A fatal flaw?

Ekosj writes a surprisingly less-bad article at the conservative site Richochet, "Modern Monetary Theory: Wishful Thinking or Exposing a Fatal Flaw at the Heart of Neoclassical Economics?" The author includes the obligatory ideological swipes at MMT, but points out an interesting feature of contemporary macroeconomics.

The supposed "fatal flaw" is that with superficially reasonable assumptions (notably the natural rate of unemployment and rational expectations), the quantity of money drops out of our macroeconomic models.

Well, yes. This feature is more-or-less by design. Economics is usually concerned with the real economy, the goods and services that provide actual utility to consumers. Economists usually view money as a "neutral veil" over what is essentially a barter economy. And, of course, a barter economy needs no money.

Economists do look at money too, but the constrained choices about money are almost, but not quite, completely unlike the constrained choices of an abstract real (barter) economy: a theory of the real economy works doesn't tell us much about how to set up a money system. Very different social systems could, in theory, coordinate a complicated real economy, and the simplifying assumptions are equally weird in every system.

We have to understand money on its own terms, not as something that emerges from real economic analysis. Ironically, when you study money on its own terms in a capitalist, fiat currency context, you get MMT.

Marxists should not dismiss MMT

I'm not saying that Marxists should become MMT enthusiasts. Adam Booth is at least partly correct: MMT scholars are mostly not Marxists or socialists, and MMT by itself will not usher in a socialist utopia.

By definition, a truly "communist" society doesn't need anything remotely resembling money: the opportunity cost of producing and consuming the ordinary social product — food, shelter, clothing, communication, entertainment, etc. — is negligible and there is no need to carefully account for its use or ration its consumption.

But any kind of "socialist" society will need something that looks very much like money. By definition, a "socialist" society must manage scarce resources, which means that society must carefully account for the opportunity cost of producing and consuming the social product to ensure that we produce what we want the most, and ration the consumption of the social product. Essentially, anything that does the job of accounting for and rationing the social product is money*.

 *It's pointless to quibble over definitions, a task I have spent far too much time on. We could define the label money as including something unique to capitalism, and then, of course, socialists wouldn't use money. But there still would what we use to account for and ration of social product, which we'll arbitrarily label as gnippa. Then the rest of this article is about gnippa.

People in a socialist society will have very different relations to money than people in a capitalist society. Socialists will use and think about money differently than capitalists use and think about money, but whatever those relations, so long as they account for and ration the social product, they will have some relations to money.

There are two reasons I think Marxists should pay attention to MMT. The first is that at least initially, a socialists society must actually manage money. I can't imagine any benefit for a socialist society to not account for the social product, and try to ration access without using numbers. Once we start slapping numbers on the social product and use those numbers to ration access to the social product, we have what is essentially money. And if we're using money, we need theories about how it works.

And just as capitalist scientists can come up with good theories about how electrons, viruses, cows, and ecosystems work, capitalist economists can come up with good theories about how money works, and how to manage the accounting and rationing of the social product.

As an economist in a capitalist society, I understand that most of my colleagues spend most of their time just providing academic support for capitalist ideology, a task I don't really endorse, but there is a little truth, mostly independent of ideology, in there. And I think that MMT has some of that mostly ideology-independent truth.

The second reason that I think Marxists should pay attention to MMT is that MMT explicitly challenges a critical capitalist myth: the myth that money itself is a scarce resource, and that to get what they want, the masses must get money from those who already have it. 

If the capitalist class had all of the iron in storage, protected by armed guards, then regardless of our social structure, if we wanted to build stuff using iron, we would need to get the iron from those who had it, by persuasion or force. And because iron is really useful in making weapons, control over iron would give the capitalist class an enormous advantage in the exercise of force.

The capitalist class rules because it has control over money. So long as we buy the myth that money itself is a scarce resource, capitalists' control over money gives them as much or more power as they would have if they controlled all the iron. Even if 99% of the people wanted socialism, if the people believed that capitalists controlled a scarce resource they needed, then the capitalists can block socialism.

This myth has real bite. Margaret Thatcher supported her eleven-year rule with little more than the slogan, "The trouble with Socialism is that eventually you run out of other people's money."But if money is not a scarce resource, then we cannot run out of anyone's money. 

The Democratic party in the United States cannot implement even a hint of a progressive, much less a socialist, agenda just because they cannot imagine how they could pry the money out of rich people's hands. Worse, the Democratic electorate, as much as they might want a progressive agenda, falls for the myth that they need rich people's money, and they too cannot imagine how to get at that money, so they don't demand that the party attempt the impossible.

MMT proponents directly challenge the myth of the scarcity of money. Whether or not they realize it, they are fundamentally subverting a fundamental myth of capitalism, really in the same sense that Christian scholars who challenge the historicity of the resurrection fundamentally subvert a fundamental myth of Christianity. 

Capitalism dominates today not just because capitalists successfully argue that capitalism is better, but because capitalism is true, that any sacrifices or privation the people must suffer under capitalism are imposed not by the capitalist system, but by nature: there is only so much money to go around, and if there isn't enough money, we can't get what we want, regardless of the availability of other resources.

So no, MMT is not itself socialist, and a simple restructuring of the Treasury and Fed around MMT theories will not by itself bring about a socialist society. However, MMT subverts a fundamental myth that supports capitalism, and it behooves all anti-capitalists to endorse that subversion.

What a criticism of MMT lacks

Perhaps surprisingly, Daniel Tenreiro's criticism of Modern Monetary Theory, "What The Deficit Myth Lacks," at least avoids the usual hysterical bad-faith anti-MMT propaganda: Tenreiro does not froth at the mouth screaming hyperinflation! and Venezuela. Indeed, Tenriero grants MMT's most important claim: the United States can presently use government spending to use idle productive resources. However, seems to understand neither the basics of MMT nor basic economic theory.

Tenreiro observes that MMT (following Keynes) prescribes government spending when the economy is below full employment and MMT predicts that government spending will cause inflationary only when the economy is at (or above) full employment. However, these theories do not simply restate the Phillips Curve; more over, modern theory has not thoroughly undermined the Phillips Curve.

We can use the Phillips Curve to say that if unemployment is above the "natural rate" (momentarily ignoring the political choices embedded in the natural rate of unemployment) and inflation is below the corresponding natural rate, then rather than shifting the Phillips Curve, government spending should just move both unemployment and inflation to their natural rates. Indeed, since the GFC, most capitalist economies have seen both too-high unemployment and too-low inflation, indicating that the government can indeed spend extra to use idle productive resources, i.e. labor and existing industrial capacity. Such spending is inflationary by design: a little inflation is a Good Thing.

It is only when unemployment is at or below the natural rate, indicating that the private economy (and ordinary government spending) is using all available labor, that government stimulus spending will crowd out private economic activity. This crowding out causes the Phillips curve to shift outwards, causing inflation with no corresponding increase in long-run unemployment, rather than causing movement along the curve to equilibrium.

Tenreiro mentions the Job Guarantee, an important and perhaps intrinsic MMT policy prescription. His sarcasm aside (the Job Guarantee does not "solve[] the economy"), he correctly states the MMT position: the Job Guarantee will "spur economic growth by employing workers who would otherwise be idle [emphasis added]." The qualification is critical, but Tenreiro perhaps does not grasp its implication.

Tenreiro does not appear to understand ECON 101 national accounting nor the usual rationale for government spending. Tenreiro's complaint here is that the Job Guarantee "would have a negligible effect on output, because by definition it would employ workers in the production of goods and services that private firms consciously avoid." Basic national accounting assumes that government spending counts directly to output: it's the $G$ in $Y=C+I+G+(X-M)$.* Tenreiro's deeper fallacy is that all government spending — roads, bridges, schools, police, the military — is by definition useless: if it were useful, private investors would find it profitable. There's nothing about MMT or the Job Guarantee that's any different from any other government spending.

*In English, output (Y) equals the sum of consumption (C), investment (I), government (G) and net exports (X—M)

Tenreiro shows his disdain for public goods with the usual conservative contempt for alternative "clean" energy. But of course alternative energy hasn't "flopped". It's doing quite well, and the Germans and Chinese are killing us in the sector. The U.S. is lagging behind because it's actually productive, and there's no way to use alternative energy to loot American consumers. More importantly, the job guarantee's primary role would be not in developing but converting the current electricity, heating, and transportation infrastructure to methods that won't kill us all from global warming. Again, ECON 101 (at least as I teach it) tells us that public goods cannot generate profit in a free market because of the free-rider problem. It is worth repeating that the social value of governments providing public goods is not a feature unique to MMT; it's standard economics.

