the generous candour of my sister, and gratified my vanity in useless or blameable mistrust! How humiliating is this discovery! Yet, how just a humiliation! Had I been in love, I could not have been more wretchedly blind! But vanity, not love, has been my folly. Pleased with the preference of one, and offended by the neglect of the other, on the very beginning of our acquaintance, I have courted prepossession and ignorance, and driven reason away, where either were concerned. Till this moment I never knew myself.”

Her self-reflection form the basis of her re-evaluation of Darcy as a person.

Darcy is deeply affected by Elizabeth’s rejection. He explains his feelings at the end of the book. This quote gives the flavor.

“I cannot be so easily reconciled to myself. The recollection of what I then said, of my conduct, my manners, my expressions during the whole of it, is now, and has been many months, inexpressibly painful to me. Your reproof, so well applied, I shall never forget: ‘had you behaved in a more gentlemanlike manner.’ Those were your words. You know not, you can scarcely conceive, how they have tortured me;—though it was some time, I confess, before I was reasonable enough to allow their justice.”

Again, we see that he has followed Peirce in re-examining his actions in Elizabeth’s company and in general. It leads him to reinterpret his his behavior, not just toward Elizabeth but in general. And then he recognizes he needs to change, and does so.

But why did they change? I think it’s because both of them have see themselves as intellectually honest in the way Perice recommends. That means facing the facts we perceive, not hiding from those that imperil our current beliefs and opinions. In Darcy’s case, there’s another obvious motivation. He likes and admires Elizabeth, much to his surprise. He admires her fine eyes and her light figure, but mostly he admires her quick wit and understanding. Even after she rejects him that admiration continues. He is certain that he was right to admire her, and that forces him to face himself and his actions squarely as she sees them.

This is also true for Elizabeth, if less obvious. “His attachment excited gratitude, his general character respect; but she could not approve him….” This motivates her to consider carefully his explanations and his observations. It also motivates her to change.

Over time they recognize the strengths and weaknesses in themselves and each other, and they each see that the other is a good match. I think Darcy recognizes that this new self-understanding will make hem a better person.

I was given good principles, but left to follow them in pride and conceit. Unfortunately an only son (for many years an only child), I was spoilt by my parents, who, though good themselves (my father, particularly, all that was benevolent and amiable), allowed, encouraged, almost taught me to be selfish and overbearing; to care for none beyond my own family circle; to think meanly of all the rest of the world; to wish at least to think meanly of their sense and worth compared with my own. Such I was, from eight to eight and twenty; and such I might still have been but for you, dearest, loveliest Elizabeth! What do I not owe you! You taught me a lesson, hard indeed at first, but most advantageous. By you, I was properly humbled. I came to you without a doubt of my reception. You showed me how insufficient were all my pretensions to please a woman worthy of being pleased.”

Elizabeth sees the value of Darcy:

She began now to comprehend that he was exactly the man who, in disposition and talents, would most suit her. His understanding and temper, though unlike her own, would have answered all her wishes. It was an union that must have been to the advantage of both; by her ease and liveliness, his mind might have been softened, his manners improved; and from his judgement, information, and knowledge of the world, she must have received benefit of greater importance.

There’s a lesson here….

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[1] If you haven’t read this book, or haven’t read it lately, I highly recommend it as part of a mental cleansing.

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MMT and Mainstream Economics

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Posts in this series. This post begins with links to all posts in this series.

In The Deficit Myth Stephanie Kelton explains in lay terms the fundamental ideas of Modern Monetary Theory and shows that they can be used to organize a economy that works for everyone. Throughout this series I have occasionally pointed to ways that MMT differs from mainstream economics. In this post I will try to get those ideas organized.

1. Elements of Mainstream Economics.

Let’s start with this quote from the J.W. Mason review of the book:

But in my view it’s better—both more accurate and more productive—to see [MMT] as a body of arguments within an older Keynesian tradition of economics. Contrary to the sense you might get from both supporters and detractors, it’s not a crystalline logical structure where, if you remove one piece, the whole thing collapses. Rather, like most emerging bodies of thought, it’s a ramshackle assemblage of parts built at different times for different purposes, tied together with loose solder of association and inference rather than tight bonds of deduction.

The boldfaced part of this sounds to me like a fair description of mainstream economics. We can see some of the assumptions and axioms of mainstream economics in this list by Harvard economist and textbook author N. Gregory Mankiw of ten things economists agree about. The link is a good refresher course in introductory economics.

One crucial assumption is that rational people think at the margin. By “rational” Mankiw means “systematically and purposefully doing the best you can to achieve your objectives.” [1] This is a reference to marginal utility theory, invented by the mathematician William Stanley Jevons around 1870. Jevons’ book is premised on the utilitarianism of Jeremy Bentham. [2] Marginal thinking pervades mainstream economics. [3]

As an example, consider the notion of Pareto Optimality, invented by Vilfred Pareto, another early economist with a STEM background. The idea is that we add up all the individual utilities of all the members of a society at a point in time and get a total. If we change some policy, it will affect the individual utilities. If the new policy makes some people better off and doesn’t make anyone worse off, we approve the policy.

So, for example, suppose a corporation has excess cash. It could distribute the money to shareholders or it could give raises to all the workers who created the excess. Either way is fine under Pareto Optimality. In the real world, the money goes to the shareholders, and the workers are rightly hostile about their stagnant wages. If you don’t like this as a normative principle, you’ll really despise Kaldor-Hicks Optimality.

Other things that went into the early stages of economic theory are based on conditions at the time. That’s why we see the word “markets’ taking a central place. No one thinks that markets of today bear any resemblance to the markets known to Jevons or Adam Smith. It’s also why commodity money, like gold, has a central place, even though the US has only offered fiat money for decades. And it’s one reason we have this mystic reverence for capital and capital accumulation, which we have been taught was the engine of our current prosperity. This reading of history obscures the roles of slavery, government give-aways of land and mineral rights to the wealthy, and the misery of the recessions that unbridled capitalism created.

We have completely forgotten why we have these ideas. We don’t realize that we are centering the ideas of Jeremy Bentham. We never ask why we should prioritize maximizing utility for each individual, or ask ourselves what the balance is between the utility of the day, the decade, or the nation or our children might be. We forget the role of enslavement in the accumulation of capital, and deny the role of government. We ignore the damage capitalism has done to hundreds of millions of us over our history. We don’t question the need for more and more capital accumulation to push the economy where we want it to go. We don’t even ask what ends we want the economy to fulfill. We think and act like we are still on the gold standard.

I realize that many mainstream economists are more or less conscious of all this. But this is the thinking that dominates in our political discourse about the economy. All our politicians, most reporters and pundits (and all right-wing reporters and pundits), and most of us, think and act as if in essentials the “economy” is the same today as it was 150 years ago.

There is a strong tendency in mainstream economics to treat the status quo as if it were the result of the operations of natural laws. This tendency is illustrated in first part of this post.

2. MMT as an alternative.

MMT proceeds from a completely different place. It has no roots in philosophy. It seems to me that MMT is in the tradition of Pragmatism, the American philosophy of Charles Peirce, William James and John Dewey. [4] MMT starts with questions: what is money, and how does it work in our economy? There is no normative principle at work. MMT theorists proceed empirically, studying the way we use money throughout our economy. Money is a thing, and we need to understand its nature and its use. A big part of The Deficit Myth is devoted to examining these questions.

