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Modern Monetary Theory

 
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11 March 2019 10:56
 

Has anyone read much about MMT, the economic theory that is the underpinning of the New Green Deal and other Democratic proposals?  I’m no economist, but my understanding of it is generally that rather than seeing money as a commodity that has a value as a rate of exchange (when it was tied to gold it had an actual value), it is seen as simply a creature of law that the state recognizes as legal tender.  The idea (as I understand it) is that the state can print any amount of money that it wants to basically do whatever it wants, and that inflation will be controlled because supply and demand will basically be balanced by government spending and taxation.  So, we can have Medicare for all, college tuition paid by the government, guaranteed jobs, and governmental support of any environmental program we think needed.  No need to worry about public debt - just print more money, pay off the debt, and take money out of circulation through taxation. 

It sounds too good to be true - a real free lunch.  It wouldn’t work on a private scale, because you and I can’t print money.  But Uncle Sam can, so he just goes to town and funds every pipe dream that comes along.

“If it sounds too good to be true, it probably is”, as the saying goes.  Does anyone have sufficient economic background to explain exactly why it won’t work, or to defend it if you think it will?

 
mapadofu
 
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mapadofu
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11 March 2019 12:05
 

Try this podcast that has a discussion between an MMTer and a more conventional economist

https://traffic.megaphone.fm/VMP3252452383.mp3

What I recall from it that might be relevant for your first paragraph is that MMT would say we have a lot more flexibility in terms of the size of the deficit provided that other aspects of the financial system, the Fed in particular, are able to do the right things.  In that sense it is not a complete free for all.

[ Edited: 11 March 2019 12:08 by mapadofu]
 
Antisocialdarwinist
 
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11 March 2019 12:16
 

Here’s a video in which a proponent of MMT explains it.

It’s a pretty soft-ball interview, but the gist of it seems to be that printing money won’t cause inflation if the supply of goods and services increases at a sufficient pace to prevent the “too-much-money-not-enough-stuff” scenario (skip to the fifteen-minute mark). But there’s no discussion of how to prevent this scenario from developing, or why printing money so often does lead to inflation.

She does, however, mention “Quantitative Easing,” which was basically a way for the government to print money without seeming like it was printing money. And it’s true: contrary to what many expected, QE did not lead to inflation. So the traditional view—that printing money inevitably leads to inflation—doesn’t appear to be the case. But I’d like to see some discussion about why printing money often does lead to inflation, but sometimes doesn’t.

Here is a debate between a proponent and an opponent of MMT. But I haven’t listened to it yet.

 
 
mapadofu
 
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11 March 2019 12:39
 

Suppose that the Fed is actively trying to manage the rate of inflation (which afaik has been true for decades now), and is competent at it.  Then, when the govt runs up debt (within some bounds) it is possible for the Fed to react in a way that prevents inflation from occurring.  According to MMT this is the situation we’re currently in in the US.

So, my understanding of the idea is that when there are these other competent financial actions that can pull levers to counteract the effects of spending, then MMT applies.  They didn’t exist back in history, so spending caused inflation, and It doesn’t apply to states that don’t control their fiscal situation, like member states of the EU.

If you accept this, there is a different question that seems worth asking: “if not inflation, what are the negative consequences of ramping up spending?” 

Maybe we’d just squeeze the balloon in one place (inflation) only to have it burst out somewhere else.  then again, maybe having well constructed interlocking organizations pushing on the economy in the right ways allow us to do stuff that wouldn’t seem possible.

My 100%gut reaction is that MMT based policies could probably work great, until they don’t,and we’ll only find that line by tripping over it.

[ Edited: 11 March 2019 12:45 by mapadofu]
 
Poldano
 
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12 March 2019 02:40
 

One of the phenomena that may actually prevent inflation is if there is a disguised deflation in process. Deflation was a feature of the latter part of the 19th century in the U.S., because of a combination of rapid population rise combined with a hard-money policy (i.e., the Gold Standard). This had the effect of protecting the interests of the lender class, but resulted in insufficient currency to oil the general economy to the extent that it needed to be oiled. The result was several long-lasting depressions.

A similar situation could be occurring today in the U.S. because human labor is being systematically devalued. The lender class/community, on the other hand, is sitting pretty. One analysis I recently read is that the systematic devaluation of human labor is actually repressing technological advance, because there is little incentive for investing in risky new technological solutions when labor is so inexpensive and becoming less expensive. There is no obvious action to counteract this trend in the U.S. I theorize that a general reduction in population in the U.S. could remedy the economic situation, similarly to the way the Black Death is said to have created labor shortages in 14th-century Europe that resulted in a technological and commercial revolution. A better way would be some kind of general action that creates a greater demand for labor (*cough* infrastructure investment *cough*), but that would probably be opposed by those currently pulling the strings of political power.

