I was going to write about Jamaica today but this topic emerged that I thought I should deal with before I write about the home of reggae. In fact, some of the material is input into a reasoned discussion about Jamaica so it logically precedes it. With the increasing profile of Modern Monetary Theory (MMT), social media activists are wont to talk about MMT in various ways that, in many cases, do not bear resemblance to our work. But that doesn’t stop them claiming things about what we have written or said and then proceeding to say how this is a ‘big problem’ with MMT that they cannot accept. Then their own local commentators chime in reinforcing the point. It is obvious that the original writer hasn’t read our work or if they have they haven’t grasped it (including the nuance and subtlety) but still feels privileged to hold themselves out as experts to wax lyrical about the technical flaws in the said work. This gets amplified by the responses from the readership who have probably read even less – to the point that we end up with MMT being constructed as something ridiculous and foreign to its original. Sort of like start by saying you are discussing 2, call it 3 and say it equals 4. It is a problem because it confounds people and also gives those who oppose our work ways to further misrepresent it in the public debate.
I expressed my concerns about this phenomenon in this blog post (with links to other posts embedded) – When two original MMT developers get together to discuss their work (December 13, 2018).
In May last year, after a particular Real Progressives segment, I wrote a three part series about international trade and finance:
1. Trade and external finance mysteries – Part 1 (May 8, 2018).
2. Trade and external finance mysteries – Part 2 (May 98, 2018).
3. A surplus of trade discussions (May 23, 2018)
There were earlier blog posts which also considered these questions in detail:
4. Gold standard and fixed exchange rates – myths that still prevail (May 28, 2009).
5. Modern monetary theory in an open economy (October 13, 2009) –
6. Do current account deficits matter? (June 22, 2010).
7. MMT and the external sector – redux (September 26, 2018).
These are among a host of blog posts I have written over the last 15 years which shed light on what the MMT analysis of international trade involves.
In the last 24 or so hours I have been bombarded with E-mails (and DM Tweets), some of which have announced that there are serious flaws in MMT (whoa! just discovered, after all these years), and others, from people keen to educate themselves on these matters who have become genuinely confused by the misrepresentations but do not know where to go from there.
The specific article they have held out was published in the so-called Progressive Pulse – which says it “is a centre-left blog seeking a fairer society for all”.
They “very much regret Brexit” and claimed that it was “the normalisation of anti immigrant and racist rhetoric is a stain on the country”.
So one wonders. Europhiles are not known for their reasoned judgement (-:
The article – Suggested requirements for a properly functioning Monetary system based on MMT in the UK (January 8, 2019) – which was written by one Peter May who has “many years experience in the food and drink sector”.
The intent was to ‘expose’ an alleged rift between an early MMT academic Fadhel Kaboub (who was taught by Randy Wray at UMKC) on one side, and, Warren Mosler and myself on the other side. Fadhel also worked as an intern in my research centre at the University of Newcastle for a semester while he was finishing his PhD.
Apparently, Fadhel Kaboub, who Mr May writes:
… is a great Modern Monetary Theory ‘MMT’ … and Job Guarantee Advocate, seems to be rather opposed to the Warren Mosler and Bill Mitchell idea that exports are like a household: such that what you export is going to make you poorer, simply because they used to be your resources.
Mr May continued:
To me this idea not only jarred because sovereign monetary systems are not like a household, but also because I’ve always thought that this was a rather simplistic point of view.
There was a link to an earlier article he wrote which gets things about as twisted as this one.
I will come back to the Fadhel Kaboub reference presently.
But, where, pray tell, have I ever written or said that “exports are like a household”.
The answer is simple. Never.
I think the author is confusing the ‘currency-issuing government is not like a household’ with something he wants to say about international trade.
Which then means that his assertion of knowledge “because sovereign monetary systems are not like a household” is just nonsensical.
Exports … sovereign monetary systems … what exactly are we talking about?
Further, when have we ever said that “what you export is going to make you poorer simply because they used to be your resources”?
The answer is simple. Never.
There appears to be a lot of confusion about the external economy in a fiat monetary system. Many economists do not fully understand how to interpret the balance of payments in a fiat monetary system.
So it is no surprise that the general public struggles in this domain.
Now what Mr May was upset about, I think, is the basic MMT proposition that exports are a cost and imports are a benefit.
As I have said often – that should be undeniable.
For an economy as a whole, imports represent a real benefit while exports are a real cost.
Exports mean that we have to give something real to foreigners that we could use ourselves – that is obviously an opportunity cost.