Separate and apart from this inquiry, we need to ask ourselves what we think makes for a good society. This inquiry isn’t about money or the economy, but about our goals. [5] In the US we make these decisions democratically. [6] We elect leaders by majority rule, and we lean on them to legislate and enforce our preferred policies. MMT shows that we can have legislative policies that support our overall desires. That claim, that we can have the things we want, is the real lesson of The Deficit Myth.

Of course, MMT doesn’t attempt to overthrow the entire edifice constructed by mainstream economics. Pragmatic theory says that we only change what we have to as our understanding improves. This means, for example, that ideas formed from an examination of data about other parts of the economy are not necessarily overturned by MMT. But even so, the ideas of MMT are a tool for examining the entire structure.

Conclusion.

Both political parties agree that our society can’t have what we want an need because there is no money, so we must suffer the status quo. Speaker Pelosi tells us she will impose PAY-GO. Joe Biden’s adviser Ted Kaufman says that we can’t do anything because “When we get in, the pantry is going to be bare.” In practice, this means we can only have whatever the richest people think is best for us. It’s not true. Speaking personally, it makes me angry when I see it in practice, long lines at food banks, people forced to risk their health to earn enough to eat, lead-ridden water systems in Flint and elsewhere, to name a few.

We need politicians who can read Kelton’s book. Those politicians need advisers who have studied the expanding literature of MMT. Mainstream economics is a dead end for our nation, and it will take the rich down with the rest of us as the planet catches fire and we suffer one horrible disaster after another.

Note: this is the last post in this series. Please feel free to use the comments to ask any questions or comment on any aspects of MMT.
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[1] I don’t qualify as rational under this definition. My objectives are rarely systematic, and often I’m not conscious of them. They change from time to time based on my understanding of possibilities and probabilities, as well as contacts with my fellow humans directly and through books. The closer people are to me, the more they have the ability to influence my objectives. Many of the systematic efforts I’ve made failed and others have to be realigned with new and different objectives. And it’s absurd to think that most of my everyday purchases are made with some objective in mind beyond passing fancies. I’m too lazy to change things unless I have to, so often I stay with one system when another would be cheaper and better. And so on.

[2] Jevons’ book, Principles of Economics (1871), is available to read online. It’s an effort to put Bentham’s theories of utilitarianism into the form of a calculus of pleasure and pain. This is from the Preface to the Second Edition:

As to Bentham’s ideas, they are adopted as the starting-point of the theory given in this work, and are quoted at the beginning of chapter ii.

[3] I look at these ideas in several posts, here among others.

[4] I give a short primer on Pragmatism in three posts, here, here, and here.

[5] This question is beyond this series, but I can offer something on the edge of philosophical as a starting place: The Needs Of The Soul, a short essay by Simone Weil. Or listen to a podcast by Partially Examined Life, episode 250.

[6] This is not the place to discuss the problems with our democracy, which I acknowledge are great.

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Reviews of The Deficit Myth

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big
The Wonkish Myth Of Crowding Out
MMT On International Trade
Social Security And Other Entitlements

The last two chapters of Stephanie Kelton’s The Deficit Myth are focused on the real problems facing our economy and steps we can take to deal with them. These chapters show that thinking along the lines of Modern Monetary Theory is consistent with the goals of progressives, and that MMT can be applied to support working people and our society.

In this post, I look at some of the reviews of the book. I’ll start with this one from the Wall Street Journal by John H. Cochrane. [1] Cochrane begins with a complaint: what is MMT, it’s so confusing. Then he claims he wanted to learn logic and evidence supporting MMT. Maybe a professional economist shouldn’t look for technical descriptions in a book written for the general public. He then spins out a collection of weird stuff (she praises Kennedy for helping unions!) and misreadings (she doesn’t cite peer-reviewed papers, ignoring the footnotes).

He admits that the government can print money to meet its needs. He understands Kelton’s insistence that the real constraint is inflation. But how will we know if there is slack in the economy or if we’ll get terrible inflation, he asks? He likes the concept of the Non-Accelerating Inflationary Rate of Unemployment. Kelton rejects NAIRU on the grounds that there is no such thing. Ignoring her reasoning, he sneers at her conclusion that NAIRU is a “… doctrine that relies on human suffering to fight inflation.” Here’s a chart showing the top-line unemployment rate from FRED:.

The gray bars represent recessions, most of which were caused by the Fed to fight inflation. The result is increased unemployment, which is solid evidence that Kelton is right.

He tries to make actual arguments:

“Taxes are there to create a demand for government currency.” This is a deep truth, which goes back to Adam Smith. Soaking up extra money with fiscal surpluses is, in fact, the ultimate control over inflation. But then arithmetic fails her. To avoid inflation, all the new money must eventually be soaked up in taxes. The new spending, then, is ultimately paid for with those taxes.

Well, not really. That’s why we have a national debt: it’s accounts for the actual wealth created by the government. We can raise or lower it as needed using taxes, all for the rational purpose of managing inflation. [2] There’s much more in the same vein, but that’s the flavor.

Here’s a generally laudatory review from Hans Desplain, a professor of political economy at Nichols College, in the London School of Economics blog. Despain recognizes that this is a book for lay people, and isn’t concerned about Kelton’s failure to address the ontology of money. [3]

Here’s one from the Mises Institute. The writer, Robert P. Murphy, is a senior fellow at the Mises Institute, a group focused on Austrian economics and libertarian political economy. He agrees with much of what Kelton says. His primary objection is this:

… [R]egardless of what happens to the “price level,” monetary inflation transfers real resources away from the private sector and into the hands of political officials.

“Monetary inflation” in this sentence means spending money without regard to tax revenues. Murphy’s concern is the violation of the principle that the private sector should allocate all resources, and any effort by the government to decide what society needs or wants is just bad. Another way to read this is that MMT is agnostic about government action. Kelton advocates forcefully for government action to amke people’s lives better. Murphy is on principle opposed to government spending. This is one of Kelton’s central points. We need to debate the allocation of resources as a society, and we do that through our democratically elected officials.

One final artical, this one by J. W. Mason in The American Prospect. Mason is an Assistant Professor of Economics at the John Jay College at CUNY. Based on his affiliations, he seems to be a progressive.

He points out that MMT is new, and therefore isn’t a polished structure of thought. It’s a “… ramshackle assemblage of parts built at different times for different purposes, tied together with loose solder of association and inference rather than tight bonds of deduction.” He accurately summarizes Kelton’s thesis and her solutions.

Mason disagrees with Kelton’s contention that all money comes from the government. He points out correctly that banks create money, and that Kelton does not address this point. I discussed a paper Kelton wrote on the nature of money here. She argues that money is a debt relationship, a matter of balance sheet entries, and discusses the superiority of this view to other theories. As Kelton says, quoting Randy Wray, “[m]oney is privately created when one party is willing to go into debt and another is willing to hold that debt….” [4]

In footnote 1 here, I briefly discussed the issue of bank-created money in MMT, based on this article by MMT economist Bill Mitchell. Mitchell says that banks do create money, but at the same time they create a liability, so the balance sheets of the bank and the borrower don’t change from the creation of money. When a government creates money it creates a liability on its books, and the consumer gets an asset. As I see it, the difference is that the government can decide to hold the liability forever while banks expect to be repaid promptly, which destroys the money created by the loan. Banks do lose money on loans, leaving the money in circulation, but that’s not supposed to happen. That’s one difference.