 
 
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12 March 2019 05:05
 

If we can increase the money supply to pay for things like Medicare-for-all, infrastructure improvements, and college tuition, we could also increase it to pay down our national debt.  That would not directly create jobs, but it would free up more of our budget for socially beneficial projects, as that money would no longer be needed to pay interest on the debt.  Anyone see a problem with that idea?

 
mapadofu
 
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12 March 2019 05:21
 

ROI considerations - which resource allocations are more likely to lead to more productivity.

If we’re in a position where we can increase spending w/o negative consequences then decreasing the deficit doesn’t “free up” anything, it just represents a missed opportunity to do something more directly useful.

[ Edited: 12 March 2019 05:25 by mapadofu]
 
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12 March 2019 08:01
 
mapadofu - 12 March 2019 05:21 AM

ROI considerations - which resource allocations are more likely to lead to more productivity.

If we’re in a position where we can increase spending w/o negative consequences then decreasing the deficit doesn’t “free up” anything, it just represents a missed opportunity to do something more directly useful.

OK, understood.  I’m still hazy on exactly how inflation can be controlled with so much spending going on.  The New Green Deal is going to cost trillions (assuming it ever passes).  How will that not push inflation over the top? The spending has to bring more productivity so that more goods (stuff to buy) keeps up with the increased money supply.

 
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12 March 2019 08:02
 
Antisocialdarwinist - 11 March 2019 12:16 PM

Here’s a video in which a proponent of MMT explains it.

It was informative.  Thanks.  But she never gets into controlling inflation.  That’s the big question.

 
GAD
 
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12 March 2019 08:05
 

If all any country has to do is print all the money they want to have everything they want then why doesn’t every country have everything.

 
 
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12 March 2019 09:20
 
GAD - 12 March 2019 08:05 AM

If all any country has to do is print all the money they want to have everything they want then why doesn’t every country have everything.

Because they don’t really agree that this works, or don’t think they can control inflation.

 
GAD
 
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12 March 2019 09:32
 
EN - 12 March 2019 09:20 AM
GAD - 12 March 2019 08:05 AM

If all any country has to do is print all the money they want to have everything they want then why doesn’t every country have everything.

Because they don’t really agree that this works, or don’t think they can control inflation.

Hum, I wonder if it’s because as you print money to balance the cost of things the efficiency of producing those things goes down as there is no market pressure to drive efficiency, thus the money you need to print goes up, destroying your foreign markets as the exchange rates become lopsided.

 
 
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12 March 2019 10:23
 
GAD - 12 March 2019 09:32 AM
EN - 12 March 2019 09:20 AM
GAD - 12 March 2019 08:05 AM

If all any country has to do is print all the money they want to have everything they want then why doesn’t every country have everything.

Because they don’t really agree that this works, or don’t think they can control inflation.

Hum, I wonder if it’s because as you print money to balance the cost of things the efficiency of producing those things goes down as there is no market pressure to drive efficiency, thus the money you need to print goes up, destroying your foreign markets as the exchange rates become lopsided.

Perhaps. I remain undecided. My suspicion is that we would not be able to control inflation and the value of our money would go down. However, we will probably never know unless we tried it.  But if you try it, the deficit will go up (MMT folks are unconcerned about that), and it might be difficult to reverse course if you find that the theory is unworkable.

 
Antisocialdarwinist
 
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12 March 2019 11:05
 

I’m less skeptical about MMT now than I was when I first heard about it seven or eight years ago.

mapadofu - 11 March 2019 12:05 PM

Try this podcast that has a discussion between an MMTer and a more conventional economist

https://traffic.megaphone.fm/VMP3252452383.mp3

This was a pretty good discussion between Stephanie Kelton (the proponent of MMT in the link I posted above) and Jason Furman, Obama’s chief economist. Although Furman isn’t necessarily the best anti-MMT representative in my opinion—he’s too much of a deficit dove. I’d like to hear from a deficit hawk.

Kelton’s key point is that mainstream economic theories are still based on fixed exchange rate currencies and make wrong assumptions about whether the economy is operating at full capacity. (Furman disagrees with this claim.) According to Kelton, MMT is an economic theory which assumes a floating exchange rate currency—a so-called “fiat currency”—and which modifies assumptions about when the economy is operating at full capacity. Taking these two factors into account changes predictions about when inflation and/or interest rates will rise.

