There has been a couple of interesting articles written by John Carney who is a Senior Editor at CNBC.com on Modern Monetary Theory (MMT) – starting with Monetary Theory, Crony Capitalism and the Tea Party (December 22, 2011) and followed up with Modern Monetary Theory and Austrian Economics (December 27, 2011). I am happy that our work is penetrating in to the mainstream business and economics commentary space. It is good that John Carney has spent some time coming to terms with MMT and its departure from the failed mainstream macroeconomics. But some problems remain with his analysis. The issues he raises relate to political matters rather than the economics of MMT. In that context, MMT is neither anti- or pro-crony. But if you delve deeper and really understand the MMT macroeconomic framework then you realise that MMT is biased toward anti-crony.
John Carney notes that the US fiscal stimulus and central bank quantitative easing “both occurred without any attendant inflation or giant soaring of interest rates” and that the “so-called ‘bond vigilantes’ turned out to be mythological creatures” and “the downgrade of the U.S.’s credit rating only lead to lower interest rates”. These events were contrary to the predictions made by several prominent mainstream economists.
That should be of no surprise because the predictions were consistent with the theoretical models that students are taught in mainstream economics programs and which guide the research efforts of the majority of my profession. Clearly, the predictions were wrong – over and over again.
In this context, John Carney said that:
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.
Which is an accurate portrayal except I would note that the real constraint on government spending is not price inflation rather than the productive capacity of the economy. Price inflation in this sense is a symptom that nominal aggregate spending is outstripping that capacity.
I would note that the “MMT school of thought” is different from the various blogs that have developed since the academic material emerged in the 1990s which draw on that conceptual material. There are many “blogs” now that are sympathetic to MMT or suggest they espouse MMT which have been derived from the early academic work that a few of us (Warren, Randy, Stephanie, Scott, Matt, myself and a few others) developed. I always agree with the contributions of the early MMT writers but often disagree with some of the statements that the blog writers outside of this group make in the blogosphere.
I consider the early MMT writers to be the MMT theorists.
John Carney also noted that:
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).
Remember that MMT is derivative in that it draws on previous theoretical traditions – dating back to Marx, Keynes, Kalecki, Lerner, Minsky to name just a few of the intellectual influences from yesteryear.
However, the way these influences are drawn together into a comprehensive macroeconomic framework by MMT theorists is unique and distinctive. Further, it is a framework that has stood up to extreme empirical scrutiny.
We have large budget deficits relative to the norm and the central banks have expanded their balance sheets by a significant degree. We do not have inflation nor out of control interest rates. And, as predicted, the Eurozone is melting down in the face of the flawed (unworkable) design of its monetary system. All essential insights that one can derive from MMT.
The focus on price stability and the way that buffer stocks can be used is very distinctive and you will not find this in the mainstream framework. The Job Guarantee is developed within that tradition.
John Carney like most other students of MMT tend to consider the JG to be a “guarantee jobs for everyone” which he think of as one of the “distractions” to the main MMT contribution. However, that characterisation demonstrates to me that the “student” hasn’t fully embraced the buffer stock thinking that is unique in MMT.
Those who haven’t come to MMT from a solid background in macroeconomics can easily just think the JG is a tacked-on “leftist” or “social democrat” policy aimed at providing jobs to those who cannot find them. So I often get the view expressed in E-mails etc that the JG is all very nice but peripheral to the deep financial and monetary insights that MMT provides and should be culled from the writings or de-emphasised so as not to alienate the hard financial market types.
The progressives who support an income guarantee (for example, Basic Income proponents) also play down the importance of the JG (an employment guarantee).
I take John Carney’s “distraction” categorisation as fitting him into those that haven’t fully grasped the role that the JG plays in MMT.
The reality is that the JG is a central aspect of MMT because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and price stability. And in making that point I will draw on it later to address John Carney’s major objection to MMT.
But to understand the role that the JG plays in MMT one has to grasp the concept of buffer stocks.