Finally, Tenreiro absurdly objects that MMT isn't what he wants it to be. Tenriero wants a supply-side theory of long-run economic growth; MMT is a demand-side theory of short-run utilization of idle resources. True, MMT fails to address supply-side economics, nor does it promise to do away with war, disease, famine, death, mopery on the high seas, nor the heartbreak of psoriasis. So what? Criticize the theory for what it is, not what it does not even pretend to address.

On the Phenomenon of Bullshit Jobs

On the Phenomenon of Bullshit Jobs

If someone had designed a work regime perfectly suited to maintaining the power of finance capital, it's hard to see how they could have done a better job. Real, productive workers are relentlessly squeezed and exploited. The remainder are divided between a terrorised stratum of the, universally reviled, unemployed and a larger stratum who are basically paid to do nothing, in positions designed to make them identify with the perspectives and sensibilities of the ruling class (managers, administrators, etc.)—and particularly its financial avatars—but, at the same time, foster a simmering resentment against anyone whose work has clear and undeniable social value.

Abandon all hope

According to Brad DeLong, your country should [a]bandon all hope of running a successful developmental-state industrial policy if:

1. You have landlords (or some other parasitic class interpenetrated with those from whose ranks your bureaucrats are drawn): then you are doomed, because the more effective your government’s ability to use levers of state power, the more the distribution of income and wealth will be frozen into a form pleasing to your anti-developmental current upper class. You need to start with a remarkably equal and definitely not inherited-inequality distribution of income and wealth. If you do not start there, abandon all hope.
2. You do not have an ideology of economic development shared by your elite: if your elite judge each other by, say, how rich they get and do not judge each other by whether they have contributed to society’s growth mission, abandon all hope.
3. You do not have an effective educational system for training and an effective examination system for selecting your bureaucrats. If your bureaucrats cannot outsmart the private sector and foreign managers whom they are attempting to regulate, outproduce, midwife, or garden, abandon all hope.
4. You do not have an ideology in which government service is a high prestige occupation. If your best and your brightest do not regard government service as a good thing to do, abandon all hope.
5. You do not have a firm and reality-based conception of what industrial structure you want your country to develop into. If you cannot point to another country, and say: we want to become like them, and here are the first stage investments and capabilities we need to develop to do so — if you cannot do that, abandon all hope.
6. You do not have the factor-mobilization prerequisites—the power to mobilize savings for investment, to massively upgrade the technical education level of your population, to move people out of low productivity into high productivity occupations, to build the infrastructure and the links to global value chains. If you do not have the factor mobilization prerequisites to make a success of industrial policy, abandon all hope.
7. You do not have access to the markets that will buy at a price that will cover your costs the goods you produce if your industrial policy is successful. If world markets are not open to you and you have to rely on domestic demand from a poor population, abandon all hope.
8. You do not have the power to judge which private businesses are successful and need to be fertilized, and which are unsuccessful and need to be pruned back. The best way to do this is to lower the value of your currency and then watch which of your firms are successful exporters—to use foreign countries markets’ as devices for telling you who is making high-quality goods at a reasonable price. But you have to do this somehow. If you cannot measure where you are succeeding, abandon all hope.

[It should be noted that the United States fails not just one or two but most of these tests, especially the first. We have access to international markets, but not much else.]

The point of economics

"The point of economics as a discipline is to create a language and methodology for governing that hides political assumptions from the public." -- Matt Stoller

MMT Misconceptions part 3b

Continuing with Doug Henwood's essay, Modern Monetary Theory Isn’t Helping, and his treatment of taxes and government revenue.

Misconception: Taxation transfers resources

[O]ur public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones.

Well, no. It's not anything like that; it can't possibly be anything like that. Henwood is not getting MMT wrong here; he's getting basic logic wrong. Henwood is at best speaking imprecisely; we could just attribute this imprecision to a desire for concision, but speaking carefully would completely undermine his point.

Generally, the word resource refers to something real: labor, raw materials, capital equipment, intermediate goods, etc. But of course it's nonsensical to suppose — and I don't think Henwood believes any such thing — that rich people have vast warehouses full of machines, equipment, parts, and raw materials, and dormitories full of people they are withholding from the labor force.

Taxes take money away from people who have it. Money is not a resource; it is the social permission to access society's resources. This isn't the 11th century; the government does not impose a tax by taking the food I grow. When I pay my taxes, I am not giving any resources to the government; the government is taking away some of my social permission to access society's resources.

Absent theft and robbery, ordinary people, households and firms, must get money by persuading someone else who already has money to give it to them, eventually in return for real resources. That's just how money works, n'est ce pas? But governments are just not at all like that.

Money is a social system, and someone, some collection of institutions (spoiler alert: the government), has to create and manage money. The government has to create the money, ensure that people want to use it as a medium of exchange and store of value. The government must ensure there's enough money overall to grant the social permission to access all of society's resources, but not so much that people think they have the social permission to access resources that we cannot produce.

No other institution except the government* can manage the money system. We can't just leave money to "the market". Even if you grant that markets have some value, they suck at delivering the kind of rigidly broad uniformity we want from money; governments are terrific at being rigidly uniform. Government does not have to get social permission to access society's resources. Government has this social permission just by virtue of being the government.

*I suppose e could go back to the gold standard, but almost a century ago, Keynes realized the gold standard was a Bad Terrible Idea, and we abandoned its last vestige in 1971.

This is what I meant previously by looking at the control system; it's important to understand how the control system works so we can effectively use it.

This is how money actually works: The government creates money and puts in the hands of the private sector by buying things like airports and bridges, loaning it to banks to manage the payment system, or buying real or financial assets with it. So that people will actually accept and use the government's money, the government imposes taxes that must be paid in the money it just issued, that could not have been be paid unless the government had first issued the money. Because the government wants some of this money to stay in circulation for private transactions, they collect in taxes less money than they issued.

The government takes these taxes and "burns" them. The government does not need your tax dollars; the government imposes taxes in part so that we need them.

Once the money economy gets rolling, the government continually creates money and puts it into the private economy; it collects taxes to destroy excess money.

The government does not borrow money; they offer people interest to take money out of circulation and "store" it in a government "bond". The government does not offer people real resources in return for the "bond", and the government has no need to give anyone real resources to get the money they promise to repay. They not just can but they have not choice but to print the money when the "bond" matures.

I don't care at all how you or anyone else, left, right or center; capitalist, socialist, or anarchist, feels about the above. That's how money actually works. Again, this is not MMT; this is fundamental monetary economics.

Capitalists fucking hate that money works this way. They would much prefer the gold standard, which gives the rich total control of the money system. The only reason they tolerate the fiat money system — and they have no choice but to tolerate it — is that the last time the bourgeoisie tried the gold standard, the peasants started gathering torches and pitchforks.

The bourgeoisie and their loyal ally? unwitting stooge? useful idiot? Doug Henwood absolutely do not want the unwashed masses to understand how the money system actually works. They want you to believe that the rich have the resources we need to run our society, and that the citizenry must either humbly beg them for these necessary resources or fight a long and vicious battle to take those resources away from them.

Neither is true. The rich have nothing but money, social permission, created by the government. We absolutely should take away most (all?) of that social permission, not because we need it, but because fuck you, that's why; we do not want them to have it. If they want to hide their money, let them. Hidden money is out of circulation and useless. If they want to defend their money — and the government really should be careful and legal about how they take anyone's money — that's fine; the government can just freeze the money while the litigation drags on; again, frozen money is no money at all.

The rich may have something we do not want them to have, but they have nothing we need.

MMT Misconceptions part 3a (taxes)

Finally, Doug Henwood's essay, Modern Monetary Theory Isn’t Helping, gets to the crux of the biscuit, taxes and government revenue.

Misconception: Taxation transfers resources

MT’s lack of interest in the relationship between money and the real economy causes adherents to overlook the connection between taxing, spending, and the allocation of resources. We have [all sorts of bad things] because the public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones, with at least the potential for them to be spent on more humane pursuits.

Long sigh. This is a complicated and persistent misconception. It's complicated because economics is complicated; it's persistent because the illusion that taxes transfer resources serves the interests of the capitalist class.

Please bear with me as I draw an extended analogy.