The second difference is the the government controls bank lending. It can limit or prevent banks from creating money through regulation of required reserves. Third, obviously the government has to consider bank-created money when addressing inflation. Finally, bank lending does not help in troubled times, when people don’t want to borrow. Right now, for example, personal savings are at a 60-year high, as people who still have jobe pay down debt and put off large purchases.

The ontology of money is way beyond the scope of Kelton’s book, but I do agree that at least bank-created money must be incorporated into the MMT framework more thoroughly. Edited to add this: Scott Fullwiller, an MMT economist at UKMC, commented below saying that MMT already incorporates bank-created money thoroughly. Fullwiller refers us to this post by Brian Romanchuk replying to Mason’s review.

Mason points out that this and other issues he raises don’t detract from the central insights of The Deficit Myth, saying that Kelton’s insights can stand alone and serve as a guide for action. This is a very useful review.

This is just a small sample, but it reveals one crucial thing: some serious people have begun to grapple with the actual arguments made by MMT theorists, and others will ignore the challenge MMT poses to conventional thinking, and defend their prejudices to the bitter ugly end.

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[1] Here’s the link; it’s behind a paywall, but I got it from my library.

[2] Cochrane’s Wikipedia page has a section titled Main Contributions. It states his research interests, and then offers this assessment, loosely translated as “snicker”:

That is a standard general equilibrium logic, but many financial economists do not view it as a priority and prefer to explain prices without an ultimate reference to choices of households and firms. Similarly, many macroeconomists choose not to worry about asset prices.

In this vein, Cochrane’s work has been to document some empirical patterns and offer some potential explanation….

[3] The ontology of money is a real thing. You could look it up.

[4] Fun question: is bitcoin money? Who is on the opposite side of the balance sheet?

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Social Security And Other Entitlements

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big
The Wonkish Myth Of Crowding Out
MMT On International Trade

Chapter 6 of Stephanie Kelton’s The Deficit Myth discusses the perennial conservative effort to cut entitlements. [1] Kelton defines entitlements as statutory determinations that people who meet certain criteria are entitled to certain defined payments. She discusses several of the most widely used entitlements, Social Security, Social Security Disability, Medicare, Medicaid, SNAP and welfare.

Kelton describes the history of these programs, beginning with Franklin Delano Roosevelt. FDR saw Social Security as the first step towards a comprehensive array of programs that would insure that the citizens would be truly free. He specifically chose to fund Social Security with a tax, so that people would feel ownership, making it harder for politicians to vote to take away those benefits. it worked. People are firmly attached to the program. The money is put into a “trust fund”, which holds it in the form of special non-negotiable US Treasury notes.

Politicians, goaded by their rich donors, try to weasel around this powerful attachment. They start with basic debt hysteria: the Trust Funds are Going Bust! [2] They base this on the reports of the Trustees of the trust funds, who are directed to estimate the date on which the Social Security Trust Fund will run out of money. If that happens. under current law, Social Security payments will be cut. They then claim that all they want to do is put Social Security on a firm financial footing. But they have to act now. Now! And somehow the only possible actions are benefit cuts and tax hikes for working people.

This worked the last time the deficit hawks of both parties tried it. Under Ronald Reagan both parties agreed to cut benefits, raise the retirement age, and increase FICA taxes. This increase in tax revenues was then used as cover for tax cuts for the filthy rich. The effort was led by Alan Greenspan, an Ayn Rand devotee, and no friend of working people.

Medicare is also funded with specific taxes which are put into a special Treasury account, and has a board of trustees. But there’s a big difference. Under Medicare statutes, the Treasury is directed to make all payments, regardless of the state of the trusts. So, every report of the Trustees says that Medicare is just fine. We could do the same for Social Security, and all other entitlements. That simple change would solve the problem. That’s what Kelton recommends, and it makes perfect sense under Modern Monetary Theory.

Liberals offer other solutions. We could raise the cap on the wages subject to FICA taxes. We could have a millionaires tax that would fund Social Security and other entitlements. We could impose a tiny tax on securities transactions and direct the funds to the various trust funds. I don’t think Kelton is opposed to funding social programs with dedicated taxes, and I don’t think she would object to any of these ideas or to the idea that paying dedicated taxes adds to a sense of ownership. The issue is that people think it must be this way. It doesn’t. MMT teaches us that we have the money to do what we want to do.

Taking the pressure off of funding sources does two things. It relieves the anxiety of the older people, the group Enzi is trying to frighten. But it also frees us to focus on the actual needs of the future and to plan for them. As people get older, their needs change. They need more medical care, more help at home, more and different kinds of medicine, different furniture, different living arrangements, and so on. Their desires change, too. They want to do more travel, to spend more time with their spread-out families, and to enjoy more varied kinds of entertainment, restaurants, and other kinds of get-togethers.

Kelton, writing before the pandemic hit, calls for the expansion of Social Security. She points out that it was originally intended as one leg of a “three-legged stool” of retirement planning. The other two were personal savings and pensions from employment. The latter two are disappearing.

Before the pandemic, 40% of us didn’t have savings of $400 for emergencies. Once upon a time, employers provided defined-benefit plans, which promised to pay retirees a specific amount based on pay and length of service. [3] Most of those plans are gone. Kelton cites a particularly ugly case where McDonnell-Douglas closed a plant in Tulsa and terminated a defined-benefit plan in part because so many workers were approaching retirement age when they could collect a full pension with terrible results for older workers. [4] Congress established the Pension Benefit Guarantee Corporation to cover a portion of the lost benefits when companies terminate plans. The benefits guaranteed are absurdly low.

Employers now establish defined-contribution plans like 401(k)s. The track record of these plans shows that they are an inadequate substitute for most people. They are expensive, as members pay administration costs as well as management fees to Wall Street. The national average all-in fee is 2.2%. The Center for American Progress estimates that “… the typical American worker who earns a median salary starting at age 25 will pay about $138,336 in 401(k) fees over their lifetime.” Median account sizes vary substantially by age. For those over 50, the median is around $66K. The average is much higher, around 200K, showing that these plans primarily benefit the wealthy.

Taken together, these facts show a critical need for a stronger Social Security system, not the cuts sought by conservatives.

Other entitlement programs are under attack from the deficit hawks. There are constant efforts to make it more difficult to enroll in Medicaid, like work requirements or co-pays. Fifteen states haven’t implemented Medicaid expansion as permitted by Obamacare; Missouri just added a constitutional amendment requiring implementation. SNAP benefits are under constant assault by Republicans in the name of frugality, as if these $68 billion in a 4$ trillion budget was meaningful compared to the needs of the population served.

Kelton’s point is that we have the money. We need the will to establish priorities that match our moral values, and a Congress that will legislate those priorities.

