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View Diary: Modern Monetary Theory vs the Fiscal Cliff (65 comments)

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  •  A few possible objections (3+ / 0-)
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    bunnygirl60, Calgacus, semiot

    I would say I agree with 95% of this, and not sure we would really disagree at all if I flesh out the details.  And my objections would be mostly academic in the current situation.  Certainly we could have used significantly more fiscal stimulus in recent years, and for at least the next year we should still be biased towards adding not subtracting stimulus.  

    Moreover, in the current situation, if there were a loss of confidence in the dollar, that would probably be beneficial, as some devaluation would increase competitiveness and reduce our trade deficit.  

    Still, it is possible that if taxes were chronically underutilized, and borrowing or seignorage relied on too much, that this might cause sufficient volatility or decline in currency markets and foreign capital flows to be harmful.  This might especially be true of a smaller country; the US as still essentially the worlds reserve currency might get a pass on this for now.  But an important point is, this might be true even if in theory, it shouldn't matter how spending is financed.  Assuming most currency traders aren't proponents of MMT, exchange rates might be impacted reagardless of whether they rationally should be.

    Another point here, none of this really means that we have to run a deficit.  If we choose to print money instead, there is no deficit.  But, it is also a perfectly valid choice to raise taxes to finance a stimulus.  So long as you are raising taxes on those who can afford to pay (who are essentially the same people who have a surplus of financial assets which they would otherwise be investing in things like those t-bills anyway),  then you would still get an effective stimulus.

    A minor quible on the wrench.  When you build the wrench, you are creating output.  It doesn't matter whether it's the government or private sector which pays for it, creating a new asset essentially creates wealth.  

    But now, suppose you change none of the numbers, but for the same money, you get a better wrench; maybe the workers were more productive or had better technology.  There is no change then in nominal measures of wealth, but real wealth has clearly increased.  In theory, since a fiat currency is backed by the entire output of the economy, this should actually increase the value of the currency (by a miniscule amount, since this is just one wrench in a big economy).  So in theory, if you invest wisely, printing money to do it does not necessarily devalue the currency, so long as the new currency is backed by real new output.

    Also , with this passage:

    An economy only gets inflationary, too hot, if new wealth continues to be pumped into the economy after the employment goal is achieved. Up until that time, provided there are no exigent commodity constraints, the supply remains in excess of the demand so inflation does not become a factor.
    I would add the possiblity of a capital constraint (the third factor of production).  

    The late 1970s were an example of a sudden supply shock to an essential commodity that wasn't easily substitued.  But commodity prices rarely matter that much, and for the most part, should be allowed to rise.  If oil gets expensive due to lack of supply, then the increased price forces the required behavioral adjustment, people walk more, conserve, etc.  

    But it might also be possible to have inflation with unemployment if the number of employable workers is limited by a lack of capital investment.  Suppose industrial capacity utilization is very high for example, potentially productive industrial workers may not be employable due to lack of opportunities.  Or suppose there is no shortage of oil, but an insufficient number of oil refineries.  Some of these things could increase (at least temporarily) the natural rate of unemployment.  

    •  I understand about the wrench... (2+ / 0-)
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      psyched, Calgacus

      my secretarial staff owns a manufacturing company and of course the public sector get the $10 and the wrench but when lawmakers are screaming about deficits and debt I never hear them recounting inventory levels. ;-)

      As I mentioned, one of the ways to keep wealth in the private sector is by collecting less in tax. I was, however, also trying to make the point that the fastest way to go after unemployment is by the Treasury turning on the spigot and creating new currency. Also, the natural rate of unemployment is, as I understand it, around 3.7% but you are right, it could be higher during a period of transition. Still, as a manufacturer, think I am less worried about that than you might be - and I could be wrong. And just in case you are worrying, I can tell you that industrial utilization is no where near, not even close, to capacity. I mean my little crew is slammed but I'm sitting here in Indiana, where there are more trained manufacturing workers than any state in the nation, and there is capacity and labor everywhere I look. That's more than anecdotal. I attended a conference in Indy and the State has hard stats. I'm sure all states do. Capacity is not the bottleneck.

      Now capital investment - talking to a bank is STILL like "talk to the hand girrl." ...and my 40 year old company grew sales 55% last year! (Don't GET me started on that subject. I'll never stop.) lol

      You are also totally right about oil and other commodities. What happened in the '70's was rare and, as I said, much more tied to politics than to economics. I don't fret about $4.00 oil. In my secret heart of hearts, I welcome it because it will drive green R&D and manufacturing even harder. My business is not in that industry but I am all about supporting it.