Consider an ordinary automobile. One way (certainly not the only way) to think about a car is to divide it conceptually into the physical system, the user interface, and the control system. The physical system consists of the engine, which physically makes the car go, the tires, which physically turn the car, and the brake pads, which make the car slow down and stop. The user interface is what you, the driver, use to control the car: the gas pedal makes the car go, the steering wheel makes the car turn, and the brake pedal makes the car stop. Finally, the control system connects the user interface to the physical system. Pushing the gas pedal down (U) causes a cable to open the throttle in the carburetor, which sucks more gasoline and air into the cylinders, (CS) and the car goes faster.

This is more or less what MMT does (or at least how I read MMT): divide the economy the same way as above. The physical part, the real economy, comprises factories, workers, capital, natural resources, etc. The user interface is money our ordinary experience of money, receiving a paycheck, spending money to buy stuff, paying taxes, etc. The control system is the banking system, including the central bank and the Treasury, which connects our ordinary experience of money to the real economy.

There are a lot of other useful ways to divide the economy, and a lot of other economic topics worth studying; MMT scholars choose to focus mostly on the control system, i.e. the banking system. Moreover, they claim to have discovered (or advanced our understanding of) how the control system works; moreover, they claim the control system does not work the way capitalist economists tell us it works.

(These claims are either true or false. If they are true, they are true even if we don't like that they're true; if they're false, they are false even if we want them to be true. It is instructive that Henwood never analyzes whether or not MMT scholars' claims are true or false, only that they are undesirable, and MMT scholars are ugly and their mothers dress them funny. Of course, I think Henwood is fractally wrong.)

Back to the car analogy. Max Max has a turbocharger on his V8 Interceptor. He has a pull switch installed on the gear shift lever that engages the turbocharger. He pulls the switch and the car goes faster. We would justly consider someone misguided who objected, "Max can't just push a button and make the car magically go faster. Pushing on the gas pedal makes the car go faster." We would consider them willfully ignorant if, when we tried to explain, they retorted, "Don't confuse me with all that 'physics' and 'engineering' bullshit. I know how a car works, and you make it go faster by pushing the gas pedal. If we could just push a button and make the car go faster, then why can't we just put in a button that makes the car go 1,000 miles per hour? Checkmate atheists engineers!"

Henwood makes the same mistake by confusing taxes (user interface) for resource transfers (control system) and exhibits the same willful ignorance by dismissing MMT scholars nerdy wonks talking about boring and mathy topics like accounting and finance. Henwood already knows how the economy works. I mean, he's at least skimmed "Wage Labor and Capital"; what more do we need to know?

In the next installment, I'll dig more deeply into what economists teach undergraduate economics students about macroeconomics (I am an expert in this topic, or at least a professional, because I am paid to do just that) and how Henwood badly mangles even conventional macroeconomics; I will follow with the changes that MMT scholars (as I understand them) propose to conventional macro.

MMT Misconceptions part 2

Let's push on looking at the misconceptions Doug Henwood's essay, Modern Monetary Theory Isn’t Helping.

Note: For clarity, I've added the label "Misconception:" to the boldfaced titles.

Misconception: MMT is about American Exceptionalism

Another serious problem with MMT is its embeddedness in a rich-country perspective, and in particular American exceptionalism. . . . MMT’s unacknowledged dependence on the exorbitant privilege of the United States —Mitchell is about the only high-profile MMTer from abroad — is almost completely unaddressed by its proponents.

American economists study the American economy. Quelle surprise. Granted, the US is indeed an exceptional economy. So what? How much does MMT rely on American exceptionalism, which really is singular, rather than its monetary sovereignty, which is not universal but more broadly shared? As Henwood later mentions, other countries such as "Canada, Japan, and Britain, though to a lesser degree" have monetary sovereignty. Henwood does not, however, compare how MMT applies to those countries which do have monetary sovereignty but not the United States' singular privilege. Instead, he jumps right to Allende and Chavez:

But less privileged countries have to worry about foreign investors dumping their bonds and driving down the value of their currency, which would jack up interest rates and inflation. Salvador Allende’s government greatly increased spending and raised the incomes of the poorest in Chile in the early 1970s; that worked nicely for a while, but then inflation took off. Allende wasn’t operating from the MMT playbook, merely resorting to policies pursued by many progressive governments facing political opposition and resource constraints. But such experiments rarely end well, and similar problems would face a poor country trying to stimulate its way to prosperity today, as we see in Venezuela now.

Wait, what!? Am I reading Jacobin or The Economist? Such experiments rarely end well not because they are economically inept but because the United States sends the CIA or the Marines to put a stop to it.

Misconception: MMT should address International Trade and International Political Economy

Those countries need, for example, to import things priced in dollars, like oil, and the value of their currency has a direct effect on living standards that Americans are insulated from because we can print the currency in which that oil is priced. Brazil, in turn, has even less freedom; it needs harder currencies like dollars and euros to import commodities and advanced manufactured goods; and poorer countries like Bolivia or Ghana have even less. To buy essential imports, these countries often have to borrow in those hard currencies. To pay off the loans, they need to earn foreign currency through exports.

MMT has little helpful to say about that situation.

I will note that not only do MMT scholars say little about IPE, they say nothing whatsoever about the heartbreak of psoriasis. So what? MMT is a theory about domestic monetary and fiscal macroeconomics.

Misconception: Advocates present MMT as a socialist panacea

MMTers show a strange lack of interest in the specificity of capitalism — how production and distribution are organized, how demand for credit arises in the course of commerce, how people earn their living and under what conditions . . . Through the fantasy of effortless keystroke money, all those relations of necessity and power supposedly get wiped away.

Supposedly? Supposed by whom? I've never seen any MMT scholar say that MMT will wipe away capitalist economic relations.

I will grant Henwood that a socialist will not find a complete plan for socialism in MMT. Anyone who thinks MMT is a socialist theory is both dumb and not a legitimate MMT scholar. But Henwood hardly needs however many thousands of words to get there. Just call L. Randall Wray and ask him, Is MMT a socialist theory? To which I imagine Wray would reply, What, are you high or just stupid? MMT is about how to run a capitalist economy. Boom! I could have saved Jacobin however much money they paid Thomas Friedman Doug Henwood. (Sorry, I keep getting those two confused.)

That's enough singing for today, lads. More on the weekend.

MMT Misconceptions part 1

I will skip the pure bad faith propaganda in Doug Henwood's essay, Modern Monetary Theory Isn’t Helping: As the saying goes, "Never wrestle with a pig. You both get dirty and the pig likes it." However, Henwood reproduces many misconceptions about MMT (and basic economics). Whether he reproduces them out of ignorance or bad faith is irrelevant; my task here is to link correct the misconceptions.

Note: For clarity, I've added the label "Misconception:" to the boldfaced titles.

Misconception: "Cool[ing] things down" means "creat[ing] a recession".

Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes.

Strictly speaking, this statement is a misconception not about MMT but about basic economics.

I don't know what Henwood actually means by "cool things down"; it's not a precise economic term; Henwood is paraphrasing without a citation, so I can't look at what Wray actually said. It is certainly the case that raising taxes is neither synonymous with creating a recession nor do tax increases necessarily or even usually cause recessions. Tax increases are contractionary, but contractionary fiscal policy is recessionary only if long-run economic growth is near zero. In standard undergraduate macroeconomic theory, when actual output exceeds potential output, some people are working harder than they want to, and they demand more for their loss of leisure than they are producing. The economy will (and should) contract (the short-run rate of growth will at least slow) no matter what the government does; all raising taxes does is to change how the contraction takes place. Without taxes, the contraction will take place through an increase in the general price level; with taxes, the government just takes the excess money out of the economy.

(Of course, if someone doesn't use a word, and Henwood explicitly says that Wray "shies away" from using recession (because contraction is different from recession), basic honesty generally requires some evidence for the imputed usage. The evidence is definitely not to be found in basic macro.)

Misconception: Reserve accounting is irrelevant

Much of the MMT literature is an elaboration of the arithmetic of bank reserves . . . Reserve accounting is important if you’re a financial economist or a central banker, but it’s of limited relevance to anyone concerned with big-picture economic questions.

Wait, what? Central bankers are most definitely concerned with big-picture economic questions. Any intro macro textbook will tell you that reserve accounting is the foundation of orthodox monetary policy. In my principles class, I spend an entire 110 minute lecture on reserve accounting. And it's not that hard; mostly just arithmetic and a little simple algebra, but it does scare some people with deficient education.