And then there was the job guarantee, which I immediately recognized as Minsky’s employer of last resort. I can’t remember what Warren called it but Bill called it BSE, buffer stock employment.
I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand.
I noted that this means that the government can thus choose – of all the “steady state” unemployment-stable inflation equilibria available – one that provides a job for all when the private market fails.
For those well-versed in the history of macroeconomic thought rather than the day-to-day financial market trends, this MMT insight is crucial and relates to the need for an economy to maintain a nominal anchor (that is, maintain price stability).
As I explained in this blog – Modern monetary theory and inflation – Part 1 – that there are two broad ways to control inflation and the use of buffer stocks are involved in each:
- Unemployment buffer stocks: Under a mainstream NAIRU regime (the current orthodoxy), inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing.
- Employment buffer stocks: The government exploits the fiscal power embodied in a fiat-currency issuing national government to introduce full employment based on an employment buffer stock approach. The Job Guarantee (JG) model which is central to Modern Monetary Theory (MMT) is an example of an employment buffer stock policy approach.
Full employment requires that there are enough jobs created in the economy to absorb the available labour supply. Focusing on some politically acceptable (though perhaps high) unemployment rate is incompatible with sustained full employment.
Under the neo-liberal policy regime, central banks have, increasingly, been given the responsibility by government for managing the price level. In conducting monetary policy to fulfill their major economic objectives, central banks manipulate the interest rate and attempt to manage the state of inflation expectations via aggregate demand impacts.
They now use unemployment as a policy tool rather than a policy target to discipline the inflation generating process. Where negative real effects from the operation of inflation-first monetary policy are acknowledged they are theorised to be necessary for optimal long term growth and employment and small in magnitude.
In MMT, a superior use of the labour slack necessary to generate price stability is to implement an employment program for the otherwise unemployed as an activity floor in the real sector, which both anchors the general price level to the price of employed labour of this (currently unemployed) buffer and can produce useful output with positive supply side effects.
The employment buffer stock approach (the JG) exploits the imperfect competition introduced by fiat (flexible exchange rate) currency which provides the issuing government with pricing power and frees it of nominal financial constraints.
So the JG works on the “buffer stock” principle. I first thought of this idea during my fourth year as a student at the University of Melbourne (in the late 1970s). The basis of the policy came to me during a series of lectures on the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC).
The Government then guaranteed that the price would not fall below that level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high. So by being prepared to hold “buffer wool stocks” in low demand and release it again in times of high demand the government was able to guarantee incomes for the farmers.
However, with some lateral thinking you can easily see that what the Wool Floor Price Scheme generated was “full employment” for wool! If the Government fixed the price that it was prepared to pay and then was willing to buy all the wool up to that price then you have an equivalent scheme.
This works just the same for labour resources – just unconditionally offer to buy all labour at a stated fixed wage and you create full employment.
The JG is thus a central plank in the MMT policy framework that seeks to maintain full employment with inflation control. When the level of private sector activity is such that wage-price pressures forms as the precursor to an inflationary episode, the government would manipulate fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand.
This would see labour being transferred from the inflating sector to the “fixed wage” sector and eventually this would resolve the inflation pressures. Clearly, when unemployment is high this situation will not arise.
But in general, there cannot be inflationary pressures arising from a policy that sees the Government offering a fixed wage to any labour that is unwanted by other employers. The JG involves the Government “buying labour off the bottom” rather than competing in the market for labour. By definition, the unemployed have no market price because there is no market demand for their services. So the JG just offers a wage to anyone who wants it.
In contradistinction with the NAIRU approach to price control which uses unemployed buffer stocks to discipline wage demands by workers and hence maintain inflation stability, the JG approach uses the ratio of JG employment to total employment which is called the Buffer Employment Ratio (BER) to maintain price stability.
The ratio that results in stable inflation via the redistribution of workers from the inflating private sector to the fixed price JG sector is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy. Its microeconomic foundations bear no resemblance to those underpinning the neoclassical NAIRU.
