Operationalising core MMT principles – Part 2

This is the second and final part of this cameo set, which aims to clear up a few major blind spots in peoples’ embrace with Modern Monetary Theory (MMT). This is all repetition. I don’t apologise for that and it does not reflect a slack or bad editorial approach from yours truly as some critics have claimed. Repetition is how we learn. Reinforcing things in different ways (aka repetition) helps people come to terms with concepts and ideas that give them dissonance. MMT is certainly about dissonance as the current level of hostility towards our work is demonstrating. It is also challenging existing ‘fiefdoms’ in the academy and beyond, which also creates aggression and retaliation. The problem is that most of the current criticism merely rehearses the same tired lines of inquiry. A stack of mainstream (New Keynesian) economists now regularly claim they ‘knew it all along’. The short and truthful response is – ‘no they didn’t. The standard mainstream macroeconomic theory cannot accommodate MMT principles unless it jettisons its core propositions and becomes something else. At any rate, as noted in – Operationalising core MMT principles – Part 1 – I am happy to help clarify quandaries that newcomers have with MMT if they are genuinely trying to work out what it is all about. I have no desire to interact with ‘critics’ who are just defending mainstream macroeconomics in its death throes and have no genuine interest in really understanding MMT beyond the superficial and no penchant for reading the now lengthy body of work we have generated in the academic literature. Yesterday, I considered a typical inquiry about an important operational detail of implementing a Job Guarantee. Today, I consider a related topic. If a government is facing a situation where it needs to shift workers to the Job Guarantee pool to stabilise inflation, how does it do that? The ‘critics’ often claim we only advocate tax increases to fight inflation and because they are politically tricky to engineer MMT essentially fails to have an effective price anchor. Today, I bring together many past blog posts to summarise the MMT position on counter-stabilising fiscal policy for those that might be struggling to put it all together.

Some background reading

By way of background and more detailed reading of the topics for this series:

1. An MMT response to Jared Bernstein – Part 1 (January 8, 2018).

2. An MMT response to Jared Bernstein – Part 2 (January 9, 2018).

3. An MMT response to Jared Bernstein – Part 3 (Jamuary 10, 2018).

4. Planning public works – history has a lot to say if we listen properly (January 30, 2018).

5. Functional finance and modern monetary theory (November 1, 2009).

Exactly how might a currency-issuing government fight inflation?

This question keeps arising even though MMT writers regularly deal with it.

The latest assertion doing the rounds of Twitter and elsewhere is that MMT just advocates tax rises to fight inflation and fails to specify what taxes.

I often wonder where people get these sort of ideas from. And I also am often astounded that they feel privileged enough to make all sorts of assertions (accusations) without fully reading our work.

When that is pointed out to them, they turn around and say it is not their responsibility to read everything – we should be clearer.

And, this accusation is usually accompanied with some spleen about there being too much MMT writing to wade through.

I don’t expect a lay person to have trawled through all the academic literature, much of which is behind expensive paywalls – given the greed that many publishers entertain.

But in the case of MMT, we have assiduously built a huge social media (blogs, Op Eds, etc) vault of the ideas. I have summarised all of my academic papers and books into readable form through the last 14 years of blog writing.

Sure enough I have left out a lot of technical discussion about the econometric techniques I have used and the advanced empirical analysis, and, whatever, but the essential ideas and the body of MMT (both theory and practice) now exists outside of the academic literature.

So I do think that to participate in informed debate, no matter what one’s background might be, places an onus on each and every one of us to understand as best we can the material we desire to discuss.

And where we don’t fully understand things, asking questions is good. But shouting that people are cranks because you don’t like what you read or can’t be bothered reading is bad.

Anyway, here is a pithy summary of the types of options a currency-issuing government has at its disposal in terms of counter-stabilisation (addressing the economic cycle) and in terms of longer-term remedies that can attenuate the amplitude and frequency of economic cycles.

The crude view that ‘MMT just argues for tax increases’ to stifle aggregate spending.

MMT clearly does suggest that as taxes reduce the purchasing power of the non-government sector and increasing taxes can stifle total spending in the economy.

But MMT argues that taxation changes are just one of several fiscal instruments that can be used to moderate or stimulate total spending in the economy, which then allows the government to regulate price pressures that arise from nominal demand outstripping the capacity of the economy to respond in real terms (producing goods and services).

Shifting workers into the Job Guarantee pool

Let’s make it clear and simple.