More importantly, MMT scholars want to prove that money does not work in the way we think it works, so they have to talk at length about how it actually works. Perhaps they're not correct, but a blithe math-is-scary dismissal is not a critique.

Misconception: MMT should be a theory of everything

Absent from Kelton’s paper, Wray’s book, and much of the subsequent MMT literature, is any sense of what money means in the private economy, where workers labor and capitalists profit from their toil and compete with each other to maximize that profit, a complex network of social relations mediated by money.

Nor does MMT literature address the heartbreak of psoriasis. So what? MMT is not intended to be a theory of everything, to rethink how a capitalist economy works at a fundamental level. Why should it be? Marx already did most of that work.

Misconception: Fiscal policy is impossible

[Abba Lerner's] proposed doctrine of functional finance held that “government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.” In other words, if unemployment is rising, loosen policy (boost spending, cut taxes, lower interest rates), and if inflation is rising, tighten policy (the reverse). On first glance, this sounds completely reasonable. But on second, it’s a lot more complicated.

For one thing, it often takes time to understand what’s going on in the economy, and it takes even more time to change policy — and sometimes, like in the 1970s, unemployment and inflation are both rising, and it’s not obvious what policy should do in response. Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision.

MMTers extend this hubris about the precision and power of policymaking

A lot to unpack and explain here. Please bear with me. Note that I'm going to hold off talking about macro stabilization techniques, both mainstream and MMT, until later.

First, Henwood commits a subtle non sequitur fallacy. They're not completely unrelated, but there's a big gap between how we should measure or evaluate policy goals, and the specific techniques we use to achieve those goals. Saying that we should evaluate policy by its results rather than its soundness does not by itself entail that any specific policy measures, i.e., "if unemployment is rising, loosen policy, . . . if inflation is rising, tighten policy." Henwood's use of "[i]n other words," is absolutely dishonest, as if he were rephrasing Lerner instead of drawing a conclusion.

I'm not saying socialists should never talk about fiscal policy lags, but this trope is such a pro-austerity conservative laissez-faire bourgeois talking point that an honest socialist must handle it with full hazmat gear. Indeed, Henwood's use of hubris, plus the connection of functional finance to policy lags to hubris, is a direct invocation of bourgeois arguments against socialism: it is hubris to believe that the government could have any role in managing anything as complicated and subtle as a market economy. I'm a socialist, so that's not an argument that I want to get anywhere near my own lips.

Fiscal policy is indeed difficult, which is why principles of macro by itself (where I teach my students about fiscal policy lags) is not a sufficient qualification for holding the Fed chair. But thinking that a lot of smart well-educated people can do something merely difficult is hardly hubris.

Although taxes do work reasonably well as an "fine tuning" automatic stabilizer, literally no economist anywhere — including MMT scholars — thinks that using conventional fiscal policy (building bridges, airports, etc.) is an effective tool for fine tuning an economy for exactly the reason that Henwood lifts out of a dimly remembered or badly garbled sophomore economics class. So what? That's not the argument that anyone is having, and that has nothing to do with functional vs. sound finance.

I can tell a lot about a firm (or a household) just by looking at their books and not their real business. Specifically, I'm looking at things such as cash flow, net profit, and debt to income ratio. I know what those numbers should look like, and if they don't look the way they should, the firm is in real trouble.

Sound finance says that to some degree or another, we can tell how a government is doing just by looking at its books, or at least that we should pretend that ordinary accounting criteria that are important to households and firms are just as important for a government.

Functional finance says that we can tell very little, if anything at all, just by looking at the government's books; instead, we must look at the real economy, i.e. at GDP, inflation, employment, investment, etc. to determine how well the government is doing. If a firm is running up a lot of debt, that's troubling by itself. For a government, we don't know: is the debt causing inflation? If not, well, the government is all right for now. If a firm has positive cash flow, that's great. For a government, we don't know: is the positive cash flow causing unemployment? If so, the government is in trouble. Functional vs. sound finance is about what we should look at to determine what to do; neither offers a specific prescription on what to do about what we see.

There's a deeper economic philosophy in play. Sound finance is the position that the government should be (or should pretend to be) part of the market economy, subject to the same market discipline that capitalists apply (or pretend to apply) to themselves. Functional finance says that the government is not part of the market economy, it manages the market economy. Naturally, the capitalist class prefers sound finance.

(Yes, as a socialist, I'm against markets in general. The socialist point here is that I argue that positioning the government as not a part of but the manager of a market economy is a useful step towards socialism. And there is an argument that a capitalist government cannot effectively manage a capitalist economy not because that task is too difficult but because it is a capitalist government. Henwood does not make this argument.)

Misconception: Monetary policy is just like fiscal policy

To extend (in bold) the ellipses at the end of the last quotation:

MMTers extend this hubris about the precision and power of policymaking to the realm of interest rates . . .

Wait! Stop! Monetary policy, i.e. interest rates, is completely different from fiscal policy, and is subject to fewer and very different lags. Conventional macro already holds that the central bank can fine tune the economy.

Misconception: MMT holds that monetary policy can fine tune the economy

To finally complete (in bold) the ellipses above:

MMTers extend this hubris about the precision and power of policymaking to the realm of interest rates, which they think the central bank is completely in control of and should be kept as close to zero as possible.

Sigh. One of the points I learned to look for when I debated religion (and especially creationism) on the internet was when a writer contradicted him- or herself in the same paragraph. Henwood manages to contradict himself in a single sentence. If MMT economists want to keep interest rates near zero without qualification, then they do not want to use interest rates for fine tuning.

And indeed MMT scholars argue not that we should not but that we cannot fine tune the economy with interest rates. MMT scholars argue that businesses' expectations of profit determine most investment; interest rates by themselves do very little. Moreover, because people hold bonds for income, interest rates have the opposite effect on consumption than they do on investment.

Misconception: MMT economists do not understand interest rates

Although MMTers tend to talk casually of “the” interest rate, in fact there are many. Long-term government bonds, for example, are almost always going to carry higher rates than short-term ones, because so many more unpredictable things can happen before the bond reaches maturity. And either is going to yield less than a bank loan of similar maturity to an oil wildcatter or the corner bodega, because of the higher risk of default.

Thank you, Mr. Henwood, for explaining to a bunch of people with PhDs in economics what I teach my sophomores about interest rates. I'm sure they are most grateful for lesson. </snark>

Talking about the imaginary singular interest rate is endemic among economists in general, for a lot of boring technical reasons, sometimes just laziness. For one, risk- and maturity-adjusted interest rates should all be about the same, because that's how markets usually work. But because people are exceptionally bad at judging risk (not to mention uncertainty), markets don't always work the way they're supposed to.

When MMT economists talk about the interest rate, they usually talk explicitly about the Federal Funds rate, the rate at which banks loan each other reserves overnight, which is indeed singular and which the Federal Reserve can indeed completely control, and which does indeed influence other interest rates at least a bit. If any MMT economist has said that all interest rates should be near zero regardless of risk or maturity, I would like to see a citation, because that economist should be stripped of their PhD and forced to repeat their sophomore principles classes.

Misconception: MMT scholars don't understand inflation

MMTers are coy about [inflation] — they never say how much is too much, and they profess great confidence in their ability to control it.

Ok... How fast is too fast? It depends. On what? A lot of things; I can't put it in a soundbite for you. But let's proceed.

In a paper criticizing MMT, the left-Keynesian economist Thomas Palley says he’s heard a “leading” MMTer say inflation less than 40 percent is “costless.”

Objection! Hearsay! Sustained. Move on counselor.

<snip long discussion about hyperinflation> Weimar Germany may be an extreme case, but since it’s often brought up by critics of MMT — “won’t all that keystroking lead to inflation, like Argentina or Weimar?” — it’s one for which they need to have a good answer. Wray’s reluctance to face head-on the risks of printing money makes you wonder how confident he really is of his own theory.

Printing "too much" money is only the proximate cause of hyperinflation, in just the same sense that turning on the heat is only the proximate cause carbon monoxide poisoning. It's a bugaboo, moreover a bugaboo hysterically promoted by capitalist economists against Allende Chavez socialism. Hyperinflation is just not a risk in a country with an otherwise well-functioning government that can effectively collect taxes; if its government is dysfunctional, the country has worse problems than just hyperinflation.

MMT scholars talk how to control inflation all the time. It's really not that difficult. You suck money out of the banking system and the economy by selling bonds, or you (gasp! horror!) raise taxes.

But raising taxes is hard! No shit, Sherlock: economics is hard. Running a government is hard. People go to school for years just to start to learn how to do it.