It also wouldn’t be worth estimating or targetting. It would be whatever was required to fully employ labour and maintain price stability.
These insights allow us to claim that a sovereign government which faces no financial constraints can achieve continuous full employment without endangering price stability. There can be no inflationary impulses coming from buying labour at a fixed price that no-one else wants.
These insights then allow MMT to make further distinctive statements.
The problem with the current approach to fiscal policy is political. The governments think that large deficits are bad so they spend on a quantity rule – that is, allocate $x billiion – which they think is politically acceptable. It may not bear any relation to what is required to address the existing spending gap.
The better basis for the conduct of fiscal policy which is exemplified in the provision of employment guarantees is to spend on a price rule. That is, the government just has to fix the price (the JG wage) and “buy” whatever is available at that price. After all, the budget deficit is endogenous and has to be whatever it takes to get full employment.
If the business community or anyone else thinks the deficit is “too high” or that there are “too many” workers in the Job Guarantee pool – then there is a simple remedy that is available to them – they can just lift their private spending (for example, invest more in productive capacity). Then the budget deficit will shrink and the Job Guarantee pool will decline. If they hated the Job Guarantee so much they could simply employ all the workers in the pool!
But the Job Guarantee creates a safety net that is always there to cope with private sector spending fluctuations (driven in part by varying saving desires). In that sense, it is infinitely superior to using unemployment as the buffer stock to cope with the flux and uncertainty of private spending. It is almost unbelievable to me that we tolerate governments sitting idly by watching millions of people around the world being forced into unemployment for want of some funding that the government can always provide.
Further, and very importantly (in the context of today’s blog), the Job Guarantee would also overcome many of the problems that bedevil the “politicised” conduct of fiscal policy.
Which leads me back to John Carney who said:
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.
Government spending occurs through specific channels, not in aggregate abstractions. This means that certain companies and sectors of the economy benefit, and others suffer, because of government spending.
I note that John Carney lists the blogs where he learned MMT from and the list doesn’t include any of my own work. However, none of the MMT theorists (as previously defined) are politically and economically naive. I know all of them well and regularly interact with them. I consider the group to be realist in the extreme with a very good understanding of history, power elites, political machinations and the rest of it.
There is no blindness when it comes to recognising the influence of crony capitalism.
The first point to note is that while a distrust of government is reasonable given the links that exist between the financial and political elites advocating an economic framework with minimal government involvement is naive in the extreme. Whether one likes it or not, a sovereign government issues the currency and so is the centre-piece of the economic system.
If you try to design a monetary system that forced elected governments to use foreign currencies or restricts their use of their own currency you end up with the Eurozone or some derivative. Fixed exchange rates don’t help because they become the prey of speculators and force domestic policy into a subservient position.
Trying to balance government budgets always (over the cycle or whenever) is a denial of the role that the budget plays in a monetary economy and will bias the economy to the NAIRU conception (spending on a quantity rule).
So the challenge is to: (a) recognise the centrality of government; but (b) realising it is typically corrupted by the elites – currently those in the financial markets and the other crony interest groups.
MMT allows you to understand how the monetary system works whether it is being manipulated by corrupt governments who are being influenced by crony capitalists or by sound governments acting under strict democratic mandates to advance public purpose.
There is no guarantee that our governments will be of the latter persuasion and realistically they will more likely be of the former ilk.
So I advocate – outside the realm of MMT – grass roots action to reinforce the democratic connection between citizen and government. To make it harder for governments to be co-opted. For example, I would ban political funding and allocate a fixed amount of public funds to the candidates for public office to be used for electoral purposes. I would have very strict conditions placed on electoral commentary within the media etc.
All of that is outside of the domain of MMT.
But had John Carney delved into my blog (at all) or read any of my academic work he would have learned that I take a strong position about “crony capitalism”.
