Tuesday, April 2, 2019

A Top MMTer Informs: When Exactly MMTers Would Start to Battle Price Inflation

L. Randall Wray
UPDATE BELOW: Warren Mosler response.

One of the many criticisms of Modern Monetary Theory is that price inflation would get out of control under their money printing policy prescriptions.

They have countered that if price inflation did get out of control, they would respond by raising taxes and cutting government spending.

I reached out to Prof. L. Randall Wray, a leading proponent of MMT and co-author of a new textbook on MMT, Macroeconomics, to see if I could get a sense for what MMTers would consider the conditions necessary to battle price inflation.

Below is our exchange.

Wenzel email:
Subject: Inflation question 
Dear Prof. Wray,
In your response to Doug Henwood, I note that you write:
 "If there were a prolonged stretch of inflation we would—of course—recommend pro-actively raising taxes and/or reducing spending."
What inflation rate would you consider high enough that pro-actively raising taxes and/or reducing spending should be implemented? And is there a particular length of time that should be linked to such a rate of inflation before a  call for the pro-active measures?
       Thank you for your help on this matter.
Best regards,

Wray's response:
I do not think one number fits all cases. Depends on whether the rising prices are broad-based (across the components of the CPI)--if so, I'd recommend after a relatively short period of time--four years?--and sooner if it was accelerating. If it was across a few categories (which has always been the case in the USA since the late 1960s) I'd probably wait longer to see what happens (and take other approaches to fighting the pressures instead). You want to try to determine if the cause is excessive aggregate demand (then raising taxes could be appropriate) or if it comes on the supply side (in which case raising taxes is a poor choice). 
L. Randall Wray 
Senior Scholar, Levy Economics Institute 
Professor of Economics, Bard College 
Papers: www.levyinstitute.org/publications/?auth=287
Co-editor Journal of Post Keynesian EconomicsISSN 0160-3477 (Print), 1557-7821 (Online)www.tandfonline.com/toc/mpke20/currenthttp://www.tandfonline.com/toc/mpke20/current 
New Book: Why Minsky Matters: An Introduction to the work of a maverick economist, Princeton University Press http://press.princeton.edu/titles/10575.html 
New Book: Modern Money Theory: a primer on macroeconomics for sovereign monetary systems, Palgrave Macmillan http://www.palgrave.com/page/detail/modern-money-theory-l-randall-wray/?isb=9781137539908 
Wenzel email:
Thank you for your prompt reply.
If it is a case of broad-based inflation crossing the Fed's target of 2%, say to 2.5%, would that be the type of inflation you might act on after 4 or more years? Or would it be inflation at 3% or 5% that would concern you. 
Thank you once again for your help on this matter.
Wray email: 
not 2 or 2.5%. at a level that low you cannot tell if there is even inflation. could be measurement error. if it was sustained above 4 you'd be pretty sure there was actually inflation pressure (especially if broad based)
RW final comment:

Suffice to say, it does not appear that MMTers are in any hurry to fight price inflation.


Warren Mosler responds: here.

1 comment:

  1. Everyone should notice two of the basic monstrous assumptions of the MMTers:

    1. The free market always fails and leads to mass unemployment. The only issue is whether monetary or fiscal policy can cure this. The MMTers go with "fiscal policy" in the form of the government spending massive amounts of new funny money into existence. Actual history and Austrian analysis are never mentioned, engaged, refuted or even thought about.

    2. A "government" is necessarily a "sovereign currency issuer". La-di-da. We all know this is true, it's ok, it's wonderful and that's just the way things are. And because a government is a "sovereign currency issuer", there is nothing practically, legally or morally precluding the government from spending massive amounts of funny money into existence. Something must be done to cure the mass unemployment caused by the free market and this is the cure.

    3. Although we live in a Hayekian nightmare world of Neo-liberalism, the government, run by the capitalists, is constantly engaging in MMT-type policies to fund their endless wars. We need to reclaim this for the Green New Deal and high speed trains.

    Rebecca L. Spang is Professor of History at Indiana University where she directs the Liberal Arts and Management Program. The author of Stuff and Money in the Time of the French Revolution (Harvard University Press, 2015), she participated in the historians’ roundtable at the Second International MMT Conference (The New School, September 2018).


    "MMTers and silverites, in contrast, emphasize the work left undone—factories shut, children and the elderly not cared for, solar panels not made and installed, etc.—because there is too little money in circulation. MMT’s proposed mechanism for adding money to the economy is hardly that of the “Free Silver” movement, but the two fundamentally agree that money is a political phenomenon (a “creature of the state” in the words of Abba Lerner’s 1947 paper). Populists in the 1890s campaigned against the 1873 law that demonetized silver; MMTers today, against the rhetoric of “deficits” and mandates for pay-as-you-go budgeting that have been central to American politics since the Reagan Revolution. MMT crucially claims that a monetary sovereign cannot go broke in its own money—it can always issue more. We should therefore think of public deficits not as bills to be paid, but as indicators of how much we as a nation care about particular issues. Since money exists for wars and walls, they say, it can just as readily be found for high-speed trains and clean-power energy."


    And on a slightly different topic (of horrors):