      And, finally, to your first point, I really am just a physics PhD so what I know about international economics is just about enough to fill a thimble. I was only writing about US currency and our current stupidity. I know MMT applies worldwide, I just haven't read enough yet to respond intelligently. Apologies.

      Just as an FYI, the reason I ended up writing this was because I couldn't find a short, simple explanation anywhere. Maybe I just didn't know where to look but I wrote this for my friends and then posted it here at Daily Kos in case it was helpful to anyone else.

      "When in doubt, do the brave thing." - Jan Smuts

      by bunnygirl60 on Sun Nov 25, 2012 at 06:02:40 PM PST

      [ Parent ]

    •  You will not get the equivalent stimulus (3+ / 0-)
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      psyched, bunnygirl60, jellyyork
      So long as you are raising taxes on those who can afford to pay (who are essentially the same people who have a surplus of financial assets which they would otherwise be investing in things like those t-bills anyway),  then you would still get an effective stimulus.
      Defining the deficit as Government spending - tax revenues, it follows from the sectoral financial balances model that if you balance the budget, so that there is no deficit; then the foreign trade balance and privates sector savings must be equal to zero. So, if the US were to have a trade deficit of 4% of GDP, then the domestic non-government sector would have to run a deficit of 4% of GDP.

      That deficit would not be sustainable over a period of years, because no credit bubble can be sustained long-term. So, if you try to fund economic stimulus activities without deficit spending by paying for the spending with taxes, then you may create greater real wealth for awhile, but eventually the economy will collapse from the year-to-year cumulation of private sector wealth destroyed by taxation.

      So it does matter how you fund stimulus. It has to be funded with deficits; though not necessarily with debt since you could use coin seigniorage to pay for everything!

      •  Good Points (2+ / 0-)
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        psyched, Letsgetitdone

        Good points. Yeah, basically acerimusdux is talking about "the balanced-budget multiplier" discussed in a billyblog, remarkably entitled What is the balanced-budget multiplier?. As you & he point out, limited relevance to an open economy like Australia, USA  today. More applicable to the postwar USA.  Or maybe if we just use budget deficits to accomodate foreign deficits.

        bunnygirl60: I really am just a physics PhD so what I know about international economics is just about enough to fill a thimble.

        Well, that puts you ahead of most economists of the last few decades, who have much more than a thimble filled with anti-knowledge.

        •  Absolutely, Cal (0+ / 0-)

          My comment was based on Billy Mitchell's work. Warren Mosler, Randy Wray, and Bill Mitchell are the MMT "fathers." They've been the main figures in development of the approach. Others who have done important work include: Stephanie Kelton, Marshall Auerback, Scott Fullwiler, Mat Forstater, Jan Kregel, Pavlina Tcherneva, Rob Parenteau, and Eric Tymoigne.

      •  I disagree (0+ / 0-)

        First off, we don't know whether a 4% trade deficit is sustainable or not.  But so long as the Federal deficit is zero, it isn't contributing to that deficit.  If there is any credit "bubble" there, it is being entirely financed by foreign capital flows.  So if foreign holders of the currency think it's sustainable, it will be.  If they eventually want to hold less dollars, then the exchange rate will adjust and the trade deficit will go away.

        However, so long as the US is wealthier than our trading partners, then maybe a small annual errosion of our relative wealth is also sustainable long term.

        Keep in mind, a trade deficit means that we are consuming more than we are producing.  But a recession means that we are producing less than we CAN produce.  

        If you do have an economy that wants to consume less than it is capable of producing, and that thus requires government deficits to achieve potential output, then the cause of that is generally an excess of financial wealth.  Financial wealth is just a way for wealth holders to delay both consumption and production to some future period.  In Keynesian economics, the output gap is caused by an excess of intended savings over intended investment.  Savings is just a single period, wealth is the result of that savings excess on the balance sheet.  Note that financial wealth passes on no benefit to future generations, it passes on both an asset and liability.  

        So why not correct that imbalance by taxing that excessive financial wealth?  Rather than just accept that you have an economy which requires perpetually high federal deficits?

        But this is really all that seignorage does, it's just another way of taxing that wealth.  The benefit of using seigniorage instead of taxation is the more direct impact on the currency, which would help lower that trade deficit.  So yes, that is preferrable right now.  But it's hard to cause inflation right now, monetary policy is impotent.  So anything that gets use there helps.  I'd put seigniorage first, taxes second, and more debt third as far as what the economy currently needs.

        But I also think the amount of currency adjustment required at this point isn't great.  I think we need both seigniorage and restored taxation on higher incomes.  The degree of seignorage should be determined by the trade balance.  

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