At present, governments shift workers from employment (in the non-government sector or the standard public sector) into unemployment as a way of reducing spending pressures in the economy. They do this with a combination of spending cuts, tax hikes, cutting direct public employment, among other means.

Monetary policy may, under some circumstances, also reduce overall spending, although this option is far from reliable or predictable.

But, however they do it, government’s use an unemployment buffer stock to suppress bargaining power.

The Job Guarantee is an unconditional job offer at a fixed wage at the bottom of the acceptable non-government wage structure to anyone who cannot find a job elsewhere and wants to work.

So from a social well-being perspective, the continuous availability of these job opportunities (the ‘buffer stock of jobs’), means that a worker never needs to endure unemployment again and can always find a job with a socially-acceptable wage that guarantees they can participate fully in their communities and society in general.

In other words, the Job Guarantee provides a much stronger safety net for disadvantaged workers than the unemployment buffer stock approach.

But we should never forget that the Job Guarantee also provides government with a mechanism to reduce spending pressures in the economy in more or less the same way as if it was using the unemployment buffer stock option.

Although, from this perspective, instead of shifting workers (in the non-government sector or the standard public sector) into unemployment when there is a need to rein in total spending in the economy, the Job Guarantee shifts them into the Job Guarantee pool of jobs.

By buying labour resources that have no alternative bid for their services the government shifts workers from the inflating sector to the fixed price sector and eventually price pressures stabilise.

So the Job Guarantee used as a counter-stabilising force on the upside of the cycle is not Shangri La! It is a coercive mechanism that creates job losses, but, substitutes those losses with a Job Guarantee job instead of unemployment.

In the downside of an economic cycle, it acts as a safety net.

The question then is how does the government go about shifting workers into the Job Guarantee pool should it desire to do so?

Foundations of the MMT counter-stabilisation approach

Modern Monetary Theory (MMT) draws, in part, on the work of Abba Lerner’s Functional Finance. Please be clear – MMT is not Functional Finance. It just draws on some of the thinking that Abba Lerner presented.

I considered that part of our heritage in the blog post (5) cited at the outset (above).

The point is that a currency-issuing government is not financially constrained and thus is free to adopt the principles of functional finance in its spending, taxation and debt-issuance decision-making.

In that sense, all initiatives should be evaluated by their ‘functionality’ (against stated goals such as well-being or environmental sustainability) rather than asking irrelevant questions such as whether the government ‘has enough money’.

Restricting our appraisal of policy options based on perceived ‘financial ratio’ acceptability, is the driving force in what is known as ‘sound finance’, where the government is envisaged to be a ‘big’ household and financially constrained in much the same way.

Functional finance rejects ‘sound finance’ as a means of policy appraisal and government conduct and so does MMT.

We should be careful not to follow the ideas in functional finance slavishly though because as I explained yesterday the standard ‘progressive’ interpretation of functional finance (which appears in Post Keynesian arguments) advocates ‘generalised expansion’ to generate full employment, which, of course, dispenses with an effective inflation anchor.

The upside risk of that implementation is an inflation outbreak, which makes the approach prone to ‘stop-go’ dynamics.

That point marks a divergence between MMT and other progressive (Keynesian) approaches.

Even Abba Lerner abandoned functional finance (and became a Monetarist) because he developed a fear of its inflationary consequences.

If you have any doubts on this, please read his 1997 paper – From Pre-Keynes to Post-Keynes (full reference to follow). If you have library access you can get it from JSTOR as below.

[Reference: Lerner, A.P. (1977) ‘From Pre-Keynes to Post-Keynes’, Social Research, 44(3), 399-415. https://www.jstor.org/stable/40970292]

MMT is concerned with what and how the government injects net spending into the economy in addition to how much it should spend to achieve full employment.

And so we need to be cautious in how we draw on the ‘steering wheel’ analogy that Lerner initially presented in his 1941 article The Economic Steering Wheel, which said that macroeconomics was all about “steering” the fluctuations in the economy.

In that time, Lerner held out that fiscal policy was the steering wheel and should be applied for functional purposes.

Laissez-faire (free market) approaches (‘sound finance’) was akin to letting the car zigzag all over the road and if you wanted the economy to develop in a stable way you had to control its movement.

What are the ‘steering wheel’ tools available to government confronting inflationary pressures?