(Maybe they should just go to journalism school and write dishonest hatchet jobs. Hell, it works for David Brooks and Thomas Friedman, maybe it'll work for Henwood; perhaps he'll go all James Burnham on us and join the AEI.)

But people hate taxes! Really? You don't say! Do they love recessions? Because that's how to control inflation without raising taxes.

Actually, people don't hate taxes, capitalists hate taxes, and they tell the people what to think. Henwood approves of taxes, and good on him, I do too, and so do MMT scholars.

Damn! This is getting long, and we're only about a third of the way through Henwood's mess. Let's take a break here and pick up where we left off in a day or so.

MMT and socialism

It's always depressing to read "socialist" polemics against Modern Monetary Theory, and Doug Henwood's essay, Modern Monetary Theory Isn’t Helping in "socialist" Jacobin magazine follows the trope: nothing but bad faith and a Gish gallup of ridiculous capitalist propaanda.

It's clear Henwood is arguing in bad faith. With suitable elisions, Hemwood more or less accurately presents a core concept of MMT:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” . . . Since there is a risk that too much government spending would spark inflation, the government might need to cool things down . . . by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

This seems like a straightforward presentation of an idea that is admitted as true by most economists, even if they don't really want the general public to know about. Let me add back the elisions in bold:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” You might be wondering where income earned on the job fits into all of this, but the world of production doesn’t play a large role in the theory.

But having tempted us into thinking that taxes were dispensable, Wray pulls a bait and switch. Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

I don't know what is more depressing, Henwood's shameless hatchet job, or how transparently he tries to manipulate his readers. Henwood seems to think that Jacobin readers are as gullible as Fox News viewers. I hope he's wrong.

It's not really useful to go into Henwood's article point by point; instead, I want to highlight a specific capitalist talking point Henwood reproduces, which implies that a popular government — i.e. a socialist government — cannot responsibly manage a fiat currency. The idea starts with the half-truth that MMT theorists think government creating money will magically cure all our problems. According to Henwood, MMT theorists claim, "A few computer keystrokes and everyone gets health insurance, student debt disappears, and we can save the climate too, without all that messy class conflict." The most obvious problem, of course, is inflation. MMT's answer is that taxation (fiscal policy), rather than central bank manipulation of the Federal Funds rate* (monetary policy), is the correct way to curb inflation. The question is, will taxes rather than interest rate manipulation work to control taxes?

*The rate banks charge each other to borrow reserves overnight.

On the one hand, Henwood appears to like taxes: "Taxation may not be full expropriation but it’s the next best thing in this fallen world. It is a form, however mild, of socialization — transforming private investment and consumption into public expenditures. [link original]" I concur, as do many notable MMT scholars. However, Henwood casually insults the "naïve belief in the curative powers of fiscal policy" (i.e. taxes). And Henwood claims the government is far too cumbersome to manage an economy with fiscal policy, "Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision." Henwood doesn't answer the question about who should fine-tune the economy. The central bank? The capitalist class? A socialist drum circle? I dunno.

The dead giveaway, however, is the considerable ink Henwood spends on the dreaded bugaboo of hyperinflation, invoking "[t]he extreme inflation of Weimar Germany in the 1920s." He also condemns the fiscal policies of many peripheral states, including Venezuela (!), Chile under Allende (!!), Venezuela, Turkey, and Greece. (Henwood has at least enough sophistication to talk about Greece before the euro.) Hyperinflation is one of the favorite monsters-under-the-bed unsophisticated capitalist propagandist love to invoke. Only the capitalist class can prevent the government from handing free stuff out to everyone. If the capitalist class does not impose the illusion of government fiscal discipline, a socialist government will eventually spend its way into hyperinflation and economic collapse.

Now very economist knows this illusion, this superstition, for what it is: the government does not have a real fiscal constraint. Paul Samuelson himself admits on camera (long before MMT) that the idea that taxes fund government is a superstition. A useful superstition, to be sure, but a superstition nonetheless.

An ordinary person such as myself has a fiscal constraint: I must obtain money through revenue (my paycheck) or borrowing (a bank loan) before I can spend it. Thus, I must persuade someone who already has the social permission to spend — my employer, my bank, or my friends — to give that permission to me before I can actually draw on the social product. The same is true for firms: they must persuade someone to buy their product (generating revenue), lend, or invest before they can spend money.

We like to pretend that the government is the same: it must obtain money by taxes (revenue) or by issuing bonds (borrowing) to obtain the money before it spends that money on public goods and services, and if the government cannot get the money, they cannot spend it. But this constraint is nothing more than pretense. The government can, if it chooses, spend money before it obtains it from others. For me, spending money I don't yet have is impossible; for a government, it might or might not be wise, but but it is possible.

Fiscal constraints differ from real constraints. If there are no cars available (real constraint), I can't get a car, no matter how much money I have. However, if I can't get money (fiscal constraint), I can't get a car, even if there are a thousand sitting on the lot. The trick is to get all these individual fiscal constraints to match up with the overall real constraints.

One point that MMT scholars make is that the present capitalist-managerialist system has already abandoned fiscal constraints in reality, but the system tries its best to bury this fact and make sure that deviations benefit the only capitalist class. One reason MMT scholars dig deep into the accounting is to try to uncover this buried truth. Again the capitalist story is clear: the government can deviate from its fiscal constraint for the benefit of the capitalist class without causing (too much) economic chaos, but do it for the people and bam! we're in Venezuela.

Abandoning even the pretense of a government fiscal constraint does make life more difficult. If we pretend that government has a fiscal constraint, it's easy to put an upper bound on how much the government should spend: only as much as it can convince the citizens to cough up in taxes or are willing to lend. If we drop the pretense, then the upper bound is much more difficult to determine. If we abandon the imaginary fiscal constraint, we have look at what the spending does rather than just ensuring expenditure does not exceed revenue. We want to spend — and spend appropriately — until we have full employment and are at potential output. One way of determining whether we're at full employment is by looking at inflation. If the price level starts rising, either stop spending or increase taxes. Henwood has a point: the above task is much easier said than done. Then again, so is the task of transforming a capitalist-managerialist country such as the United States to socialism.

Socialists face two main dangers. The first danger is that it might not be possible to run a socialist economy with anywhere near the level of comfort and convenience afforded by a capitalist economy. This danger is mitigated by the fact that capitalism-managerialism is lowering standards of living for all but the rich at an accelerating pace. The second danger is that capitalists, who will certainly fight back, will defeat socialism. We cannot avoid these dangers except to abandon the struggle. Socialism is not a Sure Thing: if we fight, we have to accept the possibility that we will fail. We can either admit defeat before we start, or bit the bullet and proceed despite the dangers. Fundamentally if someone believes a government not controlled by the capitalist class cannot effectively manage the economy, then they have no business calling themselves a socialist.

It would be nice to have an economy that doesn't use money, where we had so much that no reasonable person would want more than social product could afford them, where everyone contributed to the social product not to have more of the social product but out of a spirit of self-actualization, altruism, and civic duty. I don't think such an economy is utopian, or at least not impossibly utopian. But we're also not there today, and we won't get there tomorrow. We have a money-mediated market economy today, so we have to start pushing that economy towards our utopian ideal. And MMT is a good place to start pushing.

The objections against MMT are important, but not dispositive. MMT economists (Kelton, Wray, et al.) are not socialists, and MMT is thoroughly left-managerialist, not socialist. Just putting Kelton in charge of the Fed and Wray in charge of the Treasury will not usher in a socialist utopia. So what? Either MMT ideas are true or false; socialists should use the true ideas, regardless of the political orientation of their proponents. MMT scholars make errors, some grievous, and disagree on important points. So what? No one should propose making prophets of Kelton, Wray, etc. following to the letter the dictates of a nonexistent MMT scripture. We should not treat anyone (not even Marx!) as a transcendent authority; we should subject all ideas to ruthless critical scrutiny, not calumny. Like everything else, some of MMT is bullshit, but much of MMT really is true, admitted even by mainstream economists.

MMT is better-developed than Henwood would have us believe: MMT even has its own textbook. If MMT scholars are sometimes vague, well, the details really are complicated. How high should taxes be? How much inflation is acceptable? Where should we spend our money? The answer is the same as any economist would give: it depends. How fast should you go? It depends: are you in a car? a plane? A rocket ship to the Moon? Are you driving a Mercedes on the autobahn or a dynamite truck on an icy mountain road? The details are very different, but the framework, physics, is the same. MMT scholars are first and foremost proposing a framework for answering these questions.