Imports represent foreigners giving us something real that they could use themselves but which we benefit from having. The opportunity cost is all theirs!
Thus, net imports means that a nation gets to enjoy a higher material living standard by consuming more goods and services than it produces for foreign consumption.
Saying that an export is a cost is not the same thing as saying that the act of exporting makes a nation poorer.
Clearly, a nation that merely gives up material resources and gets nothing in return would be making itself poorer in material terms.
And certainly, the history of colonial nations is riven with examples of resource plunder from the colonial masters.
But that is not remotely what we are considering when we say an export of a good or service which contains real resources owned by the nation is a cost.
It should be undeniable in terms of material living standards that giving some real thing away is a cost. Getting some real thing is a benefit.
That doesn’t equate in a conclusion that MMT’s preference is for a nation to have a current account deficit.
It just states the obvious fact that exports, by definition, involve sacrificing real resources and depriving a nation of their use.
Imports on the other hand clearly involve receiving final goods and services where the real resource sacrifice has been made by the exporting nation.
In a world where we produce to consume – not for its own sake – then receiving goods and services is better (real terms) than sending them elsewhere.
Now, I understand that we can have a spiritual debate about mass consumption. Is is really an appropriate path to happiness?
I wrote a bit about that in this blog post – The mass consumption era and the rise of neo-liberalism (January 7, 2016) – so my views are known on that issue.
That exports are a ‘cost’ suggests the motive to export.
The ‘cost’ is incurred to generate benefits – to enhance the material prosperity of the nation.
There is only one reason a nation would want to relinquish access to its own real resources – and that is to get other real resources that it desires from other nations through trade.
That is to generate a higher rate of return.
Which means that the cost is best considered as an investment in generating benefits, which in this case, might be an increased capacity to purchase imports.
But it could also be for different motives – to accumulate financial claims in the currency of the nation.
One might argue though that there is an irrationality in the second motive. Why would a nation, once it has satisfied its penchant for imports continue to pursue a strategy that generating ever increasing external surpluses?
If that is the government’s strategy (and one could suggest Germany fits that bill) then they are deliberately depriving their citizens of a higher material standard of living. They are either working too hard, being paid too little and underconsuming.
But being able to export is clearly particularly important for a nation that cannot feed itself or run electricity systems with the resources it has at its disposal with trade.
In general, a nation hopes the costs of using our resources as exports will not become terms of trade losses – in real terms.
A trade deficit is a sign that the real terms of trade are working in favour of the deficit nation. That is standard MMT and, in my view, unassailable.
Unless you adopt the view that imports are not beneficial. And good luck running that line.
Further, I have written extensively about:
1. The problem of foreigners who have built up local currency reserves selling all their currency holdings in one fell swoop and destroy the currency and the role capital controls can play.
2. The claims that external deficits automatically lead to a hollowing out of the industrial sector and the nation ends up a consumption unit (consuming junk) and sedating its population with a Job Guarantee, once all the skilled jobs shift to Country X?
There is nothing in MMT that supports a deindustrialisation process and perpetual current account deficits.
There is nothing in MMT that precludes a very forward-thinking industry policy being developed and implemented to expand domestic industry, spawn innovating research and development, upskill the workforce, build export capacity and all the rest of it.
A nation can do all of those things if it has available real resources or can get them from abroad.
MMT tells us that in those circumstances, there would be no financial impediment for a government building national industries, funding research and development, providing first-class universities and apprenticeship training and the rest.
If a nation with its own currency slides into oblivion by closing its manufacturing sector, cutting career public sector jobs and relying on low-paid and precarious service sector jobs for employment creation, then that has nothing much to do with enjoying a positive real terms of trade (that is, running external deficits).
It has a lot to do with the political choices made by the legislature.
So all of those MMT ideas have been on the public record for years. They are completely at odds with Mr May’s conception of MMT.
What about developing countries?
The alleged rift between Fadhel Kaboub and Warren and I apparently emerged in the excellent article written by Fadhel Kaboub (January 7, 2019) – Why Government Spending Can’t Turn the U.S. Into Venezuela.
In that article, we read that:
For developing countries, the problem begins with trade deficits and resulting debt owed in foreign currencies … Those deficits are the product of fundamental economic shortcomings, themselves often a legacy of colonial rule. Postcolonial countries are typically unable to produce enough food and energy to meet domestic need, and they face structural industrial and technological deficiencies. Because of this, they must import food and energy, along with essential manufacturing inputs.