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[1] It’s one of the more bizarre conservative demands. Social Security is a crucial element of the financial lives of a very large number of older Americans; approximately 40% of retirees would have incomes near or below the poverty line without it. That’s about 21 million voters who are more likely to vote for conservatives. To protect themselves from voter anger, conservatives explicitly call for the “I’ve got mine, screw you Jack” approach: their proposals always exempt today’s older crowd, as if the younger citizens won’t notice that their parents are safe but they aren’t and neither will their parents.

[2] We are currently getting a heavy dose of this from Republicans as they try to avoid passing a pandemic rescue bill that will primarily benefit ordinary Americans. Here’s Senator Mike Enzi, from the metropolis of Wyoming, where he ran a shoe store, insisting that Social Security is the problem. Kelton has a story about Enzi. P. 41 et seq.

[3] The strange locution “defined benefit plan” comes from the Employee Retirement Income Security Act of 1974. Its counterpart is defined contribution plans, which don’t promise any specific payment on retirement. It just requires the employer to pay a specific amount into some kind of plan with whatever vesting rights and investment possibilities the employer chooses.

[4] McDonnell-Douglas eventually merged with Boeing. Here’s a story connecting its executives to the 737 Max disaster.

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MMT on International Trade

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big
The Wonkish Myth Of Crowding Out

Chapter 5 of Stephanie Kelton’s The Deficit Myth takes up international trade. Trump thinks the US is losing at trade simply because we import a lot more than we export. He promised to bring manufacturing jobs back to the US. This won him votes in many states where corporations closed US operations and moved production offshore. But it’s a lot more complicated than just the dollars. I’m only going to address a few of the points Kelton raises.

1. Trade has good and bad results

It’s true that for a number of years the US has run a trade deficit with the rest of the world. We import more than we export. This means we send other people dollars and they send us stuff we want, like oil, computers, cars and cars with computers in them that run on oil. That seems like a good trade.

Many poorer countries do not produce enough food, drugs and advanced equipment to meet their needs. [1] Their currencies are weak, so they need dollars to pay for those shortfalls. Giving them dollars for their goods is a partial fix. Also, it means their workers have jobs and can hope for better lives.

It’s a fact that we have lost a lot of good jobs, those with benefits and middle-class pay, and replaced them with poor jobs. Supposedly we get lower prices as a result, though people buying iPhones might wonder. However, most of the benefits from trade go to the richest among us, corporations and their top executives and the lawyers, accountants, and consultants hired to minimize their costs, taxes, personnel, and unions. [2]

Maybe someday foreign holders of US dollars will want stuff themselves, instead of dollars. They might buy stuff from us. If that means increasing our exports of goods and services, then it seems good. If they buy up our land, buildings and equipment, that might not be so good. If they buy our oil and export it to their countries, we might not like that. Its complicated.

2. What about the money?

This seems to bother Trump a lot. He seems to think sending dollars abroad is bad, even if we get useful stuff in exchange, which sounds stupid when you write it down. One real problem is that money spent abroad doesn’t circulate in the US. Your spending is someone else’s income. If American Airlines buys jets from AirBus, that’s money not spent in the US, and less money for Boeing employees to spend here. The result is lowered economic activity here. Kelton has an answer for this.

Let’s start with the two-bucket accounting system from the previous post. Deficit spending by the Federal Government creates a surplus in the hands of Everybody Else. So, if the FG spends $100 and taxes back $90, then FG has a negative balance of $10. EE has a surplus of $10, which is available to increase demand for goods and services.

Let’s now split the EE bucket into two pieces: US and Other Countries. Now suppose people in the US spend $5 on goat cheese from France, part of OC, and French people spend $3 on US movies. The US surplus drops by $5, and increases by $3, for a loss of $2, leaving $8. Those 2 dollars won’t be available to buy stuff in the US, reducing economic activity.

Trump’s solution to this problem is tariffs on imports from OC. Tariffs are taxes. They put money in the FG bucket, and remove it from the funds available to support domestic demand. Suppose the FG imposes $1 in tariffs on imports. The US bucket drops by $1, to $7. If the problem was reduction of demand, that’s perverse.

The real solution is more deficit spending by the FG on US goods. If the FG spends another $2 buying US goods, those two dollars add to the US surplus, returning it to $10. Problem solved, especially for people who like Crottin de Chavignol. [3]

3. It’s the jobs, not the dollars.

The real problem is not the dollars, but the good jobs that disappeared. Kelton doesn’t say so, but in fact sending jobs overseas is the result of corporate decisions, made solely in search of profits. The federal government does not explicitly support this corporate decision, but its policies do not discourage shipping jobs overseas, and in many ways support offshoring of jobs. For example, modern trade treaties contain provisions designed to protect US businesses in foreign countries, and the government is often willing to use force to protect US assets abroad which can cost the lives of our military people to protect the interests of the rich.

Mainstream economists have always praised trade deals as benefiting Americans, despite the fact that the benefits of trade for the most part flow to the rich while the burdens fall mostly on the poor and the middle class. The middle class is shrinking. Part of that is due to the loss of well-paying jobs. The response of Congress has been worthlesss, mostly job retraining and minimal recompense. [2]

Kelton once again offers the job guarantee as a solution. The proposals for legislation contemplate that all jobs will pay at least $15 per hour with benefits, which will keep people reasonably safe. But these are not an adequate replacement for good middle-class jobs. We need more effort put into solving that problem.

I’ll offer one idea. The pharmaceutical business model is to raise the price of their drugs at least annually, so as to increase profits, and thus the price of the stock. As part of the jobs guarantee, the federal government could build plants to manufacture drugs and compete directly. There would be no problem doing this with generic drugs, but the government could also do it with other drugs bearing extortionate prices, like insulin and coronavirus treatments like Remdesivir. Also see this.

The expertise is out there, and the government can buy it. People can be trained to operate these plants, and make an enormous contribution to their fellow citizens. I see this an an illustration of one of Kelton’s normative policy assumptions: the point of the economy is to make our lives better. This is a political choice. It’s not a choice we should abandon to the rich and powerful.

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[1]Kelton knows this is a problem. In short, it’s the result of a number of factors, including weak or corrupt governance. The Washington Consensus perpetuates this problem. With better governance and careful attention to some of the ideas in this book, that problem might be slowly corrected. See p.141 et seq.

[2] This entire problem was the result of a consensus among economists on the benefits of trade, a consensus that supported the desires of capitalists and giant corporations. Both liberal and conservative economists and politicians joined the chorus of assent. I discuss the impact of this disaster in four posts you can find here, beginning with The Problem Of The Liberal Elites. TL;dr: liberal elites squandered their influence pushing a bad economic theory. We have no reason to trust their judgment after the damage their advice created.

[3] Alternatively we could try to reduce the trade deficit. Kelton discusses this, but it raises several complicated issues, and I’ll just refer interested readers to pp. 135-6.

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The Wonkish Myth of Crowding Out

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Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big

Chapter 4 of Stephanie Kelton’s The Deficit Myth takes up the theory that federal government deficits increase the cost of borrowing by the private sector. Here’s Kelton’s typically incisive description:

In its most common form, the crowding-out myth says that fiscal deficits require government borrowing, which forces Uncle Sam into competition with other would-be borrowers. As everyone competes for a limited supply of available savings, borrowing costs move higher. With interest rates on the rise, certain borrowers — especially private businesses — won’t be able to secure funding for their projects. This causes private investment to fall, leading to a future where there are fewer factories, machines, and so on. With a smaller stock of capital goods, society ends up with a less productive workforce, slower wage growth, and a less prosperous economy. It does sound ominous! P. 101-102.

