Thursday, January 5, 2012

Getting in the Middle of an MMT Debate

As I have said before, I am going to pick my spots debating MMTers. There really is too much MMT stuff out there with moving parts to address most of the dance. However, when a comment is made that seems to need to be corrected because of its numerous fallacies that could mislead many, I will jump in, and such a comment has occurred.

MMTers Pavlina R. Tcherneva and John Carney of CNBC are having a debate over the call by most MMTers for a Jobs Guarantee program. Carney is against such a program, which is good to see. However, he yields much too much to those in favor of JG.

He writes:
Since I've been one of the critics of the Job Guarantee, there are a few points I'd like to make in response to this.

1. I agree that (a) unemployment is a social evil, (b) it is a serious macroeconomic problem of capitalist economies, and (c) the private sector cannot deliver a long term solution. Our point of disagreement is not on whether the world is beset by evils but whether or not a state-created program--more specifically, the Job Guarantee--can eradicate the evils.
First, I don't see unemployment as a "social evil".

I personally do not believe I have anything to do with the current unemployment situation and I am certain most others are not responsible for the unemployment. Long-term unemployment is the result of two factors: minimum wage laws and unemployment "insurance" payments.

If minimum wage laws are above the marginal revenue product of a potential wage earner that person will not be employed. This is simple basic economics. An entrepreneur will not hire someone if the cost is greater than the revenue. Pretty simple stuff. Make the minimum wage (cost to an employer) high enough and you will have massive unemployment. Second, if a person is offered payment for not working, some may opt for this option. I see no other factor that can cause unemployment (outside of some very short-tern unemployment when a person searches for a new job)

There is no "social evil" in unemployment, just as there would be no social evil if the government passed a law that bananas could not be sold for less than $500 each. The resulting rotting of bananas is not because of some social evil but because of a very specific action taken by government, having nothing to do with most in society. Society suddenly didn't hate bananas. Government regulations distorted a market exchange.

Second, unemployment is not, as Carney states, a "serious macroeconomic problem of capitalist economies". We see clusters of unemployment in economies at times when a central bank exists and manipulates the money supply, which results in the boom-bust business cycle. But this has nothing to do with "capitalist economies" and everything to do with central banks. During the bust phase, sizable unemployment occurs because the economy is going through a readjustment phase following the distortions caused by central bank money manipulation during the boom phase. But even this unemployment would clear up fairly quickly, if allowed to do so. The unemployment tends to linger only as a result of the minimum wage laws and unemployment "insurance" payments which hinder the readjustment process from taking place.

In other words, such unemployment has nothing with capitalist economics, and everything to do with government interventions in a capitalist economy.

Finally, it is not the case that the "private sector cannot deliver a long term solution", but that through the government interventions of minimum wage laws and unemployment insurance payments, the private sector is limited from hiring individuals at the wages the market will allow.

In other words, free the markets will result in the unemployment "problem" disappearing, and we won't have to get so pensive over "social evils" that are in reality problems created by evil doings of government leaders.


  1. Again, there is no evidence that any of these MMT “critics” of the free market have the slightest understanding of even basic Austrian School concepts. Why would they reject Austrian analysis out of hand when they meticulously avoid even approaching it while hiding behind a door and wearing a blindfold?

    This avoidance-based neurotic reaction of our critics, while predictable, is getting downright creepy. But there it is, and it is all they have.

  2. In a world that consists of constant change, unemployment cannot be a "social evil". It's a necessity for progress. Should we be complaining that the horse & buggy business no longer exists on such a large scale? Or the milkman? Is it a "social evil" that people employed in these industries had to become unemployed?


    The market clears....and anything that hinders that clearing process is *the evil* that makes a temporary unemployment situation a permanent part of our lives.

  3. Why is Modern Monetary Theory (and by the way, you can put quotes wherever you like in that one, e.g. "Modern" "Monetary" "Theory") building this weird cult-like popularity? It's such an obviously meritless doctrine, the kind of Internet bullshit that's just one notch above Zeitgeist/The Venus Project and the "Resource Based Economy."

  4. Repeal of the minimum wage would go a long way to achieving a "Job Guarantee" at no cost to government, the private sector, Moral Hazard, or efficiency. What it lacks is the political control over jobs, which is the real objective, not solving labour market shortfalls.

  5. Question: I agree with everything in this post. However, in discussions with people about minimum wage laws, they may bring up the high cost of living or purchasing goods they need to sustain themselves (food, gas, etc.)

    I see minimum wage laws as harmful, but if the FED continues to manipulate the money supply and intrude itself in the economy, thus affecting prices elsewhere.

    Here's my question: Would there need to be a holistic removal of govt out of the economy in order to get rid of minimum wage laws?


