John Carney Replies

In the comments section, John Carney has replied to my earlier post with regard to his view on unemployment. I reproduce his response and then offer a rejoinder.

Bob,

I know [sic] 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

Hi John,


You mention that unemployment may rise to high levels, but then use the example of lobstermen who find themselves unemployed. This a case of specific unemployment and not broad-based unemployment, but allow me to discuss this situation for a moment.


I never intended to give the impression that unemployment can never exist. Under the circumstances you outline, the lobstermen would surely be unemployed while they searched for new jobs. Indeed, in my original post I made it clear I was talking about long-term unemployment:

 Long-term unemployment is the result of two factors: minimum wage laws and unemployment "insurance" payments... I see no other factor that can cause unemployment (outside of some very short-term unemployment when a person searches for a new job)

But, more important, I do not deny that at times unemployment can become massive: 

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.

But back to the lobstermen, you write that lobstermen may not be able to find jobs. You start off first by writing:

 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.

But, you then write:

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.

The first part of what you write has some truth. The basic supply and demand curve teaches us that as supply increases, the price falls, but it nowhere says that the demand curve would simply disappear for some workers. That would make no sense. If for example, there is an economy with 10 workers, each earning $100 per week, if nothing else, if another 10 workers appear on the scene then revenue for the 20 workers would be $50 per week. That's how supply and demand would adjust to an increase in the supply of workers. But, before you charge me with being harsh and not caring that the pay to workers has declined, please keep in mind that the consumers of lobsters now have more funds with which to increase their demand for other products, since they are no longer purchasing lobsters. You completely fail to consider this part of the equation.

Net, net, when demand shifts down in one area, it increases in another. As for your argument that there is a zero-bound to wages and that workers can't work who are starving. In one sense, I agree with you that this is a natural lower bound to wages. But, I think it has little to do with a plentiful country such as the United States, But further if anywhere, I see a bunch of men starving and I am an entrepreneur, I obtain land and put these men to work on the land and pay them a portion of what they are going to produce.

So I just don't get how market unemploymnet is a "social evil". If lobsters die off or people lose their appetite for lobsters, it is true that lobstermen will be out of a job as lobstermen, but entrepreneurs will be out attempting to find new work for these men immediately. Where is the evil?

In my view, the problem in the United States is not one of wages plunging to starvation levels, if we remove minimum wage laws. Rather that many now who can not find jobs, starvation or otherwise, will at last be able to join the job market. In other words, the removal of minimum wage laws, removes evil.

The highest level of unemployment is among black male teenagers. Because they are not employed, their income is indeed zero. If the minimum wage is lowered, they will finally get a job and learn basic jobs skills and certainly have more money in their pocket than they do now.

The government is who failed these youth in the first place by failing to give them a decent education, now the government is pricing them out of the jobs market as a result of minimum wages. That's evil!

Finally, John I would like to comment on your opening paragraph where you write:

  You see market processes as a panacea for the economy, much the way statists see the government as a panacea. 

I see a huge difference between the way I view the economy and the way statists do. 


My view of the great beneficial powers of free markets is based on understanding the deductive reasoning of the implications of how man acts, as outlined by the great economists, Ludwig von Mises, Friedrich Hayek and Murray Rothbard. I see the statist view as making significant errors in their thinking. 


If you are attempting to imply that my belief in the market process is somehow mystical, you are wrong. Starting from the premise that man acts, by deduction, I can prove out the superiority of free markets. I am not shouting out "free markets" without the ability to logically back up what I say.


John, we'll have to go over this more the next time we have a beer.

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.

Oh Brother (John Carney-MMT Edition)

CNBC's John Carney tweets:

Just gave a plug for MMT on [CNBC's]Power Lunch!

An MMTer on Carney's View of Austrian -MMT Similarities

MMTer Cullen Roche has also responded to John Carney's view on the similarities between Austrian economics and MMT.

I don't agree with most of Roche's MMT views, and I am not sure that he gets exactly what the differences are between Austrian economics and MMT, but he knows there are some. He writes:

But while there are certainly elements of Austrian economics that MMTers agree with there is one large hurdle….