1. Taxation – to reduce the purchasing power of the non-government sector, which indirectly, reduces total spending.

2. Spending – to withdraw direct spending impulses.

3. Industry policy – to stimulate higher productivity growth and lower cost technology.

4. Incomes policy – to create consensual charters among income recipients to moderate income share demands.

5. Trade policy – import substitution, export enhancement strategies, and capital controls – the latter to prevent damaging speculative runs on currencies, which then result in exchange rate movements that introduce price pressures.

Fiscal policy is usually confined to (1) and (2), although clearly the other tools often require accompanying taxation and spending initiatives.

Lerner’s general principle, espoused in his 1943 article – Functional Finance and the Federal Debt (p.39), was:

Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, “printing money,” etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability

[Reference: Lerner, A.P. (1943) ‘Functional Finance and the Federal Debt’, Social Research, 10, 38-51.]

To answer the question – how does a government intervene to curb an inflation – depends on what is driving the inflationary process.

The background blog posts that will help here are:

1. Modern monetary theory and inflation – Part 1 (July 7, 2010).

2. Modern monetary theory and inflation – Part 2 (January 6, 2011).

Typically, the criticism that people have of MMT is based on what we consider to be ‘demand-pull’ inflation which arises from nominal demand (spending) growth outstripping the real capacity of the economy to react to it with output responses.

The crude criticism is that governments will spend willy-nilly once they accept they are freed from financing constraints. This is a political issue – and the criticism is really about the quality of the polity.

Imposing artificial constraints to negate the status of the currency-issuing government is a weird way of improving the quality of government.

Conversely, ‘cost-push’ inflation arises from supply shocks – such as a rise in an imported raw material (for example, oil).

Where an economy is exposed to imported cost pressures, using ‘demand pull’ options (restricting total spending growth) will not be a very effective means of reducing inflation.

In that context, arrangements have to be put in place to facilitate a ‘sharing’ of the overall real income loss (arising from the higher import costs) among the domestic income recipients.

If such a sharing arrangement breaks down and these claimants on national income attempt to make up their real losses by increasing their nominal income aspirations (workers pushing for higher nominal wages growth, bosses pushing their nominal margins) then an inflationary spiral can begin.

In this context, cost-push inflation is sometimes linked to the ‘conflict theory of inflation’, where a ‘battle of the mark-ups’ drives the inflationary process.

Firms and unions are considered to have some degree of market power (that is, they can influences prices and wage outcomes) without much correspondence to the state of the economy. They both desire some targetted real output share.

In each period, the economy produces a given real output which is shared between the groups with distributional claims.

If the desired real shares of the workers and bosses is consistent with the available real output produced then there is no incompatibility and there will be no inflationary pressures.

But when the sum of the distributional claims (expressed in nominal terms – money wage demands and mark-ups) are greater than the real output available then inflation can occurs via the wage-price or price-wage spiral noted above.

The ‘battle’ might begin with workers trying to get more real output for themselves by pushing for higher money wages and firms then resisting the squeeze on their profits by passing on the rising cost – that is, increasing prices with the mark-up constant.

Or vice versa, firms push their margin up and workers resist.

In thinking about solutions to these sources, we should understand that there is a close link between ‘cost push’ and ‘demand pull’ notions of the inflationary process.

Conflict theories of inflation note that for this distributional conflict to become a full-blown inflation the central bank or the government has to ultimately ‘accommodate’ the conflict. What does that mean?

If the central bank pushes up interest rates and makes credit more expensive, firms will be less able to pay the higher money wages (the conceptualisation is that firms access credit to ‘finance’ their working capital needs in advance of realisation via sales). Production becomes more difficult and workers (in weaker bargaining positions) are laid off.

The rising unemployment, in turn, eventually discourages the workers from pursuing their on-going demand for wage increases and ultimately the inflationary process is choked off.

Alternative, if the government maintains its current fiscal position, the higher nominal income demands can easily outstrip the real capacity of the supply-side to respond with production of real goods and services.

So, if the central bank doesn’t tighten monetary policy and the fiscal authorities do not increase taxes or cut public spending then the incompatible distributional claims will play out and inflation becomes inevitable.

The solution to both sources of inflation thus is not that dissimilar although additional measures might be brought to bear to handle the case of a price hike in an imported raw material (incomes policies, technology substitutions etc).