This is entirely consistent with what I wrote in this blog post – Ultimately, real resource availability constrains prosperity (February 11, 2016) and Bad luck if you are poor! (June 25, 2009).
There are external constraints on governments who seek to maintain full employment and generate material prosperity for the citizens of a nation.
For less-developed countries, a currency-issuing government faces different issues to that of an advanced nation, especially where essentials like food and energy have to be imported.
While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention.
In the case of less-developed countries, specific problems cannot be easily overcome just by increasing fiscal deficits.
That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population.
A totally general statement about the capacity of a currency-issuing government that applies to any nation and is a fundamental principle of MMT is that a government can always use its currency-issuing capacity to ensure that all available productive resources that are for sale in that currency, including all idle labour, can be productively engaged.
That is, such a government can always, without exception, ensure there is full employment.
There is no financial constraint on such a government who desires to achieve that desirable policy goal.
While that might sound salutary, it somewhat evades a further question as to whether achieving this desirable goal moves a nation out of poverty.
A second totally general statement, which complements the first is that the worst-case scenario for a nation, irrespective of its government’s currency-issuing capacity, is defined by the real resources that such a nation can access.
If a nation can only access limited quantities of real resources relative to its population, then no matter what capacities the government might have, that nation, in all likelihood, will be materially poor.
The ultimate constraint on material prosperity is the real resources a nation can command, which includes the skills of its people and its natural resource inventory.
Thus, even if the government productively deploys all the resources a nation has available, it will still be materially poor if its resource base is limited.
Enter international trade.
In his article, Fadhel Kaboub notes that imported resource dependencies drive trade deficits, which place downward pressure on the exchange rate of the nation and make imports (benefits) more expensive to purchase.
This impacts on the overall price level, eroding real wage equivalents and is often “the real driver of … social and political unrest”.
This is the classic scenario where the IMF turns up to provide bailout loans to meet the shortage of foreign exchange in the nation but undermines the benefits of that assistance by imposing “painful austerity measures” and debt dependency.
Then the quest is on for activities that will generate foreign exchange to repay the IMF debts and stop the austerity.
And further problems emerge – for example, the shift from sustainable domestic agriculture to export-led cash crops kills the traditional community organisation and livelihoods – which “decreases self-sufficiency and reinforces the dependence on foreign goods that caused the debt in the first place.”
I have often written about this vicious cycle (see blog posts cited above). The Structural Adjustment Programs (SAPs) that are the hallmark of the IMF (and World Bank) approach to ‘development’ actually ruin sustainable ‘development’.
Fadhel Kaboub then outlines what he called the “MMT-informed solution … to help developing countries regain monetary policy and their ability to spend on domestic priorities”.
This is the section Mr May (Progressive Pulse) quotes as being in contradiction to my own writing (and Warren’s work).
The full quote is (Mr May edits his version):
The goal is to reduce imports, secure a favorable trade balance and pay off their debts, so countries would focus on the root causes of trade deficits: invest in sustainable agricultural practices (like aquaponics) to restore food sovereignty; build renewable energy (like solar) to secure energy sovereignty; and invest in education and research and development to increase productivity and gain the ability to manufacture more valuable products. Such development would also increase the real productive capacity of the economy, meaning that governments would have more room to spend before inflation.
Mr May’s zeal to find a rift in the work of the MMT academics just discloses his lack of attention to the body of work we have built up over the last several decades.
Some years ago, I did some commissioned work for the Asian Development Bank on Pakistan (and other Central Asian nations) which gave me a very good understanding of the problems that less developing nations which run external deficits face when trying to use their currency-issuing capacity to advance domestic welfare objectives.
I have written about this a number of times (even though the actual commissioned reports I produced for the ADB with Randy Wray and an ADB staff member were confidential).
As an aside, one day I will tell the story about those ‘official’ reports which culminated in an official ADB monograph being published by the ADB (complete with cover design and relevant ISBN data) on their WWW site.
However, within about 24 hours the document was withdrawn and replaced by a completely different publication not related to our work on Pakistan but which carried the same library details (publication number, etc).
The reason for the withdrawal by the ADB (which meant our report never saw the official light of day) was that the Pakistan media discussed our results (which were antagonistic to the IMF) in the morning press and the IMF complained to the ADB, which then bowed to pressure and buried our report.
The full story is very interesting and I have all the documents. But that will wait for another year! Peoples careers might be at stake.
