Friday, December 23, 2011

John Carney Sips a Bit of MMT Kool Aid

CNBC's John Carney is out with a piece that examines MMT and seems conclude that he likes what he sees. John writes:
The past few years have taught us a lot about the effects and operations of monetary policy in the United States.

The Federal government responded to the economic downturn by spending enormous amounts and Federal Reserve responded to the financial crisis with an enormous expansion of its balance sheet — what the proles call "printing money" — and both occurred without any attendant inflation or giant soaring of interest rates.

The school of economics that best explains this phenomenon is called "Modern Monetary Theory" or MMT. The MMT school is made up of scholars, businessmen and online advocates who have a deep understanding of the operations of the actual operational aspects of our monetary system.

They argue, quite persuasively, that our monetary system is built in such a way that our government is never revenue constrained, which is to say it can spend as much as it likes, because the government creates our money. The real constraint on government spending is price inflation, which occurs when government and private spending outpace economic output.

I was first attracted to MMT because of the focus on monetary operations. I really enjoy figuring outMany of the MMT people have studied this stuff in detail.
John! John!!!

"The nitty-gritty details of how things like swap lines, Treasury auctions, and payment of claims on the Treasury occur and reading detailed papers on the daily meetings of the Treasury and the Fed estimating what Federal spending will amount to" are not the exclusive domain of the MMTers, any damn Fed watcher worth his salt will follow this stuff. Most with alternative interpretations to the way the MMTers read the data and statements, so please don't give the MMTers a gold star for just reading material that many others do.

You also state that:
They [MMTers] argue, quite persuasively, that our monetary system is built in such a way that our government is never revenue constrained, which is to say it can spend as much as it likes, because the government creates our money. The real constraint on government spending is price inflation, which occurs when government and private spending outpace economic output
This is not an MMT view it is an Austrian school view. Here is Austrian economist Murray Rothbard on the matter:
Throughout history, governments have been chronically short of revenue. The reason should be clear: unlike you and me, governments do not produce useful goods and services that they can sell on the market; governments, rather than producing and selling services, live parasitically off the market and off society. Unlike every other person and institution in society, government obtains its revenue from coercion, from taxation...If taxation is permanently short of the style of expenditures desired by the State, how can it make up the difference? By getting control of the money supply, or, to put it bluntly, by counterfeiting....[We must stop the central banks] To save our economy from destruction and from the eventual holocaust of runaway inflation, we the people must take the money-supply function back from the government.
John, what really separates the MMTers from the Austrian school, and others, is their view that the U.S. debt can be paid off with newly created "U.S. notes" and that this will not be inflationary. Further, they want to replace current Federal Reserve notes with the newly created "U.S. notes". They some how see all this money printing as non-inflationary!

This is one dangerous view.

John, you go on:
There's a lot more to MMT than its view of monetary operations and government funding, however. They believe the government should guarantee jobs for everyone, that the financial system tends toward crisis and corruption, that capitalist economies are not self-regulating, and that fiscal policy should be measured by its effect on the economy not on whether budgets are balanced. Some of this is fine, other parts I regard as distractions (such as the jobs guarantee).
John, there is nothing right about these views. The financial system doesn't tend toward crisis. An economy where money is controlled by a central banks, such as the Federal Reserve, is prone to crisis, but takeaway central bank money manipulation and the crises disappear. When MMTers say that "capitalist economies are not self-regulating" that sounds to me like they are calling for more government regulatory agencies, which is how power centers are developed and can be used to corrupt.

And as far as "fiscal policy should be measured by its effect on the economy," the first question that comes to mind is does this mean this supersedes private property that as long as something is good for the economy, it can be taxed away from an individual? Further, just how do you measure what is good for an economy? Value is subjective. What may be viewed as good by one person, may be viewed as a total annoyance by another. Thus, it is extremely dangerous to go around talking about what is "good for the economy, especially when you are talking fiscal policy.

I think you get some of this, John, when you write:
But my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending. When they talk about spending it is almost always in terms of abstract aggregates, which is weird for a school of economics so focused on the specifics of monetary operations. What this means is that they miss the distortions of crony capitalism the accompanies so much government spending.
But, it goes beyond crony capitalism. Even if we assume government was run by a bunch of saints, there is no way for them to determine a collective good for the economy, since values are subjective and change from person to person.

That's why when you write:
So my recommendation to the MMTers is that they stop talking about spending in the abstract. Start talking about spending that leads to crony capitalism and spending that does not. Get on the side of the anti-crony, Tea Party brigades. There's a natural friendship to be made.
I must disagree. Battling cronyism, although cronyism is real, won't solve the problem of having choices made at a central power level, rather than by individuals. You just can't eliminate the fact that subjective values, eliminate the possibility of choices being made at a central authority that will be "good for all.".