Given the amount of capital floating around in the world, much of it US dollars, it’s hard to see why this makes sense. The big problem is not the availability of capital for US businesses, but the insistence of the rich that they not be exposed to any risk of loss. What could be a better solution for that than Treasury securities? But the crowding-out theory requires a chain of reasoning, and so it appeals to the self-regard of our wonk class. [1]

Kelton first addresses the idea that there is a limited pool of savings. As she does throughout the book, Kelton uses this myth to discuss the overall picture of money as explained by mainstream economists. They claim that private savings are the ultimate source of the funds that are available to lend. [2] If the government borrows from that limited amount, there is less for others. As you can see, it’s a pinched view of government spending. It seems to mean that government spending is lost somehow, instead of going into businesses and our own pockets, in the US and elsewhere when the government buys from businesses in other countries.

Kelton asks us to consider the flow of dollars in our economy from an accounting perspective. She starts with a two-bucket system: the Federal Government is one bucket, and Everyone Else is the second. Any dollar that leaves the FG bucket goes to the EE bucket. There is no where elso for it to go. Taxes take money out of the EE bucket and put it into the FG bucket. That leads to our first equation:

FG balance + EE balance = 0

So, if there is a FG deficit then there is an EE surplus of like amount.

FG deficit = EE surplus

Deficit spending has a good side! That’s something that seems to elude the practitioners of deficit scare-mongering. On the other hand, if the government runs a surplus, we get

FG surplus = EE deficit.

That seems bad. It means we are losing some of our wealth. Where does that wealth go? Well, it’s cash. Remember that cash is a debt on the government’s books, so the cash it collects in taxes just offsets the debt, and disappears. That might be bad! That’s something else the deficit scare-mongers never mention.

Kelton emphasizes that it’s the net that counts. So, if the FG spends $100 and taxes $90, there is a surplus of $10 in the EE bucket. That’s money in our pockets, increased savings. The federal government can just issue Treasuries in that amount, converting the green dollars into yellow dollars in Kelton’s parlance. So contrary to the myth of crowding out, FG deficits don’t eat up our existing savings, they actually increase the amount of savings. It’s not an opinion, it’s just simple accounting.

At this point we might ask if there was ever any real danger of a shortage of loanable funds. The Fed publishes a weekly summary of the balance sheets of all commercial banks in the US. As of July 1, total loans were $10.6 T and total deposits were $15.6 T. [3]. The Treasury has issued trillions of dollars of securities to cover deficit spending to date and there are still $5 T in available bank credit, and with the multiplier effect [2], there’s much more. There’s plenty more where that came from. Money Market funds have a total of about $4.6 T, all of it short-term, and much of that is available for longer-term investment if there were reasonable returns for the perceived risk. But there aren’t any decent returns to cash right now. Why?

That’s Kelton’s second point. Step 2 in the reasoning chain for this myth is that competition to borrow money drives up interest rates. Not so, says Kelton. She explains that interest rates are a policy choice. The Fed has always been able to control interest rates, both short and long term. In the past, it has done so extensively. During WWII, the Fed kept interest rates at specific levels to help control the economy during the war. That continued until 1951. We have had other bouts of serious control, including immediately after the Great Crash, though that didn’t last long. The Fed is currently keeping interest rates low for both short-and long-term loans.

At other times, the Fed has controlled short-term rates and allowed the private market to affect longer-term rates. Kelton explains how the Fed controls both long- and short-term interest rates, which I’ll skip over. It’s enough to say that this puts the nail in the idea of crowding-out.

Deficits have their good side, but they can create problems, like inflation or politically-driven mis-allocation of resources. MMT doesn’t argue for deficits or surpluses. It argues that we should pay attention to the state of the economy and pick policies that maximize our political desires. I think the government should do more to take care of our citizens. I think everyone should have a job, good schools, decent transportation, clean water and clean air, a planet that isn’t catching fire, and a world not ravaged by Covid-19. MMT supports those goals. Others think we should buy more tanks and guns and do nothing else, just let the market fix things. There are MMT prescriptions for that too.

Finally, it’s worth noting something Kelton doesn’t discuss: keeping interest rates low hurts savers, whether they are saving for a rainy day, for college for the kids, for a down-payment on a home, or retirement. These are funds that people mostly don’t want to put at significant risk. But if interest rates are low, there is a real danger that inflation will slowly erode those savings. For example, health care costs are one reason people save for a rainy day. It’s likely that inflation in that sector is higher than the overall inflation rate. Low interest rates will hurt those savers. Similarly, college costs are rising faster than overall inflation, and in some cities, house prices and rents rise faster. In each case, the saver is a loser.

We should be thinking about that if we want to see progressive uses of MMT achieve their full potential.

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[1] That’s my view, not Kelton’s. She says there is some evidence that crowding-out can be a problem for non-sovereign currencies, but not for sovereign currencies.

[2] This is accompanied by the idea that bank lending results in deposits, and those deposits fund another round of lending, etc. Each round of lending is smaller because banks are required to hold a percentage of all deposits in their reserves at the Fed. I was taught that this is the multiplier effect; it’s now called the money multiplier. We can ignore it for these purposes, because it leads to a larger number, but still one defendant on savings.

[3] Respectively, H.8, P. 2 Line 9 and H.8 P. 3, line 34.

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The National Debt Is Sooooooo Big

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Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth

Chapter 3 of Stephanie Kelton’s The Deficit Myth addresses the National Debt. It’s a very big number, and politicians use it to terrorize voters. Kelton tells a story about Senator Mike Enzi, R-WY, complaining about a CBO budget outlook report, saying it should put in the zeros instead of using the word “trillion”. And that’s how seriously we should take the problem. Remember what we learned in the last post: money is a debt on the books of the US government, but it’s also an asset in the hands of a currency user. That means that the National Debt tells us how much we collectively have received in assets from the Treasury.

Kelton says that fear of the National Debt is shared by everyone in and near government across the ideological spectrum, politicians, staffers, wonks and think-tankers. When she was Chief Economist for Bernie Sanders on the Senate Finance Committee, Kelton questioned the myth.

One of the most eye-opening things I learned came from a game I would play with members of the committee (or their staffers). I did this dozens of times, and I always got the same incredible reaction. I’d start by asking them to imagine that they had discovered a magic wand with the power to eliminate the entire national debt with one flick of the wrist. Then I’d ask, “Would you wave the wand?” Without hesitation, they all wanted the debt gone. After establishing an unflinching desire to wipe the slate clean, I’d ask a seemingly different question: “Suppose that wand had the power to rid the world of Treasuries. Would you wave it?” The question drew puzzled looks, furrowed brows, and pensive expressions. Eventually, everyone would decide against waving the wand. P. 77. [1]

Wiping out the National Debt means eliminating Treasuries, and that exposed the contradiction at the heart of the myth of the Very Scary Debt. We can’t get rid of Treasuries! But the raw number scares voters so many people continued to rant about the National Debt. They never asked why voters were scared, or questioned their role in creating that fear.