  6. Why is MMT building this weird cult-like popularity?

    I think it's just the same old commie stuff in a new dress. The Marxist stuff, the Fabian/Socialist/Keynesian stuff, the multi-cultural stuff, the environmental hysterical stuff has all been exposed and has no traction with the masses (as opposed to the elites).

    It's just another round of "we're smarter than you are, we know how to run your life, and this stuff is so incomprehensible to mundanes like you, don't even try to follow what we're saying". Just another round of “pseudo-intellectual as Nazi-overseer syndrome“.

    Let’s not forget the source of this stuff, a big RED book, Abba Lerner’s magnum opus “The Economics of Control”. The title should send shivers down your spine. Read some of the table of contents:

  7. Maybe using their constructs, unemployment can be a "social evil." They believe because the United States is monetarily sovereign (we have printing press), that federal governmental budgets differ from other budgets, in that they have no meaning.

    And because the federal government is monetarily sovereign, and its budget doesn't matter, it can fund as many projects, pay as many workers and provide as much social assistance as is necessary. They can do all this without harmful taxation (Federal government destroys tax revenue, therefore retiring it from economy) and without fears of inflation (Federal government would need to create an absurd (even by today's standards) amount of money to cause worrisome inflation.)

    I guess it'd be the same thing to them if the Federal government deprived someone of air.

  8. The gym where I lift weights at, the owner constantly complains about unemployment insurance on his "contractual" employees i.e. fitness trainers that the state charges him for. $1400/month in unemployment benefits. I got him even madder when I said "All your doing is paying for other people to sit around, its not going into a trust fund for these people". Unemployment insurance is just a smaller Social Security program.

  9. My guess as to why they see unemployment as a evil; they don't know what you're up to and while that might be ok for a couple of people, a whole group of them outside the state's ambit makes suspect all sorts of nastiness.

  10. Anonymous@6:29 PM,

    It is because less intelligent people are trying to grasp onto something that can reverse economic reality, something like voodoo economics. They think they have discovered the secret of turning lead to gold, in this case, unlimited creation of money without inflation.

    It is for this reason that MMTers make bizarre distinctions between types of money creation, like when they say creating money would be OK because they would be printing "US notes" rather than FRNs. Or when they say that electronically created money (from the central bank to a bank) is not inflationary because it hasn't been printed onto paper.

    The fact is that MMT is very far outside the mainstream. By saying that I am not trying to put it beyond the pale, merely pointing out that well established terms with economic meanings, like 'savings', have radically different meanings to MMTers. This is how you can have MMTers make odd statements like 'private savings' are impossible without a government deficit.

    Anyway, the main thing people have to know about the MMTers is that they are the inheritors of the chartalist school of economic thought, which lead to the hyper-inflation of Weimar Germany.

  11. By the way, the leading Swedish social democratic socialist thinker Gunnar Myrdal at one time plainly criticised minimum wage laws as having negative employment consequences for the poor and for being a social evil in themselves. (See here.) Apparently Myrdal didn't get the memo.

  12. You want to bury the job guarantee idea. I suggest reaching out to Cullen Roche, MMTer. He hates the idea and debunked 20 years of work over breakfast this weekend.

  13. Defeating MMT is very simple.

    First, the sectoral balance equation holds true under ANY government controlled monetary standard, whether it is unbacked paper, coconuts, or a gold standard.

    Second, since the sectoral balance equation holds true under any standard, it stands to reason that the counter cyclical policy proposals promoted by MMT would be the same no matter the currency.

    (Quick note, when pressed, I found out that their business cycle theory is a Minsky-hybrid, though what is hybrid about it, I'm not sure.)

    Third, since counter cyclical proposals would be the same, the US could not have arisen from the 1920 depression in 18 months. The US could not have had a robust 1947. Same goes for all the panics and recoveries before the Great Depression.

    In other words, it's bunk.

    Now, John Flynn wrote a cool book called "The Decline of the American Republic." In Chapter 3(?), he cites a 1936 book by some Harvard economists. Their main arguments sound EXACTLY like MMT.

    Give me a day and I'll find the exact page and arguments. If you've got Flynn's book handy in pdf, open it up and google 1936 or Harvard until you find it.

    David in Liberty

  14. Bob,

    I know see a a critical difference between your outlook and mine. You see market processes as a panacea for the economy, much the way statists see the government as a panacea.

    I don't think we have easy solutions to life's problems. Market processes may be the best we have available but that does not mean things like unemployment go away just because we do away with intervention.

    There's nothing in Austrian economics that suggests otherwise. Unemployment can indeed arise, even at high levels, because of natural shocks, shifts in consumer behavior or technological innovation.