In the past I have advocated among other things:
1. Extensive banking reform to eliminate the power and influence of the financial market elites. Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks and Nationalising the banks – for further discussion.
2. Prosecution and outlawing of the corrupt rating agencies. Please read my blogs – Time to outlaw the credit rating agencies and Moodys and Japan – rating agency declares itself irrelevant – again – for more discussion on this point.
3. Extensive financial market reform to outlaw unproductive speculation Please read my blog – We should ban financial speculation on food prices – for more discussion on this point.
4. Revised policy frameworks to ensure there is a major redistribution of national income back to wages to reduce the reliance of consumption spending on credit growth. Please read my blog – Nationalising the banks and A radical redistribution of income undermined US entrepreneurship – for more discussion on this point.
5. Reject standard Keynesian thinking about “generalised expansion” in favour of employment buffer stocks and hence increased reliance on automatic stabilisers. Please see the blogs that the following string – Job Guarantee – yields.
6. A recognition that class still pervades economic outcomes. Please read my blog – The top-end-of-town have captured the growth – for more discussion on this point.
What has been the logic behind the ideas contained in these blogs? The logic has been to reduce the capacity of the financial market and political elites to capture government policy and skew the benefits in their favour
As John Carney says – by way of criticising what he says is MMTs spending solution to unemployment – that:
The sectors and companies that benefit are not those that bring the most or the widest prosperity but, conversely, those in which prosperity is most concentrated in the hands of a few. The spending is accompanied by regulatory privileges and barriers that also benefit the very same groups. When government spending levels and regulatory operations are high, this has a widely distortive effect on the economy that effectively impoverishes most of the population. This is basic public choice Econ 101 but the MMTers seem blind to it.
Apart from the historically inaccurate claim that high government spending within a tight regulatory environment “impoverishes most of the population” – it is impossible to argue that when output falls and unemployment rises that the problem is not an inadequacy of aggregate demand. Please read my blog – What causes mass unemployment? – for more discussion on this point.
The solution is that one or more of the three main spending sectors: (a) external sector; (b) private domestic sector; and/or (c) the government sector – have to increase their nominal spending growth.
A recession is usually associated with a prolonged decline in private spending growth which also, typically, undermines the prospects of export-led growth. That is why Keynes and others advocated public sector spending to kick-start the economy and promote positive future expectations about the prospects of sales and employment growth in the private sector.
The question is not whether the public sector should increase spending under these conditions but in what way should the fiscal intervention be constructed. That is, what sort of fiscal stimulus is required.
Typically, Post Keynesians – deriving their insights from what they think Keynes wrote – advocate generalised fiscal and monetary expansion mediated by incomes policy and controlled investment as a solution to unemployment.
They advocate a boost to public infrastructure investment which enhances the profitability of private sector investment, in addition to contributing to aggregate demand and employment.
Major construction projects run right into the backyards of the crony capitalists and tend to provide massive profits with lower employment dividends.
Further, public investment is unlikely to benefit the most disadvantaged workers in the economy. The JG is designed to explicitly provide opportunities for them. But the major problems with this sort of (indiscriminate) expansion in isolation is that it does not incorporate an explicit counter-inflation mechanism and fails to address the spatial labour market disparities.
If we only consider aggregate demand as the target then we can design capital infrastructure projects that pump purchasing power into the economy. But how can we be sure that the investment will provide jobs in failing regions? Upon what basis are the most disadvantaged workers with skills that are unlikely to match those required by new technologies going to be included in the ‘generalised expansion’? Where is the inflation anchor?
Further, environmental constraints militate against generalised Keynesian expansion. JG proponents emphasise the regional dispersion of unemployment. Higher output levels are required to increase employment, but the composition of output remains a pivotal policy issue. JG jobs would be designed to support local community development and advance environmental sustainability.