The United States has no reason to worry much about hyperinflation. Wiemar Germany, Chile, Venezuela, Turkey, even Zimbabwe, are very different from use, and facile comparisons have no value. We do have the real capacity to make everything we want in the United States. We can and should worry about countries on the periphery, countries without our economic, social, and military privilege, but that's a different issue, and one we cannot even begin to address without first further advancing the cause of socialism.

The above notwithstanding, MMT gives us important weapons in the fight against capitalism. The first is that we do not need the money of the rich. We should definitely take their money, because they're the enemy, and money is their weapon, but we don't need it. As long as we hold on to the superstition that we need their money to fund socialism, we give the rich leverage: we must appease them, at least to some degree, to get their money. Why give that power away? Don't give the rich the power to hoard their money and crash the economy; instead, create our money to spend on what we need while we're clawing their money away. It's a subtle distinction, but one that is crucial to advancement of socialism.

The other big advantage of MMT is the job guarantee. Sure, a job guarantee (JG) could be implemented poorly, or the capitalist class could force it to be implemented poorly, but it can also be implemented well. The JG is straightforward, has theoretical and empirical support, and can act as a powerful automatic macroeconomic stabilizer. As Henwood admits, it begins to erode the most important tool to maintain capitalist power, the threat of the sack. The JG is not perfect, it does not solve every or even most of the problems facing the working class. But in this case, the perfect is the enemy of the good. The JG is not the end of the journey, but a step in the right direction.

Economic analysis

[T]o the economics profession mathematical analysis of stylized models is taken seriously exactly so long as the conclusions fit the prejudices of economists. Thus when an economist says "Mathematical analysis which you wouldn't understand of my model shows that X is a bad policy" you should hear "I don't like X." — Robert Waldmann

Old-fashioned economic religion

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times, once it is debunked, takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency, and one of the functions of old-fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, in every short period of time. — Paul Samuelson

John Maynard Keynes: Life, Ideas, Legacy, dir. Mark Blaug, 1988, Film.

Video clip here

Heterodox economics is heterodox

Is the British Labour Party's Fiscal Credibility Rule [pdf] (FCR) neoliberal? I dunno: what's a "neoliberal"?

The FCR might or might not be politically advantageous, but I'm not a politician or political advisor — nor am I a member of the British Labour party — so I have nothing to say about the politics. I do, however, have something to say as an economist: the FCR isn't all bad — it's better than a poke in the eye with a sharp stick austerity — but it doesn't seem very good.

Simon Wren-Lewis put up an unconvincing defense of the FCR against MMT critics of the rule.

Wren-Lewis first undermines his credibility by not linking to the criticism he's rebutting. Presumably, he's referring to Bill Mitchell's extensive criticism of the FCR. Briefly, Mitchell asserts that the FCR "reinforces the narrative that deficits and public debt are in some way ‘bad’", and this narrative "will not turn out well."

The first part is undoubtedly true. The FCR states, "Labour will close the deficit on day-to-day spending over five years. Labour make sure government debt is falling at the end of five years. Labour will borrow only to invest. [emphasis added]" The substantive question, then is how this narrative will turn out.

Instead, Wren-Lewis's chief complaint is that MMT scholars have a gasp! horror! political agenda: "MMT is also a political movement of the left." The political agendas of many economists are irrelevant: they ask questions about politically-independent reality. But macroeconomics, at least the kind of macroeconomics that seeks to inform public policy, must have a political agenda. Value judgements are bound up in the very fabric of macro. We talk about employment and unemployment, for example, precisely because we value employment. According to Wren-Lewis, MMT scholars "are therefore naturally indignant that a Corbyn led government has adopted a rule that is derived from mainstream economics rather than adopting MMT." Yes, and? MMT scholars believe that the rule itself — a rule that derives from mainstream economics — is bad, and that a policy derived from MMT would be better. That's the whole point of disagreeing with mainstream economics.

Wren-Lewis offers only the most tepid defense of the FCR:

Why the need for a fiscal rule at all? . . . The answer is provided by something called deficit bias. . . . In the 30 years before this crisis, the ratio of OECD government debt to GDP almost doubled for no justifiable reason.

Deficit bias happens because politicians like cutting taxes or raising spending through borrowing, because it puts off any obvious economic pain. . . . But if deficit bias does substantially raise the debt to GDP ratio, as it did before the GFC, then more debt requires paying more interest which in turn requires higher taxes or lower spending. Deficit bias does not avoid the downside of cutting taxes or increasing spending, it just puts it off until a later date.

But Wren-Lewis simply begs the question here. MMT scholars do not argue that a fiscal rule is not the correct way to limit deficit spending. They argue that deficit spending is the generally correct way to implement government policy. (They do not argue that deficit spending is good by definition: any tool can be used poorly. But the problem is not in the tool itself but the application.)

I do not see "neoliberal" as an insult: Brad DeLong classifies himself as a (left-)neoliberal, I would classify Keynes as a left-neoliberal, and I would classify Wren-Lewis as a left-neoliberal. Neoliberalism is just an philosophy in political economy that holds that private market solutions are almost always preferable to government policy, i.e. provisioning public goods as well as using non-market activity to achieve efficient social allocation of resources. And government policy is inferior precisely because the government is not budget constrained: if the government is not actually budget constrained, it must pretend it has a budget constraint.

In contrast to right-neoliberals, left-neoliberals usually agree that government must rescue markets when they face the danger of collapse. (Most left-neoliberals also advocate greater prudential economic regulation, in agreement with MMT, but that's not the issue here.)

In this sense, the FCR is clearly neoliberal. The message is clear: When not at the zero lower bound, government should sharply restrict its economic impact, especially use of deficits. The FCR treats deficits like dynamiting houses during an out-of-control fire, a desperate measure justified only when used to avert total catastrophe.

MMT scholars and I myself hold almost the opposite opinion: Deficits by themselves are just no big deal. In just the same sense, a tyrant can make any number of horribly oppressive laws, but the idea of law itself is not the problem. The government must act economically, and it must act beyond just the necessity to fix the inevitable periodic catastrophic failures of the market system. And when it is expedient to print money to do so, then print the damn money without worrying about the effect on the capitalist class.

Additionally, the FCR calls for closing the deficit and lowering public debt over five years. MMT is clear on the implications of this policy: lowering net private wealth.* Again, if net private wealth decreases, I would be shocked! shocked, I say! to find that the decline came not from rentiers' but workers' wealth.

*Alternatively, increasing net private wealth with reduced public debt would require a huge current account surplus (increased net exports), which is probably worse.

So is the FCR neoliberal? I dunno. I don't really care. Is it bad macro? By orthodox macro, it's fine; MMT macro, it's dumb. It would be nice if Wren-Lewis and other economists, all of whom are way smarter than me, would actually address the issues instead of slinging around insults and butthurt, but I'm not holding my breath.

The exploitation of labor

Siggy at A Trivial Knot has started a discussion about economics, starting with labor exploitation. Hop on over and join the conversation. Siggy is a seriously intelligent person (waaaay smarter than I am) and a good moderator.

MMT, money, and opportunity costs

Often, if we want one thing, there is some other thing we can't have. Economists call this an opportunity cost. We study the things we must choose between, and how people make those choices.

I am an economist. Opportunity costs are my faith, my creed, my dogma, my mantra. I believe. TANSTAAFL!

Money is a socially constructed institution (or collection of institutions) to quantify, manage, and distribute real opportunity costs. But money is not by itself an opportunity cost; to equate money and opportunity costs is to mistake the map for the territory.

I have been reading the "surface" of Modern Monetary Theory — popularizations, blog posts, etc. — for almost all of my career as an economist-in-training. And what I like about MMT is that these theorists make clear the institutional, socially constructed role of money as a mapping of opportunity costs.

Every popularization of MMT that I have read promotes the same message, a message that disturbs my economist's faith not even a little: production is constrained by real resources, i.e. natural resources and human labor; production is not constrained by money by itself.

MMT advocates do say there are things we can have cheap, and in this, yes, they say nothing new, nothing that is not part of bog standard orthodox economics. If there are idle resources, unused factories, unemployed labor, we can put those resources to productive use give up little more than excessive unwanted leisure.

I have never heard any MMT theorist ever say that we can have anything "for free". Never. Not once. Maybe I'm wrong. I will dig into the literature and find out.

