Hi, It's Stupid: The Last Post on Modern Monetary Theory

 

Statue from 2009 by the late William Fawke, in the Garden of Heroes and Villains, Warwickshire, via Ellen Herold's Pinterest.

Hi, it's Stupid to say Modern Monetary Theory is all wrong, but I just can't help myself.

George Berkeley, Bishop of Cloyne, the great Irish philosopher midway between Locke and Hume, argued brilliantly that things don't exist—I mean things, material objects, the out-there stuff we see and touch, in that you can have a perfectly coherent picture of the universe without them: all you need are minds, full of perceptions, and that's enough. Things corresponding to the perceptions don't have to be there. "Berkeley's system," says the Stanford Encyclopedia mildly,

while it strikes many as counter-intuitive, is strong and flexible enough to counter most objections.

Which made Dr. Samuel Johnson, the irascible lexicographer whose portrait serves as my avi, pretty mad. Because obviously the theory was revolting to his stolid English soul, but he didn't even know how to participate in the discussion. One day as he was leaving a church with his future biographer, James Boswell, they started chatting about it, Boswell observing that "though we are satisfied his doctrine is not true, it is impossible to refute it." As they spoke, they passed a big stone along the path and Johnson turned to give it a powerful kick, no doubt hurting his foot: "Thus I refute it!" 

Meaning, more or less, GTFOOH, are you telling me this doesn't exist? Deze nutz!

This is my problem with so-called Modern Monetary Theory. 

For the Record: Biden's Corporate Tax

Cartoon by Clifford Berryman, June 1933, via Wikipedia. More material on the issues being faced then here, but (spoiler) it wasn't Roosevelt's idea to replace income tax with a sales tax..

 

Bos sent me this thread from Stephanie Kelton offering suggestions for forgetting about a hike on corporate taxes (or living with Manchin haggling the hike down, I'm not sure which). Also some corroboration for my hypothesis that she lacks clear concepts of how the budgeting process works and what Biden and Yellen are planning for the tax system. Both her ideas are pretty good, too, I hafta say, but don't offer good reasons for giving up on the tax hike:

@Yastreblyansky any thoughts on this? If the Dems can’t get the 28% incr. on Corp. taxes, what happens to the infrastructure bill? Reduce programs? Get other taxes? Or her 2 suggestions. https://t.co/IbbaCwh5bX

— Boswood - for a Job Guarantee (@Bosengood) April 14, 2021

Let Me Hear Your Balalaikas Ringing Out

Some folks probably thought I was joking when I spoke of Modern Monetary Theory as something that could lead to a situation like that of the countries in the Soviet orbit after World War II, and I guess I was trying to get a rise, anyway, but it's pretty amazing how close I came, based on a little (a very little) research—how much the monetary and fiscal system in the USSR itself, at any rate, worked the way MMT advocates claim monetary and fiscal systems are supposed to work, which just happens to explain some of the very serious problems that led to the country's demise in 1991.

Starting with the fact that, while Stephanie Kelton and colleagues wrongly suggest that the US government has sole responsibility to create all the money in the United States, in the Soviet Union it really did create all the money. That's because, for starters, there was basically only one bank, the Gosudarstvennyj Bank USSR or Gosbank, combining the functions of a central bank and a commercial bank. As the central bank, it issued all the currency, the physical rubles and kopeks, and as the sole commercial bank it issued all the credit, in particular loans, such as they were, to the state "enterprises" that constituted most commercial activity, so all the money is included in those two functions:

Think of a Household!

(Slightly updated 3 April)

Chapter 1 heading, "Don't Think of a Household", from Stephanie Kelton's 2020 The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy:

President Obama was being pretty pathetic when he said that, at one of many low points in the course of his endless struggle to make Republicans believe he wasn't a Communist (spoiler: they knew perfectly well he wasn't a Communist—they pretended to think he was because they thought it would advantage them politically to do so), but the fact is that families are a lot more like federal governments than the conventional wisdom tells you, though not for the reasons Obama was suggesting: namely,

Reaganomics With a Human Face, Continued

Warren Mosler, godfather of MMT, at his St. Croix home, with Bloomberg's headline, "A Hedge Fund Guy Lefties Can Love". Really?

Commenter Iain Bason had some very useful issues with the Modern Monetary Theory post.

Caveat: I am not an economist, so don't take anything I say as authoritative! My impression is that the academic MMT people are upset at those who distort the theory that way, but I can't remember where I read about that. Maybe Naked Capitalism?

At any rate, I think you're mistaken (or maybe just glossing over the complexity) about budget deficits not causing inflation, as well as about printing money causing inflation. Even without the Fed simply buying Treasury bonds and then essentially burning them, which I understand it can and does do, simply having the same quantity of dollars being used in more transactions looks very much like increasing the money supply; just as having the same quantity of dollars sitting in a vault and not being used at all looks very much like decreasing the money supply.

The key insight that I gleaned from dipping into MMT articles is that financial constraints are a matter of accounting, which means that we can change them by changing the rules. (Not that that's necessarily easy; and changing rules tends to cause problems; but it isn't absolutely impossible.) Physical constraints, on the other hand, cannot be avoided. If I'm elected ruler of the universe on the promise to give everyone a pony, I may find it difficult to come up with the money to fulfill that promise, but I will find it impossible to breed enough ponies. (That is not an original example, but again I can't remember where I read it.)

My idea was you didn't need to be an economist to understand where the pop-MMT argument was going wrong, that it was chiefly a matter of rhetoric, and I may have been wrong about that, in the sense that the good-economics is as odd, intuitively, as the bad-economics, and may take more preparation than I thought. The post itself could have been a lot better written, as a matter of fact, and I think some of these issues arise because of problems in the writing, so I'd like to do some clarification, though it may mean sounding a lot more like an economist (which I'm not) than I wanted to.

Reaganomics With a Human Face

 

Free lunch, photo by Bob Pennell, the Medford Mail Tribune, via USA Today.

I think I need to say something about "Modern Monetary Theory", in particular in its vulgar form, as the idea that, caricaturing a bit,

• since we now know that deficit spending does not necessarily cause hyperinflation (at least since the gold standard for the US dollar was somewhat inadvertently dumped in decisions of the Nixon administration in 1971-73),
• therefore, there is no reason to think about deficits at all, in planning increased social spending for the purposes of doing economic justice, and—oh, also, cutting, or not raising, taxes on the very well-to-do, no reason to worry about that either.

It's that last bit that got my attention, because I'm not an economist, like most of you, but an amateur human with some training in social science in general, who sometimes thinks about political economy and political morality, and my fondest dream has long been to work toward equalizing our situation, through the tax system, by getting the very rich to pay more. Lots more. Ever so much more, since the appearance of Thomas Piketty's Capitalism in the Twenty-First Century in English in 2014 gave me the courage. I told some relatively liberal online advocates of MMT about it, over the Twitter, some time ago: if there's no good economic reason for raising their taxes, how am I going to get it done? And they said, Don't worry about it! There are other reasons for taxing the rich! But they didn't offer me any reasons that would have any political weight.

That is—in other words—I started feeling as if the idea was being pitched as a justification for unlimited government spending on the poor, but was in fact a justification for not taxing the rich, a kind of Reaganomics with a smiling, liberal face, and I didn't want the economics to work out. And I really didn't like the thought that progressives like Senator Sanders and Rep. Ocasio-Cortez were looking warmly at it.