I discuss some of the outcomes from that paper in these blog posts:
1. Defaulting on public debt as a way to progress (September 7, 2010).
2. Do current account deficits matter? (June 22, 2010)
3. Modern monetary theory in an open economy (October 13, 2009).
The relevant aspects focus on current account issues.
It is quite clear that the strain of servicing rising foreign debt obligations can lead to a depletion of foreign reserves.
The orthodox (mainstream) interpretation of an increasing current account is summarised as follows.
A burgeoning current account deficit is problematic because it indicates that a nation is ‘living beyond its means’ which means that domestic demand is excessive (perhaps driven by fiscal deficits) and boosting imports.
The excessive demand is also seen to fuel inflation that restricts exports.
Further, the mainstream claim that the current account deficit must be ‘financed’ by flows of foreign reserves, which for the most part must be attracted by high returns and a stable political, economic, and social environment.
So the worsening trade account indicates that the consumption of locals in such a nation becomes dependent on the whims of foreign lenders.
So you get the picture – living beyond their means -> currency attack -> depletion of foreign reserves … etc.
In the blog post – Modern monetary theory in an open economy (October 13, 2009) – I wrote that MMT will never lead us to conclude that a nation is “living beyond its means” and, should therefore, scale back government spending and private consumption, when there is substantial unused capacity and underutilised resources (particularly labour).
In those circumstances, the nation could not possibly be living beyond its means. As a consequence the mainstream policy recommendations are always likely to worsen the situation rather than improve it.
Further, MMT does not advocate net public spending per se. There are some growth strategies which will be unsustainable.
Overall, a model of long-run growth and sustainable development requires a careful balancing of internal and external forces.
Clearly, when an economy that experiences a depletion of foreign exchange reserves has to take some hard decisions in relation to its external sector, especially if it is reliant on imported fuel and food products.
In these situations, a burgeoning external deficit will threaten the dwindling international currency reserves.
In some cases, given the particular composition of exports and imports, currency depreciation is unlikely to resolve the external deficit without additional measures.
The depreciation, in turn, raises the relative costs of imports, and imparts an inflationary bias to the economy.
Moreover, depreciation leads to expectations of further depreciation and fuels the run out of the currency. There may be no interest rate that is high enough to counter expectations of losses due to depreciation and possible default.
The reality is that a nation facing a lack of ability to purchase imports, for whatever reason, has to either increase its exports or reduce its imports.
In the short run there is probably no alternative but to urgently restore reserves of foreign currency either through renegotiation of foreign debt obligations, international donor assistance or default.
For an advanced nation, similar constraints might apply and a sudden shift in international sentiment against the nation or other financial assets denominated in that currency are no longer deemed as desirable, then adjustments in the flow of real goods and services sourced from foreigners are required.
From the mainstream perspective the consequences of encountering balance-of-payments problems before short-term capacity utilisation is reached are straightforward.
Demand has to be curtailed, unemployment increased, and capital accumulation has to be reduced.
This leads, in the long run, to a relative deterioration of the country’s export potential compared with that of its main competitors. This situation tends to lead to a vicious circle with further balance-of-payments problems.
MMT recognises this problem, but doesn’t recommend the mainstream solution.
A sovereign government has more domestic policy space than the mainstream consider.
But it is also advisable that a nation facing continual external deficits foster conditions that will reduce its dependence on imports. However, the mainstream solution to external deficits actually make this more difficult.
The IMF approach to debtor nations almost always reduce the capacity of the government to engineer a solution to the problems of inflation and falling foreign currency reserves without increasing the unemployed buffer stock. A policy strategy based largely on fiscal austerity will create unacceptable levels of socio-economic hardship.
There are also inherent conflicts between maintaining a strong currency and promoting exports – a conflict that can only be temporarily resolved by reducing domestic wages, often through fiscal and monetary austerity measures that keep unemployment high.
The best way to stabilise the exchange rate is to build sustainable growth through high employment with stable prices and appropriate productivity improvements.
A low wage, export-led growth strategy sacrifices domestic policy independence to the exchange rate – a policy stance that at best favours a small segment of the population.
I wrote all that sort of logic 10 years ago and before.
There is no rift. The original MMT developers and their students all understand these things with no disagreement.
What the Progressive Pulse article indicates is that Mr May hasn’t read and/or understood what I was writing.
It thus bears on the editorial integrity of Progressive Pulse and the standards of their Op Ed articles that are published.
Perhaps Mr May should stick to food and drink for the time being.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.