But for now, the onus of any critic of MMT, at least if they're trying to convince me personally, is to convince me that MMT advocates really do say that we can have anything for free. As yet, none have done so.

It is a much different thing to say that money by itself should not constrain a society, especially a government. Technically, orthodox economists tepidly agree, but they seem to inexorably conflate money and real opportunity costs. MMT advocates are the only people who absolutely insist on conceptually separating money and opportunity costs. Even if there is nothing else new about MMT, even if all of their economic theories fall short of figuring out precisely how to quantify, and distribute real opportunity costs, MMT is still worthwhile because the orthodox view of money has failed us. We must rethink money.

The neoliberal project to make everything subject to money and markets, even were it undertaken in good faith, has decisively failed. Whatever good it has delivered has come at the cost of economic stagnation, intolerable inequality, nascent fascism, and ecological catastrophe.

Even if MMT has found nothing new, they are at least looking. And we must look, because we cannot keep what we have now.

What, me worry?

Should we worry about "the deficit"? Well, what do you mean by "worry"?

Let me ask a similar question: should you worry about the natural gas forced-air heater in your home?

Could the heater burn down your house or kill everyone inside from carbon monoxide poisoning? Well, yeah? I guess? It does happen, but it happens only when you have a pretty serious malfunction in the heater.

If you run the heater non-stop and keep your house at 90°F (32°C), you're going to run up a hell of a gas bill. Perhaps not the best idea, but that's not a reason to worry about your bill if you maintain a more reasonable temperature.

When I hear scholars of Monetary Monetary Theory* argue that "we shouldn't worry about the deficit," I read their arguments in the same sense that we shouldn't worry that the heater might kill us all. I mean, yeah, we should kinda worry, we should make sure our monetary institutions aren't seriously defective. But they're not seriously defective, at least not in the United States. Most importantly, we have effective tax collection institutions: the IRS, state and local governments, etc. They're perhaps not as efficient as we might like, but they're a long way from the dysfunctional institutions in Austria or Zimbabwe. As long as we can credibly collect taxes, deficits won't kill us all.

*I have not studied MMT academically. Any errors here are my own.

Similarly, yes, I suppose we miiiiight run the deficit so high that it would impose substantial economic hardship. But I read MMT scholars as saying that the present deficit is way too low; it seems misplaced to argue by analogy that it would be too expensive to heat the house to 90°F when it's snowing outside and the temperature inside is in the low 50s and dropping fast.

There may be some legitimate bad faith in mainstream economists' polemics against MMT, that MMT ignores real dangers of deficit spending. However, I think a big part of what's going on is that economists tend to internalize blindness to a fundamental political problem: that the capitalist ruling class will destroy the economy rather than give up power. That's the lesson from Venezuela: the capitalist ruling class — theirs and ours — destroyed the economy rather than let poor children have milk. Chavez's failure was not what what he tried, it was that he failed — perhaps from his own hubris or incompetence, or because success was impossible — to defend Venezuela from the capitalists.

Who's going to pay for it?

We want nice things, right? Medicaid* for all, green energy and transportation systems, "free" college tuition, etc.

*I mean Medicaid for poor people, not Medicare for old people. I've been on Medicaid, and it's fucking awesome, at least in my home state.

But, of course, we have to pay for the nice things, n'est ce pas?

We run into a conceptual problem, though, because paying for things is really two distinct but related ideas.

The first idea is what economists call opportunity cost: if we pick one thing, there's something else we can't have. Everything takes work, and there are only so many people, who can work only so many hours. If we work to make one thing we can't make other things. If we want to train more doctors, we have to make fewer toasters; more solar power plants means fewer couches.

As far as I know, there isn't a single economist anywhere who says that we can have as much stuff as we want. Many, myself included, say we could have more and better stuff than we have now, but literally zero say there is no limit on the stuff we can have.

The other idea is what economists call a budget constraint: if someone wants to get something, they have to get the actual money together to buy it. If a person spends money on lattes, that's less money they have to spend on yoga lessons. If someone wants to buy a house, they have to convince a bank (or their parents) to lend or give them the money.

If we want Medicaid for all, we have to give actual US dollars to doctors. We might have to train more doctors, which means giving actual US dollars to medical schools and their professors. If we want to build solar power plants, we have to give actual US dollars to the workers who make and install solar panels and hook them up to the grid.

Opportunity costs and budget constraints are related. Budgets give traction to opportunity costs; they make opportunity costs immediate and direct. Budgets also distribute opportunity costs: whoever actually coughs up the cash is the one who incurs the opportunity cost.

For most ordinary stuff, private goods, stuff that individuals buy and consume themselves, the mapping of budgets to opportunity costs works reasonably well (not counting structural income and wealth inequality, which is a topic for another day); for public goods, which benefit everyone, not so much. If we spend real labor to keep the air and water clean, we lose whatever else that labor could have produced. But who gives up what? Should we insist that poor families give up some of their food while rich families have to give up their sixth vacation home?

Even for some private goods, there are problems mapping money budgets directly to opportunity costs It's one thing to say that if you can't afford a Ferrari, well, do without. It's quite another thing, at least in my mind, to demand that if a person can't afford the money to see a doctor, they should just do without.

Now, gentle reader, you might say, well, yes: If you can't afford to see a doctor, do without; if you die, too bad. If you can't afford clean air and clean water, breathe the smog and drink the sewage. I mean, if you feel that way, fuck you, but I'm not talking to you here.

I'm talking to the people who agree that it would be a good thing — the inevitable overhead included — to have Medicaid for all, a Green New Deal, free college tuition, etc. but worry, How are we ever to pay for these?

If you think that Medicaid for all would be good to have, then you're saying that having it is better than having the next best thing we would have had. The social benefit is greater than the social opportunity cost. And that's the only decision we really need to make. Is it worth it? Yes? Then find a way to do it.

I'm indebted for the following analysis to the scholars and analysts of Modern Monetary Theory. I have not studied MMT academically; any errors following are my own.

So how do we pay for it? The government creates the money. Boom. Paid for. Done. Congress authorizes the money and the Treasury Department starts writing checks. The Federal Reserve will honor the checks; if they don't, Congress can amend the Federal Reserve Act and make them do so.

We don't need to tax anyone or borrow from anyone to get the money. I think it would be advantageous to tax the rich, because fuck those guys, but we don't need to tax them or anyone. It might be advantageous to "borrow" from people, i.e. sell them government bonds, but we don't need to borrow anyone's money.

This solution might cause other problems (which I discuss below), all but the most trivial solutions do, but the first problem is easy to solve. It looks "too easy" only because we've been trained to not understand how money works.

There are two possible economic problems: inflation and interest rates.

If the government dumps a bunch of money in the economy for any reason, we should worry about inflation, i.e. a general rise in prices. However, inflation is not a big mystery. Inflation might not be a problem at all if new government money and the associated increase in bank lending creates enough new goods and services to absorb the additional money. If we create the money wisely, we can improve economic efficiency or put idle labor to productive work. Even if increased output doesn't absorb all the new money, it will definitely mitigate inflation.

Inflation by itself distributes the opportunity costs: inflation is really just a tax. If there's a general rise in price levels, people will reduce consumption: they might have to pay more for groceries and gasoline in return for getting, for example, universal access to health care or clean air and water. If we don't expect the government to perpetually flood new money into the economy, the irritating* inflationary spiral of the 1970s shouldn't repeat itself.

*The inflation of the 1970s was just irritating. The "cure" was economically devastating.

If we don't like how inflation distributes opportunity costs, we can increase taxes, which directly adjust people's budgets to impose opportunity costs. We would almost certainly do so for Medicaid for All, but we would just be exchanging premiums for less efficient private insurance for taxes for more efficient single-payer or "socialized" medicine.

The other more technical problem is interest rates. Dumping money into the economy lowers interest rates because of the increase in the money supply. If we don't want all the money swamping bank reserves, we can drain some of the money back by selling the banks government bonds (or just paying interest on reserves).

The technical economic problems of the government spending large amounts of new money are actually fairly well understood. Anything can be done poorly, so we would have to go about any large government spending with professionalism and care. But we would by no means be sailing into uncharted waters.

The political problems, however, are quite severe, perhaps intractable. But more on this later.

Money in Star Trek

Rick Webb constructs money in Star Trek. Not "Federation credits", which can be explained simply as a plot device, but honest-to-god money.

Although Webb posits that there's more than enough for everyone, he believes the Federation carefully accounts for every citizen's consumption.