I agree with John that there are more overlaps than most presume. But the largest hurdle is substantial. MMT is based on the state theory of money. We acknowledge that anything can be money. Gold can be money, pieces of paper can be money, credit cards can be money, a simple promise can be money. But what MMTers are very precise about is the fact that a sovereign nation with monopoly supply of currency in a floating exchange rate system names that which is money as defined in economic terms within that particular nation.

I don't think you will find Austrians disputing that the dollar is the medium of exchange in the United States, what they will dispute is that the medium of exchange must be defined and managed by the government of a country. This is simply not so, there is no theoretical reason why a country could not operate on a gold coin standard that was not in any way managed by government. THAT is a big difference between Austrians and MMTers.

Roche also writes:

We can quibble over the size of that government (I tend to prefer less government than most other MMTers), but we cannot ignore the reality that governments exist for very practical purposes and will likely always exist in some form (if for no other purpose than to provide a legal system and a coordinated military). Austrians tend to veer towards the misconception that governments are these exogenous entities that infringe on our personal liberties when the truth is that we create governments for some public purpose. We do not create governments to impose hardship on ourselves. That’s not to say that governments can’t become corrupt or excessive, but it’s rather naive to claim that a moderately sized government cannot provide some level of services that benefit the society as a whole.

Again, I reference Rothbard, who states quite clearly that when choices are left up to the government, there is no way to measure how they "benefit society" and that they are for the most part act as a negative on society.

As far as I can determine the views on issue after issue tend to be much different between the Austrian camp and the MMT camp. The MMTers have nothing, zero, to offer Austrians.

A Rejoinder to John Carney on MMT and Austrian Economics

CNBC's John Carney has responded to my earlier comments on his favorable view of Modern Monetary Theory.

In his response, Carney writes:

The MMTers believe that the modern monetary system—sovereign fiat money, unlinked to any commodity and unpegged to any other currency—that exists in the United States, Canada, Japan, the UK and Australia allows governments to operate without revenue constraints. They can never run out of money because they create the money they spend.

Here is problem one with Carney's view of MMT. MMTers do not hold that all fiat money is the same. Although they object to Federal Reserve notes, they see no problem with a fiat currency being issued they call "US notes".

Here is MMTer  Bill Still, who is seeking to become the Libertarian Party presidential nominee:

A sovereign nation does not have to borrow, in fact, being debt-free is the very definition of sovereignty. Pay off the existing bonds -- which is our National Debt -- as they come due, but pay them off with debt free U.S. Notes (or their electronic equivalents) instead of Federal Reserve Notes, which are all borrowed into existence.

Here is MMTer Cullen Roche on fiat money:

Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces.

Thus, when Carney tries to give the impression that MMTers and Austrians have a lot in common, he is just wrong. Austrians reject the idea that a fiat money of any sort is necessary in a highly industrialized economy (and any other type economy). A gold coin standard could function much better in the eyes of Austrians. A government couldn't inflate a gold standard at will, further the Austrians see no need to ever inflate a currency, unlike MMTers.

Here's Roche again:

The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary

An Austrian simply doesn't see the world this way, where "irrational participants" occur on such a scale that they must be counteracted by government. An Austrian would first ask, if there are so many "irrational participants" who is to say they aren't in government also? Remember, before the real estate crisis, it was Fed chairman Bernnake who said there was no problem with the real estate market.

Secondly, Austrians would argue that the "cluster of errors"s made because of fiat currency creation are what cause the boom-bust cycle and that without fiat money creation no such "cluster of errors" would occur. Thus, the Austrian position here is diametrically opposed to the MMT view that there are times when monetary inflation is called for.

Carney writes:

The MMTers think the financial system tends toward crisis. Wenzel writes that the financial system doesn’t tend toward crisis. But a moment later he admits that the actual financial system we have does tend toward crisis. All Austrians believe this, as far as I can tell.

What has happened here is that Wenzel is now the one confusing the world as it is with the world as he wishes it would be. Perhaps under some version of the Austrian-optimum financial system—no central bank, gold coin as money, free banking or no fractional reserve banking—we wouldn’t tend toward crisis. But that is not the system we have.

The MMTers aren’t engaged with arguing about the Austrian-optimum financial system. They are engaged in describing the actual financial system we have—which tends toward crisis.

They even agree that the tendency toward crisis is largely caused by the same thing, credit expansions leading to irresponsible lending.