In the latter case, back in 1973, the standard Australian cars were big 6-cylinder vehicles and homes used big oil heaters. In the year that followed (after the OPEC price hikes), one saw the big oil tanks on the nature strips waiting to be collected by the local council rubbish throwouts and, soon after, smaller 4-cylinder cars started to appear.

Substitution. These are structural shifts rather than cyclical shifts.

But, in the context of the economic cycle, MMT economists have a preference for fiscal policy counter-stabilisation rather than rely on interest-rate movements (monetary policy), given the latter are indirect and uncertain in their impact.

A reliance on policy settings determined by unelected and unaccountable technocrats is also counter to notions of democratic accountability.

So, an understanding of the context is important. If inflation is accelerating as a consequence of excessive spending yet unit cost pressures are not present, then the basic principles of functional finance remain valid.

I recommend Mathew Forstater’s Levy Working Paper No. 254 – Toward a New Instrumental Macroeconomics: Abba Lerner and Adolph Lowe on Economic Method, Theory, History and Policy – for an excellent account of the way in which fiscal policy can work in this context.

Manipulating tax rates is one of many options available

Raising taxes to stifle such excessive nominal spending is one option only but not necessarily the preferred MMT option.

Typically, a mix of fiscal responses will be required depending on the circumstances, the existing tax and spending structure, the state of income and wealth distribution in the particular country, how fast inflation is accelerating, and more.

Governments have shown they can cut spending quickly and still prosper politically, if the political forces are aligned.

There are many areas of government spending that can be wound back without impacting significantly on the well-being of most of us or invoking distributional consequences that would have negative impacts at the lower end of the income distribution.

For example, consider the incidence of Corporate Welfare, which includes “a government’s bestowal of money grants, tax breaks, or other special favorable treatment for corporations”.

The so-called “Socialism for the rich, capitalism for the poor” or “privatising the gains and socialising the losses” is rife in most fiscal systems, especially in this neoliberal period.

While conservatives rail against governments spending on public health and education or income support for the poor, the reality is that corporate welfare spending often dwarfs these progressive targets.

The 1993 article by Daniel Huff and David Johnson – Phantom Welfare: Public Relief for Corporate America – published in the Social Work journal [38(3), pp.311-16)] – quantified the extent to which federal subsidies in the US benefit the corporate sector.

The pattern is common in most countries.

In 1993, they estimated this largesse to be “in excess of $150 billion a year”, which “represent a major redistribution of wealth that partially accounts for the growing gap between the rich and the poor”.

There are huge opportunities within the military-industrial complex in the US to make cyclical cuts, which will attenuate nominal demand growth and multiply through the economy.

A social democratic government elected on a broad progressive consensus and a willingness to acknowledge MMT principles would be in a position to resist the neoliberal aspirations of those corporate interests who would fight “tooth and nail”.

Forward planning essential

We often think of infrastructure spending as ‘lumpy’ – big amounts are expended on some large project – like a new metro system.

But a properly organised government views public infrastructure provision as a continuous process requiring constant attention and varying amounts of financial support.

In that sense, significant forward planning is required which enhances the capacity of fiscal policy to be relatively responsive to the cycle in both directions.

MMT economists are fully aware of the technical, legislative and implementations lags that can accompany large-scale public spending.

But well thought out preparation and well planned projects can allow the government to turn spending on fairly quickly in a downturn and turn it off (or restrict it) in times of high pressure.

For example, the decision by Norwegian authorities to fast-track the construction of Oslo Airport at Gardermoen was a highly effective fiscal intervention to ease the pain of the 1992 recession.

While the location of the airport was controversial, the intervention was effective and finite. It also carried scale such that components could be expanded or restricted at fairly short notice to meet with the changing cyclical conditions.

Another good example is the highway projects in Japan. The Japanese government has a well-designed infrastructure plan in place that allows it to expand and contract government spending to extend the highway and related infrastructure (bridges, waterways etc) to suit cyclical conditions.

This type of spending can be highly responsive with minimal lags if the planning processes have been completed.

There are many other examples.

Governments can also offer coherent vocational training capacities – apprenticeship schemes – depending on the way the public sector is constructed.

While these functions should be oriented towards providing skills to suit the medium- to long-term trajectory of the economy, it is true that the government can expand or contract the intake into these schemes whenever they like – say monthly.

In terms of planning functions, the neo-liberal era has also been marked by a major reduction in Departmental capacity to design and implement fiscal policy – given the obsession with monetary policy and the major outsourcing of ‘fiscal-type’ government services to the private sector.