Printing money in and of itself will not cause inflation. What causes inflation is when the demand for goods and services exceeds their supply. If the economy is operating at full capacity, then anything that increases demand will increase inflation. But if the economy is not operating at full capacity, then increasing demand will merely take up the slack in the economy. That seems like an oversimplification to me because supply can’t necessarily increase immediately—prices increase during the lag between increased demand and increased supply—but it’s still a very different case from increasing demand at full economic capacity.

Another reason why printing money wouldn’t lead to inflation is because the federal reserve bank has the power to increase interest rates in order to counteract inflation. The Fed has two mandates: keep inflation low, and keep unemployment low, where unemployment is another way to look at whether the economy is operating at full capacity. If I understand correctly, the traditional view is that if unemployment is low (like, 4%), then the economy must be operating at full capacity and inflation is imminent; therefore, interest rates must be increased to prevent inflation.

But MMT, I think, is saying that low unemployment doesn’t necessarily mean that the economy is operating at full capacity. Which means that inflation is not imminent, and interest rates are therefore too high. I think there’s some merit to this—the labor participation rate tells a different story. If so, then increased demand with low unemployment might lead to an increase in the labor participation rate, not inflation.

Another reason why printing money wouldn’t lead to inflation is if the new money isn’t used to buy stuff. In this case, there’s no increase in demand, so no upward pressure on prices.

The most convincing reason why MMT might be onto something, in my opinion, is empirical: quantitative easing—the policy of printing money after the 2008 financial crisis—didn’t lead to inflation despite widespread predictions that it would. In hindsight, this can be explained because A) the economy was not operating at full capacity; and B) the printed money was not spent. It was mainly given to the banks and financial institutions to cover their losses and bolster their balance sheets.

If there’s a good argument for why printing money to pay off the debt would cause inflation, I haven’t heard it and can’t think of why that would be. It seems to me that the inflationary pressure would have already been caused at the time of the spending which led to the debt. How would paying off the debt by printing money increase the demand for goods and services? Paying off the debt by raising taxes or cutting spending, on the other hand, would have the effect of decreasing demand.

In addition, paying off the debt would stop interest payments, which would have the effect of taking money out of the economy (or rather, decreasing the money being put into the economy). Although this is also an oversimplification, since according to traditional economic theory, reducing government debt would “make room” for more private debt.

One thing Kelton makes clear is that MMT is not merely a way for the government to print money endlessly to pay for lots of new entitlements, as many of the Green New Dealers would like. MMTers aren’t saying that printing money will never cause inflation, they’re saying that printing money won’t necessarily cause inflation. It depends on other factors.

mapadofu - 11 March 2019 12:39 PM

My 100%gut reaction is that MMT based policies could probably work great, until they don’t,and we’ll only find that line by tripping over it.

I’m inclined to agree with you here. And actually, I think that’s kind of what we’re doing. The Fed is supposedly “unwinding” quantitative easing right now—in effect, “unprinting” all the money they printed after the financial crisis—but I’ll be very surprised if they ever put a significant dent in it. And neither party seems interested in cutting the deficit.

 
 
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12 March 2019 16:34
 

ASD:

Printing money in and of itself will not cause inflation. What causes inflation is when the demand for goods and services exceeds their supply. If the economy is operating at full capacity, then anything that increases demand will increase inflation. But if the economy is not operating at full capacity, then increasing demand will merely take up the slack in the economy. That seems like an oversimplification to me because supply can’t necessarily increase immediately—prices increase during the lag between increased demand and increased supply—but it’s still a very different case from increasing demand at full economic capacity.

I need a refresher in economics (because that doesn’t seem at all intuitive to me).

Can anyone recommend a resource that explains basic stuff like what ASD just said here? Seriously, I’m not being sarcastic here, I’m not “getting it”.

 
 
Antisocialdarwinist
 
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12 March 2019 19:35
 
icehorse - 12 March 2019 04:34 PM

ASD:

Printing money in and of itself will not cause inflation. What causes inflation is when the demand for goods and services exceeds their supply. If the economy is operating at full capacity, then anything that increases demand will increase inflation. But if the economy is not operating at full capacity, then increasing demand will merely take up the slack in the economy. That seems like an oversimplification to me because supply can’t necessarily increase immediately—prices increase during the lag between increased demand and increased supply—but it’s still a very different case from increasing demand at full economic capacity.

I need a refresher in economics (because that doesn’t seem at all intuitive to me).

Can anyone recommend a resource that explains basic stuff like what ASD just said here? Seriously, I’m not being sarcastic here, I’m not “getting it”.

mapadofu’s link.

 
 
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