The amount of welfare benefits available to all citizens is in excess of the needs of the citizens. Therefore, money is irrelevant to the lives of the citizenry, whether it exists or not. Resources are still accounted for and allocated in some manner, presumably by the amount of energy required to produce them (say Joules). And they are indeed credited to and debited from each citizen’s “account.” However, the average citizen doesn’t even notice it, though the government does, and again, it is not measured in currency units — definitely not Federation Credits. . . . This massive accounting is done by the Federation government in the background.

But why would the Federation do such a thing? It makes zero sense to account for something that's not scarce. We account for scarce things, like the social product of others, because it's important to use every little bit wisely. But Webb assumes that there are excess welfare benefits: under ordinary circumstances everyone can use as much energy (or whatever) as they want. So why account for it in detail.

Webb continues,

So, behind the scenes there is a massive internal accounting and calculation going on — the economics still happen. They just aren’t based on a currency unit, and people don’t acquire things based upon a currency value. People just acquire things from replicators, from restaurants such as Sisko’s or coffee shops like Cosimo’s, or, presumably, get larger things from dealerships or (more likely) factories. This could still be called “buying,” as a throwback.

This activity is buying. And if you keep accounts, your unit of account is currency by definition, even if that unit represents a physical quantity. Webb sees the contradiction, but doesn't resolve it:

It is tempting to argue here that the massive accounting system uses a unit called the Federation Credit, but i don’t believe that’s the case. If it were, the credit would be too much like money because a) accounting is done in it, b) it is issued by a governing body (like a fiat currency) and c) it is fungible, i.e. you can already buy things with it and if you could buy things with it AND a and b were true, it would pretty much be a currency. This would fly in the face of Roddenberry’s absolute diktat that the Federation has no currency.

It doesn't matter whether we call it Federation Credits, if we're accounting in it, it's money. Even if the money in some sense represents energy, it's still money. Accounting is done in it. It's a fiat unit issued by the government, i.e. each citizen's welfare benefit. Citizens can "buy" things with it: when they use energy, Webb assumes their account is drawn down. Furthermore, Webb assumes that this money is an incentive, that people will do "menial jobs that cannot be done in an automated manner ... [because] there is some small, incremental increase in your hypothetical maximum consumption, thus appealing to the subconscious in some primal way." This is money. Currency. Moolah. Cash.

Whatever we call it, Webb posits something that works exactly like money in a market economy, except for one crucial feature: Webb's money does not ration consumption. Webb thinks the Federation is doing all the work of managing a currency for literally nothing but some sort of subconscious appeal. It makes absolutely no sense. Just accounting for everything doesn't mean the "economics still happen." For the economics to actually happen, there has to be people optimizing the use of scarce resources. The citizens of even a proto-post scarcity society do not, under ordinary circumstances, optimize the use of scarce resources, so there's no economics.

Central planning in Star Trek

In my previous post, I talked about how Rick Webb, in his essay, The Economics of Star Trek: The Proto-Post Scarcity Economy, doesn't understand market economics. In addition, Webb also doesn't understand central planning.

Webb believes that the presence of individual choice decisively disproves central planning. He concludes, "The Federation is clearly not a centrally planned economy"* presumably because "[i]ndividual freedom of choice is very obvious." Webb claims to know that individuals have freedom of choice because "[e]veryone chooses their careers." Well, everyone, that is, who has made it in the glamorous and dangerous world of interstellar exploration. Gene Roddenberry et al. are not going to show us all the people who wanted to be starship captains but didn't get into Starfleet Academy.

*Italics omitted

(One hilarious irony is that in Star Trek, like every other military, even in the most fanatical market economy, the United States, Starfleet is most probably a centrally-planned organization. As far as I know, no one has managed a military organization with market economics: the 1st Infantry Division is not a profit-maximizing economic actor. If Webb can see a market economy in a military, he can see a market in anything.)

We cannot conclude that the Federation lacks elements of central planning. Not just because the Federation is a fictional society and has no underlying economic organization at all, but also because we don't know the the actual contingent problems a proto-post scarcity society would have to solve, and we don't know the historical context, i.e. the existing political and economic power relations, they have to solve them under. Even if we were to assume the present-day United States leads the way to a proto-post scarcity society, we cannot reliably project more than a some few tens of years; we definitely cannot predict what would happen three centuries from now.

Still, it's important to be more definite about what we mean by "central planning". There is at least a grain of truth underneath Webb's idea. It's logically impossible to run a market economy without some households making some choices, and it is logically possible to run a centrally planned economy with households having no choices at all. But just because it's logically possible doesn't mean it's necessary or even desirable to run a centrally planned economy exclusively by pointing guns at people's heads and telling them what to do.

How much economic choice people have is dependent first on the wealth of a society. Until the middle of the 20th century, the vast majority of people in the United States were farmers. A person could choose their occupation, so long as almost all of them chose to be farmers. And if we look at the beginnings of our capitalist market economy, most of these farmers had to be rather violently pushed into selling their labor on the market (see, e.g., The Invention of Capitalism by Michael Perelman.) Not having a lot of choices doesn't mean we're not in a market economy. Similarly with the Soviet Union and mid-20th century China. Both were extremely poor societies — immediately after the revolution, Russia was running its entire productive capacity and railway transportation on firewood — so there were just not a lot of choices to be had, regardless of economic organization.

On the other side, in a very rich society, at least some people will have a lot of choices, regardless of economic organization. And rich or poor, people in high status and high demand jobs will be those who want those jobs. Regardless of organization, it's pointless and stupid to force a person to be a doctor if there are 10 other people, just as intelligent and hard-working who want to be doctors. We really can't tell the form of economic organization just by looking at a few people in a high status jobs.

Just as Webb doesn't understand market economics, he doesn't understand central planning. His ignorance is perhaps more understandable: there have been only two societies — the Soviet Union until 1980 and the People's Republic of China until the 1970s — that have engaged in central planning in a big way, and both of them were not only poor, but fighting cold and proxy wars against the United States, so information about their economies is hard to come by, and propaganda about our "enemies" easy to obtain. Still, a little common sense can go a long way.

There are two basic types of central planning: command economics and state ownership. A society can combine these two types and can combine them with a market economy. Central planning and markets are not logically exclusive.

The first type of central planning is a command economy. In a command economy, the government just tells people what to produce and where to distribute it. The precise form of a command economy depends on the specific technology of production and economic problems to be solved. In a very poor mostly subsistence economy, the government will decide they need more tractors, round up a bunch of farmers, tell them to build and operate more tractor factories, and give the tractors to those who are still farmers. If Ivan or Chen doesn't want to leave his farm and build tractors, well, too bad: do it or go to jail. (Note that most modern "market" economies kicked off industrialization just as coercively. They simply dispossessed a bunch of farmers or expropriated the commons necessary for their subsistence viability, and said, "Hey, if y'all want to get money for food, come build and work at this factory over here." Sure, they had a choice: work or starve.) In a richer country, the commanders have a wider range of options, and their actions will depend on the actual problems to be solved.

A country usually employs a mostly command economy when it is fighting a "big" war. i.e. a war that requires the country to employ almost all of its surplus to fight the war. Every country, Allies and Axis, the capitalist United States and the communist Soviet Union, ran the Second Imperialist War as a command economy. This type of command economy works directly at the firm level: the central planners look at the existing productive capacity of firms, and tell each firm, "You produce this many tanks, you produce this many planes, you produce this many bullets, bombs, and shells, etc." There's no point in the central planners telling each individual where to work: each person works at one of the local factories, or they starve or go to jail. Even though there's usually a severe labor shortage in wartime, workers do not engage in market competition for wages. They take the pay and/or rations set by the government. This kind of economic organization appears very desirable. As I note above, every country — capitalist and communist — in a "big" war has employed command economics to a significant degree.

Modern corporations and military organizations have an internal command economy. Although corporations compete with each other in a market economy, internally, almost every corporation in every country is a centrally planned command economy. The employees do what the central planners, i.e. the board of directors and the senior management, tells them to do, and they use the resources the central planners give them to do it. Again, a corporation that tries to structure its internal organization along market lines risks failing as spectacularly as Sears. There are employee- and employee/customer-owned corporations, but that just means the employees (and customers) choose the commanders: these corporations are still internally centrally planned command economies.

The second form of central planning is one where the state owns and operates firms and/or controls a substantial amount of financial capital. One example is Norway, with both state ownership of significant firms and a large sovereign wealth fund.