Many of the major government policy departments in the advanced nations are now just contract managers for outsourced service delivery.

So this diminution in the overall capacity of the government machine to implement efficiently and speedily complicated nation-wide infrastructure programs has to be addressed as a matter of urgency by progressive politicians.

In that context, governments must develop forward-looking capacity to ensure that it has project implementation skills when they are required.

Please read my blog post – Planning public works – history has a lot to say if we listen properly (January 30, 2018) – for more discussion on this point.

Tax changes are less powerful than spending manipulation

Further, MMT economists realise that the expansionary and contractionary capacity of tax changes are dollar-for-dollar less than for public spending changes.

Tax cuts in a downturn are in part saved and are subject to longer lags than government spending injections. The reverse occurs in an upturn with tax hikes.

Tax changes operate through shifting private spending decisions as disposable income is impacted. Those behavioural shifts take time.

Whereas government spending shifts are direct and can add or subtract dollars to and from the economy virtually immediately.

So to claim that MMT economists are biased towards the use of tax hikes to pull back an overheating economy is more than inaccurate.

Other sources of inflation

Finally, MMT economists also recognise that inflation can come via exchange rate movements, which may require specialised policy responses.

For example, if there are speculative capital outflows which put downward pressure on the currency in the foreign exchange markets then MMT economists would suggest capital controls are an effective way to stabilise the currency and prevent the inflationary impacts emerging.

Iceland’s recent use of capital controls demonstrates the effectiveness of this strategy.


I could go into more detail of the actual design of public infrastructure projects that facilitate a ‘continuous’ investment concept – where the government see these large projects in modular form and progressively adds to the capacity.

But the point is that there is considerable flexibility on the spending side of fiscal policy – probably more so than on the revenue side.

Which is why it is ridiculous to try to mount a criticism of MMT by claiming politicians would not be able to control inflation because they would not be able to introduce tax increases quickly enough and/or at a sufficient magnitude to create the required spending curbs (in the case of a ‘demand pull’ inflation episode).

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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    24 Responses to Operationalising core MMT principles – Part 2

    1. Robert Eversfield Manley Francis says:

      Writing so much theory is probably not the way to win lay people over to MMT, which is after all only a part of something much larger. Michael Hudson is showing the way here, in contrasting Classical political economy with Neo-Classical. MMT is clearly a missing component of Classical theory. In this historical light it is possible for a lay person to understand that Neo Classical political economy (economics) is a reaction by the rentier capitalist class of the economy to the full implications of Classical theory, that was pushed rigorously by people like Karl Marx. Selling MMT apart from this larger political/historical picture is bound to be very difficult, if not quite impossible. It requires great courage to show that economics is merely political economy by another name. Even coining this name charge is embedded in attempts to move away from the Classical world of the early writers on the subject, becoming enemies of Political Economy as a project, when they realized how their interests were threatened by it.
      That is why Hudson and Keen call it Junk. It would be much wiser and more courageous to stop defending MMT as a theory, which merely adds to the Classical picture of our political economy, and go on the attack how the original project has been perverted and why. This approach is not economics in the sense of how it is understood today, but would be a return to serious Political Economy. It would also be an engagement in a culture (survival) war that badly needs to won.

    2. “MMT is concerned with what and how the government injects net spending into the economy in addition to how much it should spend to achieve full employment.”

      Does the ‘full employment’ of MMT, through ‘the Job Guarantee’ of MMT, mean that the cost of the job guarantee equals the cost to the State of unemployment plus social welfare?

      This would have a significant impact on social welfare and the minimum wage but if it didn’t the minimum wage and social welfare would be manipulated for political purposes!
      I’m assuming that MMT (in theory at least) would ensure that both are covered by an economic growth that is more than current wishful thinking — with perhaps realistic deficit financing.

    3. Chrislongs says:

      When cuts in Gov spending results in unemployment then offering people the JG programme means they move into a fixed cost structure? Is my understanding correct as this seems to prevent deflation ?

    4. Carol Wilcox says:

      Bill, I think you could enhance your prescription for inflation by recognising the role which land plays in the economy. You talk of supply shocks and “workers pushing for higher nominal wages growth, bosses pushing their nominal margins” but say nothing about land price inflation which is an important part of the real economy. Land is the ultimate supply problem as it is fixed. Fortunately there is a very simple prescription – land value tax with minimum annual reassessment, perfectly feasible with current technology.