Intuitively, if deficits aren’t a problem unless they cause inflation, then the national debt isn’t a problem unless it causes inflation. In the same way interest on the national debt isn’t a problem unless it causes inflation. Kelton acknowledges that there may be limits on the size of the national debt, usually discussed in terms of the ratio between the national debt and the GNP. The US is nowhere near the size of the debt to GNP ratio of Japan, for example, so there’s no immediate problem. Assuming there is some limit, Kelton turns to the various ways we could eliminate the national debt.

One way would be to run government budget surpluses, as we did when Bill Clinton was President. We could easily do that by raising taxes on the rich and their corporations, slowly depleting their total wealth. That’s a good idea on its own terms, because it would reduce their political and economic power. Kelton says that in the past when the government has run surpluses for several years the result was depressions. I would add that if we did raise taxes we’d be destroyed in the shrieks of the rich saying that their money was being used to pay for social programs like Social Security.

Or, the Fed could get rid of all of the Treasuries with just a few clicks on a keyboard, by reducing the number in the Treasury Securities account and increasing the numbers in the bank account of the holders of the Treasury securites. Economists call this monetizing the debt.

Or, we could do it by continuing to spend as we see fit subject to the inflation constraint, but stop issuing new Treasuries. As the old ones mature, the Fed pays them by crediting the accounts of the holders with green dollars. We could stop that at any time we reached a level of debt that wouldn’t frighten even the most fearful Americans. or at some higher level. [2]

Once getting rid of Treasuries would have caused a problem, because the Fed used the market in Treasuries to control interest rates. That is no longer the only control mechanism available to the Fed. [3] But then what? Kelton discusses an article by Eric Lonergan, an economist and fund manager. Lonergan asks what would happen if Japan monetized all its bonds. I quote his analysis in full:

First, let’s go through the balance sheet effects: 1. The government now has no debt. 2. The value of the Japanese private sector’s assets is unchanged – they used to hold JGBs [Japanese Government Bonds], now they hold the same value in cash. So overnight, the government’s debt is eliminated, and the private sector’s net wealth is unchanged.

The income effects are also interesting: 1. The government’s budget position improves. 2. The income of the private sector falls because bonds paying interest have been replaced with cash holding none.

So what happens to the economy?

Most people tend to say, “hyperinflation”, but that makes little sense. Why on earth would the Japanese household sector rush out and buy things when their interest income has fallen, their wealth is unchanged, and they are used to falling prices. The private sector already has a high wealth to GDP ratio and are spending less than they produce (which is precisely why the government runs a deficit).

The Yen might weaken because the yield on overseas assets has risen relative to Japanese assets, but this spread is hardly offering much compensation for exchange rate risk. My conclusion is that nothing would change in Japan if you had 100% monetization of the stock of JGBs!

The takeaway is that getting rid of Japanese government debt wouldn’t affect the economy at least in the short term. Two possible problems: a) less spending because bond income disappears from the economy; and b) weakening of currency in international markets because there are higher return available on the bonds of other countries. In the case of the US, we can add that cash previously held as Treasuries suddenly isn’t producing any return, so its owners look elsewhere for returns. That might mean an increased purchases of assets by foreigners; purchase of the debt of other countries; or something else. But that’s not all bad, and I don’t know enough to work it out.

Kelton accepts Lonergan’s logic. Paying off US Treasury Securities is possible and likely would have minimal short-term effects. Late in the Clinton Administration the US ran budget surpluses, to the point that White House economists prepared a draft report titled Life After Debt. Here’s a discussion by David Kestenbaum of Planet Money. This report got labeled PRELIMINARY AND CLOSE HOLD OFFICIAL USE ONLY”, and Planet Money got it through FOIA. Then the Republicans cut taxes for the rich, with the usual pennies for the rest of us, so the problem evaporated.

In sum, the national debt isn’t a problem as long as it doesn’t lead to inflation. A lesser constraint might be the impact on the value of the dollar, which might affect international trade in unpredictable ways.

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[1] This is a good example of Kelton’s style. As you can see, it’s clear, simple, and direct English prose, the highest praise my high school English teacher, Brother Daniel, ever bestowed.

[2] Here’s a recent tweet from Scott Fullwiler, an MMT economist:

The core point is it should be done by the [Central Bank]—there’s no reason why the appropriate (for mkt conditions) change in risk-free, liquid securities should equal size of govt debt/surplus, & no reason for appropriate maturity structure to be same as what cost-minimizing [Treasury] chooses.

[3] For example, the Fed began to pay interest on the reserves commercial banks are required to keep at the Fed. There is a full explanation starting at P. 117.

[4] There are, of course, distributional issues for both Treasury Securities and for the interest they pay. This is a normative issue best dealt with by politicians, and not economists. One consideration is that many people benefit indirectly from interest on Treasuries through money market funds, investments by pension plans and direct purchase, because Treasuries are absolutely safe.

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Reflections on The Deficit Myth

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Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation

The first three posts in this series address the Introduction and the first two chapters of Stephanie Kelton’s The Deficit Myth. In this post I add her definition of money and some of my thoughts, and invite readers to do the same, either questioning points she made or applying her ideas to our society.

1. Modern Monetary Theory starts by asking one question: how does money work in a fiat currency nation. Kelton defines money in her first published paper: The Hierarchy of Money. This is a very readable discussion of the range of opinions on this subject, focused on the argument between the Metalists and the Chartalists, which began over 400 years ago. [1] Kelton starts with a definition of money. [2]

Money represents a debt-relation or promise to pay that exists between human beings. It cannot be identified independently of its institutional usages, because money represents a social relationship. … The creation of money, then, is simply the balance sheet operation that records this social relation. (Emphasis in original.)

According to Kelton, the Chartalists called money any token representing a debt relationship. Thus, a postal stamp is a money: it represents an asset to the owner and a debt to the Post Office which is satisfied by delivering a letter. A plane ticket is money: it represents the obligation of the airline to fly the holder to a particular place at a particular time. Bank deposits are money: they are a liability of the bank which must deliver money at the direction of the account holder. The rule for creation of money is the agreement by one person to hold the debt of another. [2]

Now consider the dollar. The dollar is a creation of the federal government. Kelton writes:

Thus, State money is created when the public agrees to hold (as an asset) state-created money (a liability to the State) which is required in payment of taxes.

This explains why currency and other forms of dollars (bank deposits, treasury securities, and bank reserves at the Fed) are liabilities of the federal government. We users agree to hold these dollars as assets. We can use them to acquire different forms of assets from sellers, obtain services from providers, and pay taxes. When the government collects taxes, it matches that asset with a corresponding liability and clears to zero.

The point of this exercise is to demonstrate that money is a balance sheet representation of the debt/asset relations between human beings, a social relationship. That understanding is crucial to the arguments advanced in The Deficit Myth.