In other words, from start to finish, there is nothing positive or correct about the MMT policies or thinking.

22 comments:

  1. I'll throw in my 2 cents on the "capitalist economies are not self-regulating" bit.

    I contend that the harshest and most stringent regulator is the market. The market doesn't care who you are, what you think, what you say, etc. You either satisfy consumers, or you do not. And if you do not, then your capital is diminished via losses, and you must move on. No taxpayer bailouts!

    If one wants to scare the pants off the crony capitalists, let the market be free. They wouldn't know what to do with themselves. They wouldn't be able to block new competitors with licensing laws & burdensome regulations. They wouldn't be able to gain special privileges from their pet politicians.

    If the market is not the regulator, then distortion in efficiently allocating resources must exist as a result.

    We may be used to it because that's all we know, but we miss out on what could have been had the market flushed out the politically connected.

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  2. Mike Norman (of the “The number one MMT site on the web!”) explains how Social Security can never go bust:

    http://www.youtube.com/watch?v=UjNUU0D1kTc

    This was the guy who laughed at Peter Schiff back in 2006:

    http://www.youtube.com/watch?v=1G0tfb8ZefA

    The big leftist and MMT theme these days is getting money printing out of the hands of the banksters and directly into the hands of Hillary, Bill and Obama.

    100 years ago, Mises described this “state theory of money” as “a school that has inscribed the device of etatism on its banner, and to which all economic problems appear as questions of administration”.

    http://mises.org/books/Theory_Money_Credit/AppendixA.aspx

    Like Lenin.

    All that these MMTers know is the minutiae of the central banking regime. They nothing of history, the constitution, or economics. The concepts of Cantillon Effects or economic calculation are unknown to them. As Mises pointed out a century ago, their “school” is acatallactic. There are no people in their world, much less people engaged in exchange. They assume (without argument or proof) that the Keynesian vision is correct and “the economy” simply needs better administration by “experts” in government and out of the hands of the banks. It’s all beyond shocking.

    This also explains how Keynes won his battle with Hayek: By ignoring him.

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  3. And don't forget, MMT got EVERYTHING right in 2011. Just ask Mike Norman.

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  4. The best argument against his views is the great recession. What were these brilliant "scholars" saying right before the collapse? How quickly they forget.

    And its not over yet. Weren't these same people saying how great the monetary policy that caused the last boom was? Of course its good... until it isn't.... at which point "nobody could have seen THIS coming!" even though many did.

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  5. More MMT bashing (I can’t help myself).

    The Table of Contents to MMT guru Abba Lerner’s book “The Economics of Control” express his goal as an attempt to save socialism:

    Chapter l. INTRODUCTION. THE CONTROLLED ECONOMY
    The fundamental aim of socialism is not the abolition of private property but the extension of democracy. This is obscured by dogmas of the right and of the left. The benefits of both the capitalist economy and the collectivist economy can be reaped in the controlled economy. The three principal problems to be faced in a controlled economy are employment, monopoly, and the distribution of income. Control must be distinguished from regulation. Liberalism and socialism can be reconciled in welfare economics.


    The second and third chapters concerns the administration of the distribution of goods and income.

    This all looks like a soviet system where the commissars decided to lengthen the leashes of their victims a bit so that they might actually produce something useful that could be seized and redistributed.

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  6. First of all, you don't understand the MMT position so I am a little surprised that you're so quick to judge. MMTers understand that a sovereign fiat currency issuer doesn't really have any "debt". It doesn't need to issue debt because there is no such thing as the currency issuer needing to borrow money that it has the monopoly supply over. So yes, this is the key distinction between Austrians and MMTers and you've proven in your comments why the Austrians have such a fundamental misunderstanding of the way fiat money works.

    Second, while many MMTers are liberal and even borderline socialist, many are not. My favorite MMTer is Cullen Roche who is a conservative and entrepreneur. He really understands how MMT can be used to describe the monetary system, but also understands that government can't solve all of our problems and shouldn't be used in such a way. I would read this piece by him.

    http://pragcap.com/the-politics-of-mmt

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  7. LVG: We understand completely the MMT line: A government that issues its own brand of funny money is allegedly not “constrained” (unless it chooses to be by law) from using it to buy whatever it wants or passing it out willy-nilly to whomever it chooses thereby solving all economic problems including the law of scarcity. We get it. That is what is so horrifying about the “theory” and MMTers. What a freakin’ nightmare.