    5. bill says:

      Dear Chrislongs (at 2019/01/23 at 8:43 pm)

      Your understanding is correct. While the JG is less desirable than the employment they previously had (in most cases) it is better than unemployment and provides a safety net.

      best wishes

    6. HermannTheGerman says:

      @ Robert E.M.F.

      I think it is perfectly possible to walk and chew gum at the same time. Especially, when there are more than one person to do the walking/chewing ;)

      I say this as a great fan of both Michael Hudson and Bill. The political fight includes a fight of ideas both at a theoretical and a practical level. Also, if you follow Bill’s blog you’ll realize that he is perfectly aware of the existance an power of the modern “rentiers”. It just so happens that he does the most damage exposing the fallacious arguments on which their neoliberal ideology is founded and regularly taking their acolytes and supposed experts to the cleaners.

      I think I have also read Bill pointing at the private debt problem of advanced economies, which is the result of the rentiers having “drained” the financial (and actual) ressources of societies so much, that they start to reach for those in the future. Prof. Hudson’s latest work offers a criticism of the economic/political establishment from an anthropoligical/historical aspect by shedding light in the structure and dynamics of debt in societies since the bronze age. So in my opinion their work is actually complementary.

      Also, as you already seem to know, Prof. Hudson works closely with other MMT luminaires such as Prof. Stephanie Kelton at UMKC, so I’d dare say that Prof. Hudson is well aware and most likely a supporter of MMT, but he fights the neo-classical establishment on a different front with different weapons.

      I might be interpreting too much (or not enough of the right stuff) into your comment, but I’m perfectly ok with Bill prioritizing theoretical aspects of MMT, since it is necessary to keep the scientific core healthy, if ever a political movement based on it is to prosper. Otherwise one might end up with a political system that operates on ludicrous premises like perfect markets or symmetrically informed, rational actors ;)

      Finally, when you say that “It requires great courage to show that economics is merely political economy by another name” I can’t help but point to the title of bill’s book “Reclaiming the state” or to his latest comments on how (Sir?) Tony Benn succesfully refused to be bullied by big corporations. They both are testament of Bill’s awareness of how the self-inflicted government paralisis is the result of a political choice.


    7. Willy says:

      As a construction worker I consider myself a layman, and I have been completely won over and transformed specifically by ‘theory’ in this blog. I do resent those who dismiss ‘theory’ with a wave of the hand and then, showing a distinct lack of grasp of said ‘theory’, go on to think a layman wouldn’t possibly be swayed by clear, cogent, patient scholarship. Paternal instincts to dismiss others and give out ‘shoulds’ sure sounds like “you kids get off of my lawn (wth threatening cane waving)!”

    8. James Schipper says:

      If there is cost-push inflation, the government should try to get the sectors of society that are demanding too much to moderate their demands. If large sectors of the country are unionized, then the government can call labor and business leaders to the table and attempt to persuade them to stop demanding increases in excess of productivity growth. Wasn’t this once done successfully in Israel?

      In Germany and the Netherlands, the government succeeded in persuading labor to practice excessive wage moderation in order to keep inflation low and to increase exports. Those exports did indeed increase massively. It was a bad, anti-social mercantilistic policy, but it shows that a government can influence wage formation.

    9. WGreenfield says:

      I must disagree with those who argue MMT does not pay enough attention to the issues of inflation. In fact, the opposite is true. MMT is a very rich framework for the understanding of all the nuances surrounding inflationary pressures in the economy. Being a student of (mainstream) economics, I am permanently exposed to theories which suggest that the slightest miscalculation by the monetary authorities could cause hyperinflation. Their theories on the determination of the price level are mostly useless. Truly a sorry state of affairs when I’m paying many times my country’s minimum wage on a monthly basis for an education in macroeconomics that has no value for the world we’re living in. And then these macroeconomists wonder why people feel so attracted to conspiracy theories surrounding the nature of fiat monetary economies (the sort that Russia Today and goldbugs put out pretty much on a daily basis). Well, just ask any of them to answer what money is without any mention to what it does. They’ll be clueless – all those years invested in getting fancy PhDs for nothing.

      We wouldn’t tolerate professional psychologists not being able to provide an answer for what the human mind is. So why do mainstream economists get away with such a fundamental indetermination?

    10. Bob says:

      Universal jobs guarantee: Ocasio-Cortez also campaigned on a “jobs guarantee,” in which the federal government would promise to give a job to every American who could not find one.’