2. Kelton calls for a Copernican Revolution in the way we think about money. This, of course, is a reference to the Copernican Theory, which said that the earth revolves around the Sun, and not vice versa, despite what we see with our own eyes. The ramifications of the Copernican Revolution eventually led to a complete change in our understanding of the nature of reality. [3] The revolutionary change she describes is that US government spending is not constrained by its ability to tax and borrow, but by the actual resources available, labor, material, and the organization of production. One important part of The Deficit Myth is the description of the kinds of changes we have to make in our own thinking. But there are many more revolutions. Here are three.

a. Congress ducks policy arguments by turning them into discussions of budgets or into political games. That never made sense, because all budgeting is about priorities. Games like pay-fors or one-upmanship on military spending were always perverse, but both parties pretended these were real arguments. They aren’t. MMT strips away one more layer of pretense.

b. Mainstream economists refuse to look honestly at MMT. Marion Fourcade and her colleagues at Berkeley published a paper examining the economics profession titled The Superiority of Economists, a devastating critique of their pretensions. Among other things, economists tell us that markets should make our decisions about allocation of resources, and that anything that interferes with the operations of markets is harmful to society. When government spending is between 35 and 45% of GNP prior to the pandemic, it’s stupid to argue that markets are the best form of allocation of resources. When capitalists exercise outlandish control of government spending priorities, it’s stupid to argue that markets should determine what we can and can’t have.

Many economists hold themselves out as experts on all sorts of things, including the pandemic. In the MMT world, as Kelton points out, economists would concentrate on predicting the inflationary effect of spending choices, and get completely out of the business of telling us how we should make decisions about allocation of resources.

c. Historically, people thought that the most important problem facing an economy was to accumulate capital and turn it to productive use for the benefit of society. The chosen solution was Capitalism, and to encourage capitalists to invest, we allowed them to reap outlandish profits through monopoly, grants from the Crown, and other favors, while ignoring the fraud and corruption those policies entailed. This continued in the US, with gigantic giveaways to railroad and mining companies, ludicrous levels of patent protection, and grotesquely unfair tax rules, while mostly ignoring or even praising graft, corruption and fraud. The results of coddling capitalists are rubbed in our faces every day.

MMT gives us space to think about the way society could operate to make our lives better. It allows us to make decisions about what we need and want. We do not have to accept whatever is on offer from Capitalists. We can decide based on our principles, morals, values and dreams. MMT puts us in charge, and frees us from the domination of the rich. It opens the door to the “euthanasia of the rentier”, as Keynes calls it in The General Theory of Employment, Interest and Money.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.

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[1] Fun fact, Adam Smith may have held Chartalist views. Kelton quotes him thus:

A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money.

[2] Kelton doesn’t go into the history of money, but this BBC article is a fascinating picture of trade in Ancient Sumeria, and gives a tantalizing hint about the origin of money in record-keeping and accounting for trade.

[3] For a fascinating and occasionally comprehensible discussion of this new understanding, see Reality Is Not What It Seems, by Carlo Rovelli.

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MMT On Inflation

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth

The second chapter of Stephanie Kelton’s The Deficit Myth deals with inflation. In Chapter 1, Kelton explains that the deficit is not a constraint on government spending. Instead, inflation is the important constraint. A deficit does not prove that the federal government is overspending. Only an increase in inflation proves Congress is overspending. Kelton says Congress shouldn’t tax and spend so as to deliver a balanced budget. Congress should spend and tax so as to deliver a balanced economy, one that serves all of us. She says that historically we have not done this, that we have chosen to focus of deficits and in so doing our economy has not served us well.

Definition and Description of Inflation

Inflation means a continuous rise in the price level. A bit of inflation is considered harmless and even something economists like to see in a healthy, growing economy. But if prices start rising faster than most people’s incomes, it means a widespread loss of purchasing power. Left unchecked, this would mean a decline in society’s real standard of living. In extreme cases, prices can even spiral out of control, gripping a country in hyperinflation. P. 44.

The danger of eroding incomes explains why everybody worries about inflation, and explains why politicians can use the threat of inflation to terrorize voters. It works, even though the problem for more than a decade hasn’t been too much inflation, it’s been too little. Ever since the Great Crash inflation has been less than 2% annually despite efforts of the Fed.

Kelton says that economists think of inflation as either cost-push or demand-pull. Demand-pull inflation occurs when consumer spending rises faster than the economy can produce goods and services. That hasn’t been a problem for a long time. Cost-push inflation can arise from disasters, which reduce the supply of something; from pricing power, as in the case of Big Pharma with its patents and trade secrets; or from workers gaining market power and demanding higher wages which businesses pass on to consumers. That last one is the only fear mainstream economists suffer, as far as I can tell.

The dominant theory of inflation stems from Milton Friedman’s monetarism:

According to Friedman, “inflation is always and everywhere a monetary phenomenon.” What he meant was that too much money is the culprit in any inflationary episode. If prices weren’t stable, it was because the central bank was trying to force the economy to create too many jobs by allowing the money supply to increase too rapidly.

The early neoliberal Friedman insisted that the Fed must never interfere with the workings of the market. Specifically, the Fed should not try to reduce unemployment below a certain level, which came to be called NAIRU, the non-accelerating inflationary rate of unemployment. Friedman thought there had to be some minimum level of unemployment in the economy. [1] The Fed bought into this view, as did politicians of all stripes. They all agreed that to keep prices stable, the US has to accept a certain level of unwanted unemployment. And to be on the safe side, maybe a bit higher level of unemployment. In practice, Congress dumped the problems of inflation and unemployment on the Fed.

But problems arose. The NAIRU isn’t visible or measurable. It can only be seen in retrospect. And now we are pretty sure there isn’t a clear relationship between inflation and unemployment, as the Fed assumed. [2] The Fed Chair, Jerome Powell, freely admitted to Rep. Alexandria Ocasio-Cortez that the Fed has been wrong about NAIRU, but defended its use on the grounds that “We need to have some sense of whether unemployment is high, low or just right.” P. 53.

2. The Problem of Unemployment

It turns out that the Fed used the purported correlation between inflation and unemployment as its primary tool for controlling inflation, ignoring all other causes of inflation. When the economy heated up and unemployment dropped, workers gained market power, and their share of national income increased. That led the Fed to raise interest rates leading to a tightening of the economy and usually a recession, as the following chart shows.

Gray bars indicate recessions.


Kelton calls this a “human sacrifice”, forcing some people out of the workforce when they want to work and can be productive. She thinks we are asking too much of the Fed. It can’t spend money into the system; only Congress can do that. All the Fed can do is change the cost of borrowing. If unemployment is too high, the Fed can make borrowing cheaper, but it can’t force anyone to borrow. Usually when unemployment is high, no one wants to borrow. I note that this was what happened after the Great Crash. The Fed cut interest rates to zero and lowered bank reserve requirements, hoping to increase money going into the economy. It didn’t work.

3. The Job Guarantee

Kelton argues that a better way to deal with unemployment is a job guarantee. Every person who wants to work should be able to get a decent job with decent pay and decent benefits. If the private sector won’t provide those jobs, the government should. [3] Kelton discusses this idea and its foundations.

It would probably be impossible for Congress to monitor the economy closely enough to manage full employment by tweaking taxes and spending. A job guarantee would act as a safety-valve and an automatic stabilizer for the economy and help solve this problem, leaving the Fed free to focus on inflation. If the private sector needs all the workers it can find them. If not, the government hires people to do jobs that need doing. There is plenty of work that needs doing, and, as Kelton pointed out elsewhere, we can always use more flowers in our parks and boulevards.