    MMTers have no familiarity with (and thus no understanding of) the nature of human exchange, economic calculation, the knowledge problem or Cantillon Effects, the core concepts of the Austrian School. As I stated above, Mises described this “state theory of money” [MMT] as “a school that has inscribed the device of etatism on its banner, and to which all economic problems appear as questions of administration”. That’s how the original Soviet butcher Lenin viewed economics. The assumptions made by that lunkhead Mike Norman in his “SS can’t go bankrupt” video is right out of Lenin. But central government planners do not and CANNOT have the knowledge necessary to “administer” an economy. Only unadulterated free market prices can do that, including free market interest rates. MMT would screw that up probably worse than the current bankster generated funny money regime would.

    The initial problem caused by funny money is the distortion of the price, investment and capital structure due to the impairment of economic calculation it causes. Whether general price inflation appears at all, when or to what degree is a secondary issue.

    You MMTers are completely oblivious to the issues raised by the “socialist calculation debate” which also impact Keynesian policies which you apparently adopt without question. You do not even know what the subject of economics really is. Allegedly having detailed knowledge of the funny money regime is not the same thing as understanding economics.

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  8. 1. LVG claims:

    MMTers understand that a sovereign fiat currency issuer doesn't really have any "debt". It doesn't need to issue debt because there is no such thing as the currency issuer needing to borrow money that it has the monopoly supply over. So yes, this is the key distinction between Austrians and MMTers and you've proven in your comments why the Austrians have such a fundamental misunderstanding of the way fiat money works.

    I thought I had already addressed that non-issue in my first comment above where I stated:

    The big leftist and MMT theme these days is getting money printing out of the hands of the banksters and directly into the hands of Hillary, Bill and Obama.

    There is nothing “Austrian” about a government program that spreads its funny money around using our current regime of debt purchases and FRB bank loans. That’s our current system. We get that. Most of the current crop of MMTers want to eliminate the middle man so the state can really step on the gas. We get that too.

    2. Cullen Roche wrote:

    The descriptive aspect is merely an accurate portrayal of a modern sovereign fiat currency issuing nation. In my opinion, arguing that this is “wrong” is like arguing that 1+1 does not = 2.

    What a completely dishonest pile of nonsense that is and which sets forth almost in its entirety the fraud that is MMT. Just figuring out where the money goes in our purposefully obscure and Rube Goldberg-like money regime is not the same as understanding its economic effects. As I stated above, the MMTers don’t know any economics.

    Further, MMTers wish to avoid the central debate on why a funny money regime is needed at all, since it, not the free market, is the cause of the boom/bust cycle and unemployment.

    Finally, Roche’s phony rhetorical trick avoids the fact that funny money is unambiguously unconstitutional and therefore illegal. Didn’t we just have some links on this site to Edwin Vieira in the last week or so?

    http://www.youtube.com/watch?v=k6gMkKmQSW4

    http://www.fame.org/HTM/Vieira_Edwin_What_is_a_Dollar_EV-002.HTM

    I hereby officially declare MMTers hopeless.

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  9. @Bob Roddis,

    Lol! Right on!

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  10. My understanding of MMT is based on http://pragcap.com/resources/understanding-modern-monetary-system and http://en.wikipedia.org/wiki/Chartalism. Are there other sources that are appropriate to understanding MMT?

    Based on what I've read, MMT is being descriptive, not normative. In this sense, I don't see that it's in conflict at all with Austrian Economics. My reading is that MMT basically says, let's not pretend the Central Bank and the Treasury are independent institutions. Let's ignore that fallacy and assume they are effectively a single entity and the rest just proceeds from there.

    The main conclusions then are that that a government that prints its own money can't technically default (of course). The bond market isn't a funding mechanism for the government but rather a monetary tool mechanism and a feedback mechanism for market interest rates. And most importantly, that the real issues with unlimited government spending/borrowing is creating inflation, distorting markets, creating bubbles, and misallocating capital. This seems consistent with the conclusions Austrians reach.

    On the other hand, MMT does open the door for politicians and sophists like Krugman to misuse the theory and ignore its conclusions. They claim that deficits don't matter and government spending is the solution to all problems.

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  11. Except for correcting alleged technical misunderstandings about the alleged mechanisms for creating funny money and the shifting of purchasing power under the current regime, MMT offers nothing in terms of analyzing the impact of those policies. Without proof, it assumes the truth of Keynesian analysis and is oblivious to the nature of the real world which consists of real human beings with limited knowledge who engage in exchanges of economics goods which produce prices which are essential to guiding economic activity.

    The idea that the only problem with MMT is the possibility of price inflation that can be cured at any time by the simple act of Congress raising taxes is preposterous. What exactly do the MMTers mean by taxes sopping up inflation? Are our elected reps going to announce a big tax hike right before an election to sop up excess inflation? When has this ever happened? How would they know what rates to apply in advance? How could the populace plan for such a catastrophe? How do they reconcile all that with the call to forbid all prices changes without a permit if taxes can sop up inflation?