      Perhaps see if you can contact her

    11. Matt from PDX says:

      “The crude criticism is that governments will spend willy-nilly once they accept they are freed from financing constraints. This is a political issue – and the criticism is really about the quality of the polity.”

      Does it follow then that MMT must be evaluated not only in isolation, but also in tandem with the polity (and, presumably political structure) under which it is to be implemented? And if the quality of the polity comes up lacking, then implementation of MMT should be delayed until the polity & political structure can be improved?

      As a related question, do you see any polity, anywhere on earth, that is of sufficient quality to successfully implement MMT today?

    12. bill says:

      Dear Matt from PDX (at 2019/01/24 at 6:36 am)

      Thanks for your comment.

      It is not a matter of implementing MMT – MMT is the lens through which one understands how our modern monetary systems operate.

      The world out there is already operating according to MMT principles no matter how the politicians frame what they are doing.

      best wishes

    13. Matt from PDX says:

      Sorry, I realized after posting that I’d made that mistake. I’m still interested in your answer to the questions as if I’d said “Operationalising core MMT principles” instead of “implementing MMT.”

      In other words: How can a political pessimist like me support operationalizing MMT while knowing that it is vulnerable to the quality of the polity that tries to operationalize it?


      (By the way, I realize that my question comes suspiciously close to bad-faith skepticism, but I assure you that I accept your core principles. Where I’m still struggling with acceptance is exactly in the “operationalization” realm. You’ve cited one-off examples of successful public works projects, but I don’t see an overarching theory of operationalization — something that acknowledges and deals with the fact that the polity consists of some selfish, greedy, and criminal elements. As you say, “Forward planning [is] essential.” What happens to us normal people when that forward planning doesn’t get done properly? Or worse yet, what happens to us when the mechanism of planning is captured by a self-interested subset of the polity?)

    14. Adam Sawyer says:

      Matt from PDX,

      The only thing that protects a political system – any political system – from corruption and stupidity is a well informed and engaged electorate. Without them there’s no necessity for the media to ensure their reporting is accurate or balanced. Without them politics quickly fills up with corrupt morons. Rapidly there becomes little possibility of the electorate being well informed and as they see their vote having little impact on their lives they become politically disengaged or easy prey for manipulative demagogues. It’s a vicious cycle with very little possibility of escape.

    15. larry says:

      Hermann, Kelton is now at Stony Brook, and in addition to her economics position, she is a dean, which carries with it some odious administration usually. She writes less now but tweets more. Sadly, since she left UMKC, the blog she started seems to be supported primarily by Bill Black, its editor, and J D Alt.

    16. cs says:

      A very good pair of blogs that summarizes a lot of issues accessibly. The 5 inflation busters – Taxation, Spending, Incomes, Industry and Trade – are useful to know off-pat when people ask how you are going to control inflation.

    17. Steve_American says:

      Bill, you wrote above, “The crude criticism is that governments will spend willy-nilly once they accept they are freed from financing constraints. This is a political issue – and the criticism is really about the quality of the polity.”
      A clever pun. But, it might confuse some who read polity as policy.
      Maybe better to say, “The crude criticism is that governments will spend willy-nilly once they accept they are freed from financing constraints. This is a political issue – and the criticism is really about the quality of the polity, not the policy.”

    18. HermannTheGerman says:

      @ larry

      My bad. I thought she still was a UMKC. You’re right, though, her last post on that forum was years ago. Their “Money & Banking” section, were they tackle the theory, was authored almost entirely by Eric Tymoigne.

      @ Bob

      I just rad Bill Black at neweconomicperspectives write just that. I had a good feeling about AOC when I first heard of her and it just keeps getting better. Maybe this one is really special and becomes what some (naive idiots like me) hoped Obama would be. I certainly hope she does.

    19. larry says:

      No worries, Hermann. No reason you should be up to date with Kelton’s employment history. I’m a nerd.

      AOC looks good, doesn’t she. Like you, I hope she turns out better than Obama. At least, she doesn’t have the expectations that he and others hung around his neck. And she has support — 25% of women in Congress. Yes!!!

    20. larry says:

      Whenever there is a wage-price spiral, one can always do a Nixon and introduce wage & price controls for the period necessary. Galbraith was in favor of this strategy in the appropriate circumstances. Nixon, of course, did it for the wrong reason and consequently removed them before he perhaps should have. At least, that was Galbraith’s view.