If I say that automobiles don't tend to drive off cliffs, but if I am looking at a baby that is behind the driving wheel of a car that is about to go off a cliff and I say, "Hey, that car is about to go off a cliff." It doesn't in anyway mean that I am saying all cars will go off cliffs.

In the same way, the financial system, like a car, does not have a tendency to drive off a cliff. If the Fed prints money it may go off a cliff, just as a car may go off a cliff when driven by a baby. My solution for the cars being driven by babies is to stop the babies from driving cars, for the economy, it is to stop the Fed from driving the economy. To say that I should just deal with the reality of a baby driving a car and hop in the back seat, makes no sense. Anymore than it makes sense, when arguing monetary policy, to say hey just deal with the Fed's inflationary boom-bust ways.

Carney then writes:

The MMTers say that “capitalist economies are not self-regulating.” Again, Wenzel dissents. But if we read “capitalist economies” as “modern economies with central banking and interventionist governments” then the point of disagreement vanishes.

John, puhleeze. Of course, if you define capitalism to mean, well, the exact opposite of capitalism "the point of disagreement vanishes."

Carney writes:

Wenzel’s challenge to the idea of functional finance is untenable—and not particularly Austrian. He argues that the subjectivity of value means it is impossible for us to tell whether something is “good for the economy.” Humbug.

I should first note that I specifically state that I am referencing how "fiscal policy should be measured" Indeed, I further write:

Thus, it is extremely dangerous to go around talking about what is "good for the economy", especially when you are talking fiscal policy.

Far from this being "not particularly Austrian", it is at the heart of the Austrian view that subjective value can not be measured in the pubic sector ( as opposed to the private sector where exchange tales place voluntarily between two individuals). Indeed, the Austrian economist Murray Rothbard, even suggested that ALL government spending is a negative that should be subtracted from GDP:.

..most of the resources consumed by the maw of government have not even been seen, much less used, by the consumers, who were at least allowed to ride in their buggies. In the private sector, a firm's productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government's "productivity" is measured—mirabile dictum—by how much it spends! Early in their construction of national product statistics, the statisticians were confronted with the fact that the government, unique among individuals and firms, could not have its activities gauged by the voluntary payments of the public—because there were little or none of such payments. Assuming, without any proof, that government must be as productive as anything else, they then settled upon its expenditures as a gauge of its productivity. In this way, not only are government expenditures just as useful as private, but all the government need to do in order to increase its "productivity" is to add a large chunk to its bureaucracy. Hire more bureaucrats, and see the productivity of the public sector rise! Here, indeed, is an easy and happy form of social magic for our bemused citizens.

The truth is exactly the reverse of the common assumptions. Far from adding cozily to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. But this means that the productive resources of society—far from satisfying the wants of consumers—are now directed, by compulsion, away from these wants and needs. The consumers are deliberately thwarted, and the resources of the economy diverted from them to those activities desired by the parasitic bureaucracy and politicians. In many cases, the private consumers obtain nothing at all, except perhaps propaganda beamed to them at their own expense. In other cases, the consumers receive something far down on their list of priorities—like the buggies of our example. In either case, it becomes evident that the "public sector" is actually antiproductive: that it subtracts from, rather than adds to, the private sector of the economy. For the public sector lives by continuous attack on the very criterion that is used to gauge productivity: the voluntary purchases of consumers.

We may gauge the fiscal impact of government on the private sector by subtracting government expenditures from the national product. For government payments to its own bureaucracy are hardly additions to production; and government absorption of economic resources takes them out of the productive sphere. This gauge, of course, is only fiscal; it does not begin to measure the anti-productive impact of various government regulations, which cripple production and exchange in other ways than absorbing resources. It also does not dispose of numerous other fallacies of the national product statistics.

Carney may, or may not, agree with this view, but he must agree that it is distinctly Austrian and not in line with MMT thinking.

Carney concludes by stating:

At the level of theory, Austrians and MMTers have a lot in common. Tactically, an alliance makes sense.

I just don't see where the Austrians and MMTers have much in common at all. And, a tactical alliance with a group that is in favor of creating a new fiat money, to replace the current fiat money, seems to be of little value to Austrians. More than anything, there is great educational value in pointing out the important differences between MMTers and Austrians.

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.