    David Colander, a co-author of a 1980 book with the original Abba Ptachya Lerner (he of “The Economics of Control” fame) wrote:

    Initially he [Lerner] toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [page 12]

    http://tinyurl.com/4rfk3jk

    So, what is it? Will price inflation be cured with taxes rate hikes or draconian laws against raising the price of anything without trading with someone else for the right to raise prices?

    This MMT stuff is completely nuts.

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  12. Bob,

    Your comments are hilariously uninformative. Your rants essentially add up to "I am right so nanny nanny boo boo." MMTers must really not know anything if you say so! But since your comments have almost zero facts in them then I guess we'll never know.

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  13. But since your comments have almost zero facts in them then I guess we'll never know.

    Wow. Such a detailed and substantive critique. I guess you told me, eh?

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  14. This might not count as a set of facts to our brilliant LVG, but a gang of MMTers is busy cobbling together Abba Lerner’s nonsense into some insane Leninist-style proposal by Dennis Kucinich “(besides abolishing private lending banks) for the govt to spend Tsy-created US Notes instead of borrowing”.

    Obviously, the government is far too constrained in its spending under the present regime.

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  15. Bob,

    I don't deny that there are some crazy MMTers running around out there. Just like there are crazy austrians and crazy Keynesians. Does that really surprise you? I would recommend reading Cullen Roche's version of MMT. He's conservative and pure red blooded capitalist. I would email him if I were you. I think you'd like what he has to say. But hey, if you want to remain closed minded then be my guest. Keep on thinking the world is black or white.

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  16. LVG, you are right. Coconut-head Roddis has no clue about MMT, although he can't help himself writing about it as if he did. Best strategy is just to let him embarrass himself. There aren't many funnier things around. And he does it for free. No Cantillon effects. Just another economic miscalculation.

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  17. Knowing how a car operates(MMT) and driving it over 150mph(Austrians) are related but wholly different exercises.

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  18. Bob Roddis said...
    A government that issues its own brand of funny money is allegedly not “constrained” (unless it chooses to be by law) from using it to buy whatever it wants or passing it out willy-nilly to whomever it chooses thereby solving all economic problems including the law of scarcity. We get it.

    This comment makes it obvious that you clearly don't 'get it'.

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  19. Austrians like Roddis hate the reality. They hate the fact that they've been wrong for years. Government debt is unsustainable, dollar will collapse etc. No such thing will happen. I don't see anything that will stop the fovernment from serving public purpose. I don't think extremist right wing ideas will fly in America, EVER.
    Theu like to live in their fantasy world where gold is money. Sorry mate, It aint happening.

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  20. Bob, do you deny fallacy of composition?
    http://en.wikipedia.org/wiki/Fallacy_of_composition

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  21. Yes, MMT and the Austrians agree that government can create money ex nihilo, but that hardly makes the MMTers intellectual thieves, since they think the government's printing press is a feature, and the Austrians think it's a bug. The quote from Rothbard hardly denies that distinction, leaving the point of the quotation somewhat opaque.

    "They some how see all this money printing as non-inflationary!"

    The "some how" is called "SUPPLY" as in "too much money chasing too few goods." You can't have inflation unless you have too few goods. One need only look at global industrial capacity, and the rate at which it is growing, to see how printing more money will be non-inflationary. I am waiting for the first hard-money zealot even to admit that supply is a variable in the monetary policy business. It's always about too much money - "counterfeiting," as those who have run out of analytic ammo like to call it - never about too few goods. (We can talk about the "chasing" element another time.) But supply is what makes MMT matter. Supply is why it matters that monetary sovereigns are not revenue constrained, that a monetary sovereign's taxes exist to suppress demand for goods put in short supply directly or indirectly by government spending.

    If it weren't for the unprecedented increases in supply, MMT would still be "right," but it would just be an unnecessarily elaborate way to validate fiscal restraint. Fiscal policy is more accessible than monetary policy, and we have relied upon it so long that we have come to believe, erroneously, that it matters per se, when in fact, it only ever mattered as a proxy for monetary policy. In a world in which supply fluctuated, but did not take off parabolically, fiscal restraint was consistent with monetary necessity. But we now live in world where supply IS growing exponentially, a world that only MMT can describe accurately enough to permit sound monetary policy, i.e., expansionary, non-inflationary fiscal policy.

    MMT is not that hard to fathom or to appreciate, but it helps if you derive it for yourself. Just assume that the supply of everything is going to increase by 10% every year, compounding forever, and design a monetary system for a country where the government spends like ours does. Sure as Newton invented calculus, you will invent MMT to explain why the government doesn't have to tax to fund its operations, but only to keep the money supply from growing faster than the goods supply.

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