    For example, suppose all the lobsters of Maine die out. Or consumers suddenly decide that lobsters are disgusting. It doesn't really make a difference whether it is a supply or demand shock.

    In any case, the lobstermen are now redundant. They have skills for which there is no market. They must now take jobs that demand no skills, perhaps leaving their homes in search of unskilled labor.

    But note that nothing in this story means there is a demand for more unskilled labor anywhere. So these new workers must necessarily compete against the already in-place unskilled workers.

    This might have the effect of pushing wages down. On the margin it probably will. But employers face non-wage related costs of replacing experienced workers with new workers, including the cost of uncertainty about the ability of the new workers.

    What's more, wages can only go so low. They are greater than zero-bound. In fact, they are bound at the level of subsistence. Workers who cannot afford to eat will not work. This is not caused by government intervention but by human action.

    Doesn't it strike you that unemployment can arise in this situation, without any government intervention? Or do you think this is somehow impossible?

    Do you not regard this as at least unfortunate? That the once proud lobstermen now reduced to poverty and most likely unemployment strikes me as a social evil. It may, perhaps, be a necessary evil if the solutions would inflict greater evil. But why not at least admit it is a bad result.

    I think your view that no bad results can arise from market processes lets you off too easy. It is harder, nobler, and takes more courage to defend markets that are not perfect and do not always result in progress.

    I think it is also better tactically. To most people, the claim that unemployment is not a social evil makes you seem cold-hearted. The claim that unemployment cannot arise but for government intervention makes you seem out of touch with reality. I understand that you are neither of these things, that you have good reasons for holding these positions and good intentions, but I am not the one you need to convince about the justice of market processes.

    For those of you who don't know, I regard Bob as a friend and an ally. He's frequently promoted the writings of me and my brother, Tim Carney, on EPJ. I think EPJ makes a valuable contribution to our public debates about politics and economics. So I hope my comments here will be read in the friendly spirit in which they are offered.

    As always,
    John Carney

  15. Thank you for commenting, Mr. Carney, it is always better to hear the other side directly. I think your main error lies here:

    "But note that nothing in this story means there is a demand for more unskilled labor anywhere. So these new workers must necessarily compete against the already in-place unskilled workers."

    Your assumption seems unwarranted. How will people replace lobster in their diet? Wouldn't they naturally consume more chickens, beef, pork etc? Perhaps they would fore go food, would they save their money, spend it on movies, put it under the mattress?
    I believe we would all agree if all the lobsters died off it would make society poorer, and some charity to tie the lobstermen over would be much appreciated, but printing more money would hardly bring the lobsters back.

  16. Mr. Carney...I'd like to add a few thoughts to your comments:

    Market processes may be the best we have available but that does not mean things like unemployment go away just because we do away with intervention.

    In our world, where resources are in constant flux, moving from one industry to another, unemployment can't (and shouldn't) go away. To do away with unemployment is a goal that can only be achieved in a static world without change.

    Austrians do not claim that a free market will eliminate unemployment. That's a horrible goal to shoot for. The USSR achieved it!

    The best that can be achieved is to have as little friction as possible in the shuffling around of resources. A government that is not hands off can only add friction.

    In a free market, demand is always a function of price: the higher the price, the lower the demand. Artificially raise the price of wages, via the minimum wage law, the lower will be the demand.

    If the government pays people more not to work, naturally more will choose not work.

    Government takes a necessary situation like temporary unemployment and turns it into a permanent fixture.

  17. Carney makes the fundamental error of assuming human needs are finite. The newly unemployed lobster fisherman could find some way, any way to satisfy some other human need. If all resources of society are being used productively elsewhere, then diverting some to help thumb-twiddling lobster fisherman will surely make society poorer. Surely you don't have to be Einstein to get this. Why are professional Keynesians (both journalists and court economists) unable to understand simple stuff? They all believe in some variety of "prosperity comes from the printing press."

    Carney, for all your polished writing, you are retarded.

  18. The currency itself is coercive govt. Intervention.
    The dollar is a simple public monopoly.
    When any monopolist constrains supply there is excess capacity.

    The dollar functions first to provision govt.
    Govt. desires to hire people.
    So it imposes taxation payable only in it's own currency
    This creates pool of people looking for work that pays in dollars, directly and indirectly, that we define as unemployed
    The govt can then spend its otherwise worthless dollars to hire who it wants
    If anyone remains unemployed as defined, it means the tax was too high in the first place.

    And, in any case, there will be a price anchor and it will be a buffer stock policy and govt will have a 'bid' for the object of the buffer stock. So pick one. Choices include gold, wheat, unemployed, and employed/jg buffer stocks.