JG workers could participate in many community-based, socially beneficial activities that have intergenerational payoffs, including urban renewal projects, community and personal care, and environmental schemes such as reforestation, sand dune stabilisation, and river valley and erosion control. Most of this labour intensive work requires very little capital equipment and training. We denote this form of spatially targeted employment policy as Spatial Keynesianism, in contrast to the bluntness of orthodox Keynesian tools which fail to account for the spatial distribution of social disadvantage.
Even locally-designed but federally-funded projects do not evade the reach of the crony capitalists. That is where local citizen groups should be involved in the project design phase to ensure that community needs are advanced.
For more analysis of this issue you might like to read our report (from a 3-year study) – Creating effective local labour markets: a new framework for regional employment policy.
Among other things it outlines in considerable detail how job design and project planning can advance wider interests . Before you make any negative comments please read that Report – we have spent years thinking through all the obvious issues.
So MMT is very cognisant of these issues.
The JG also differs from a Keynesian expansion because it represents the minimum stimulus (the cost of hiring unemployed workers) required to achieve full employment rather than relying on market spending and multipliers.
Further, the JG reduces (but does not eliminate) the influence of crony capitalists who always seek to capture government policy to advance their own interests.
The the JG functions as an automatic stabiliser rather than as a discretionary program. It builds further endogeneity into the budget balance. When the economy turns down, the JG pool of workers will rise as displaced workers elect to take the guarantee. When the economy starts to improve again, the private sector merely has to offer a wage (or conditions) better than the JG wage and the JG pool will decline again.
The discretion by governments is thus reduced. A pool of projects would be agreed upon with local communities and the expansion or contraction of the scheme would be automatic. There would be no big bailouts of banks or business firms. The financial markets would be largely dealt out of the game.
The Job Guarantee is not a universal panacea. It is a safety net employment capacity that provides a nominal anchor for the macroeconomy via the fact that the government would never be competing for resources with the private sector. The private sector can bid the workers away any time they want to pay above the minimum wage (and provide reasonable working conditions). If there are inflation pressures, tighter policy settings would redistribute workers from the inflating private sector into the fixed price Job Guarantee pool and stabilise prices. That is how buffer stocks work.
The value of this approach is that the government knows exactly how much stimulus is required to achieve this “loose” full employment on a daily basis. The tap turns off when the last worker walks in the door on any day looking for a job. This provides daily feedback to the fiscal system and overcomes the uncertainty of timing and guessing the size of the stimulus.
Once the economy is at full employment – in this sense – the government can then design other stimulus measures that it deems to be politically sustainable (and which hopefully add social value) to create employment and activity elsewhere. But it always knows that if the nominal demand levels come up against the real capacity of the economy then employment will just be redistributed if policy tightening is required rather than unemployment being created.
The challenge is always to make our governments work for us rather than the elites. MMT is not naive to the capture of our governments by the latter. But what we do about it is in the political domain – the class struggle etc.
MMT does provide a full employment and price stability framework which helps reduce the change of this capture.
John Carney also thinks that “MMTers seem not to understand the politics of inflation and why government often doesn’t prevent inflation from occurring, even though it is obviously within its power to do so”. Well in the interests of time today I will leave that claim and simply assert it is spurious – see previous discussion about the JG>
He concludes his first MMT article by saying that:
… 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.
Again I wonder how much MMT literature John Carney has read. I am always emphasising “employment-rich” spending. My recommendations about fiscal stimulus packages are always underscored by the need to introduce a JG as the first step and then develop public services like education, health etc. I have written about the need to eliminate the private insurance companies from health spending and the desirability of nationalising health care.
But whether there is a natural friendship with Tea Party brigades or not is a political issue rather than anything to do with MMT. You could understand MMT and still advocate some of the pernicious social and cultural attitudes that seem to be advanced by the Tea Party.
I would never advance those agendas. Nor do I consider the Tea Party provides any deep understanding of how the monetary system operates. The only question I have is why do people who will be harmed the most by the policies they advocated flock to these political movements. The answer is that they are being used by the cronies. But then John Carney doesn’t address that at all.
I will consider his second offering another day.
That is enough for today!