4. Preventing Inflation

So how should Congress budget knowing that the only effective constraint on spending is inflation? What would change? The way Congress currently works is that every bill that calls for expenditures gets a score from the Congressional Budget Office that assesses the impact of the expenditure on the deficit over a ten-year period. If inflation were the constraint, then the CBO would offer a score based on the probable impact of the expenditure on inflation. If the economy is, as now, operating well below its capacity for producing goods and services, the possibility of inflation would be low.

If the economy is close to capacity, either as a whole or in part related to the area of expenditures, then Congress has to make hard calls. How important is the expenditure? Can we create “fiscal space” for the expenditure with taxes? For example, in the case of the entire economy humming along, a general income tax hike would take money out of most people’s hands so they would not be buying as much, leaving room for the government to buy more. If there is a bottleneck, a more focused tax or some other step might be necessary.

Conclusion

MMT recognizes that inflation is a crucial problem. It shows how it arises and how we should protect ourselves from it.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Marx said that the reserve army of labour is a necessary part of capitalism. Hmmm.

[2] This relationship is embodied in the Philips Curve. I discuss it here.

[3] Other economists favor a universal basic income. Both have the added benefit of freeing workers from abusive or irritating employers. Your family won’t starve if you walk out on a bad situation.

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Debunking The Deficit Myth

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The Deficit Myth By Stephanie Kelton: Introduction And Index

The first chapter of Stephanie Kelton’s book The Deficit Myth takes up the biggest myth about federal government finances, the idea that federal budget deficits are a problem in themselves. The deficit myth is rooted in the idea that the federal government budget should work just like a household budget. A family can’t spend more than its income will support. The family has income, and may be able to borrow money, and the sum of these sets the limit on household spending. Those who propagate the deficit myth say government expenditures should be constrained by the government’s ability to tax and borrow. First the government has to find the money, either through taxes or borrowings, and only once it has found the money can it spend. The way things actually work is different.

In the real world, it goes like this. Congress votes to direct an expenditure and authorize payment. An agency carries out that direction. The Treasury instructs the Fed to pay a vendor. The Fed makes the payment by crediting the bank account of the vendor. That’s all that happens. It turns out that the real myth is that the Treasury had to find the money before the Fed would credit the vendor. That’s because the federal government holds the monopoly on creating money. U.S. Constitution Art. 1, §§8, 10. In practice this power is given to the Treasury, which mints coins, and to the Fed, which creates dollars. [1]

It also turns out that for the most part, the Treasury does cover the expenditure by taxing or borrowing, but because the government is an issuer of dollars, it isn’t necessary. [2] In the last few months, the Treasury has been selling securities and the Fed has been buying about 70% of them. Here’s a chart from FRED showing Fed holdings Fed holdings of treasury securities. The Fed may or may not sell those securities to third parties. If it doesn’t, they will be held to maturity and remitted as a dividend to the Treasury.

The recognition that spending comes first, and finding the money comes second is one of the fundamental ideas of MMT. Kelton describes her meeting with Warren Mosler who introduced her to these ideas; the stories are amusing and instructive. I particularly like this part:

[Mosler] began by referring to the US dollar as “a simple public monopoly.” Since the US government is the sole source of dollars, it was silly to think of Uncle Sam as needing to get dollars from the rest of us. Obviously, the issuer of the dollar can have all the dollars it could possibly want. “The government doesn’t want dollars,” Mosler explained. “It wants something else.”

“What does it want?” I asked.

“It wants to provision itself,” he replied. “The tax isn’t there to raise money. It’s there to get people working and producing things for the government.” Pp. 24-5.

Put a slightly different way, people accept the government’s money in exchange for goods and services because the government’s money is the only way to pay taxes imposed by the government. Kelton says she found this hard to accept. She spent a long time researching and thinking about it, and eventually wrote her first published peer-reviewed paper on the nature of money. [3]

The monopoly status makes governments the issuers of money, and everyone else is a user. That fundamental difference means that governments have different financial constraints than households, and that it certainly isn’t constrained by its ability to tax and borrow. Kelton offers several interesting and helpful analogies that can help people grasp the Copernican Revolution that this insight entails.

Once we understand that government doesn’t require tax receipts or borrowings to finance its operations, the immediate question become why bother taxing and borrowing at all. Kelton offers four reasons for taxation.

1. Taxation insures that people will accept the government’s money in exchange for goods and services purchased by the government.
2. Taxes can be used to protect against inflation by reducing the amount of money people have to spend.
3. Taxes are a great tool for reducing wealth inequality.
4. Taxes can be used to encourage or deter behaviors society wants to control. [4]

She explains borrowing this way: government offers people a different kind of money, a kind that bears interest. She says people can exchange their non-interest-bearing dollars for interest bearing dollars if they wish to. “… US Treasuries are just interest-bearing dollars.” P. 36. Let’s call the non-interest-bearing dollars “green dollars”, and the interest-bearing ones “yellow dollars”.

When the government spends more than it taxes away from us, we say that the government has run a fiscal deficit. That deficit increases the supply of green dollars. For more than a hundred years, the government has chosen to sell US Treasuries in an amount equal to its deficit spending. So, if the government spends $5 trillion but only taxes $4 trillion away, it will sell $1 trillion worth of US Treasuries. What we call government borrowing is nothing more than Uncle Sam allowing people to transform green dollars into interest-bearing yellow dollars. P. 36-7.

It might seem that there are no constraints, but that is not so. Congress has created some legislative constraints on its behavior, including PAYGO, the Byrd Rule, and the debt ceiling, but these can be waived, and always are if a majority of Congress really want to do something. They also serve as a useful way of lying to progressives demanding public spending on not-rich people, like Medicare For All. We have to pay for it under our PAYGO rules, they say, while waiving PAYGO for military spending (my language is harsher than Kelton’s).

The real constraints are the availability of productive resources and inflation. The correct question is not “where can we find the money”, but “will this expenditure cause unacceptable levels of inflation” and “do we have the real resources we need to do this” and “is this something we really want to do. As Kelton puts it, if we have the votes, we have the money.

In my next post, I will examine some of these points in more detail. Please feel free to ask questions or request elaboration in the comments.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Art. 1, §8 authorizes the federal government to create money; §10 prohibits the states from issuing money. That leaves open, for now, the possibility that private entities can issue money. Banks and from time to time other private entities play a role in the creation of money, but I do not see a discussion of this in the book.

For those interested, here’s a discussion of the MMT view from Bill Mitchell. I may take this up in a later post. In the meantime, note that every creation of money by a bank loan is matched by a related asset. Thus, bank creation of money does not increase total financial wealth. In MMT theory this is called horizontal money. It is contrasted with vertical money representing the excess of government expenditures over total tax receipts, which does increase financial wealth. Here’s a discussion of this point.

[2] There are, of course, constraints on government spending, especially inflation and resource availability. We’ll get to that in a later post.

[3] Kelton cites the paper in a footnote: The Role Of The State And The Hierarchy Of Money.

[4] Compare this list to the list prepared by Beardsley Ruml, President of the New York Fed, in 1946.

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