    21. Eduardo says:


      When you said that
      “…expansionary and contractionary capacity of tax changes are dollar-for-dollar less than for public spending changes.
      Tax cuts in a downturn are in part saved and are subject to longer lags than government spending injections. The reverse occurs in an upturn with tax hikes.”

      Are you specifically talking about income taxes? I was wondering if it wouldn’t be more efficient for the government to manipulate a sales tax rate instead of (or in addition to) income tax rates. The idea has a certain appeal because the government would be directly discouraging or encouraging consumption, which is I believe the main aggregate behaviour the government would want to influence in order to ease inflationary/deflationary pressures.
      Regarding the lags, I believe in most countries changing a sales tax rate is quicker than changing income tax rates. Take Brazil as an example: here income tax changes have to be approved by congress and come into force only in the next calendar year, while there is something similar to a sales tax, but applied only for industrialized products (IPI), which the president can change by decree and the change comes into effect 90 days after publication. This capacity is not used frequently and when it is, it is not with the goal of stabilizing inflation, but I was thinking that it could.

      Any thoughts?

    22. Keith Newman says:

      Response to Robert EMF, complementary to HermannTheGerman (HTG): In addition to HTG’s comment there is also the issue of priorities. Once the financial crisis hit it was only a matter of time before conservatives would opportunistically evoke ”sound finance” to reduce social spending. And sure enough that’s what happened. As an economist working on the ground it was, and remains, very helpful to me to have Bill’s full explanations of why ”sound finance” was nonsense and why functional finance, a rather startling understanding, could actually work. I needed the confidence that functional finance was a technically realistic economic strategy in order to be able to recommend policies consistent with it.
      While an overall understanding of where it fits in within political economy is important, when you are involved in immediate political action on the ground it is something you get to later.
      To give concrete examples, over the last 6 months I have been involved in a variety of functional finance-friendly political interventions centered on the addition of prescription drugs to Canadian Medicare: discussions with various groups including unions, discussions with several Members of Parliament including a Minister of the government, and an economic piece that is used by a major political action group in Canada. Bill’s insights regarding functional finance, as well as those of the rest of the MMT crew, are present throughout. Yet I still need to do additional study of where it fits in to economic and political history. I am hoping to get to it soon…

    23. smoortema says:

      @ Matt from PDX,
      After a couple of years of reading MMT-texts, your well-formulated question is also one I ask about MMT. Even if these policy proposals are sound and reasonable, is the state apparatus capable of implementing them? Coming from Hungary, I have come to be quite sceptical about how well the state can serve the public purpose.

      But parallelly you also have to ask the question: if we assume that the state is imperfect, and “polity consists of some selfish, greedy, and criminal elements” (or even if you don’t go that far, we can assume limited rationality), how does your policy proposal change? The imperfect state would implement any kind of policy imperfectly, so why would it do more damage by implementing the job guarantee than by not implementing it, or by implementing something else? One answer can be that of conservative thinkers: they suggest a limited government and decision by unelected technocrats precisely because of their distrust in the ability of government to implement policy proposals, even if they are well-intentioned ones.

      To give an example, in Hungary there is a public work program since 2011, which is in some ways similar to the JG proposal, but in a lot of other ways it is different: wages are very low, jobs are not permanent, and employment is managed by local mayors, who have a say in employing someone or not. The result is a new kind of feudalism-like system, where during the elections, the mayor can always count on the votes of people stuck in public work schemes.

      I don’t have the answers neither, but I think this is an important point to underline: Bill and other MMT economists trust in the state’s abilities, whereas others do not. Even if the JG proposal works perfectly in theory, one can be for or against it depending on how much efficiency and rationality one assumes about the state apparatus.

    24. WGreenfield says:


      Coming from South America, at times I do pose myself the same kind of questions. Yet I admit not having read the entire JG literature, so it is likely that the point has been addressed in the past.

      I presume it has to do with the unconditionality and fixed wage nature of the program – as Bill tends to underline so often. This would neutralize attempts to both politicize it and transform it into a source of corruption (you can’t bribe officials for a better “pay”!), and the judiciary could step in if any such working rights became violated, setting a number of precedents in the process.

      Of course these would vary depending on the country’s law tradition but it is doable even in less than optimal conditions. The JEFES program in Argentina was more or less successful and their state capacity is not exactly top of the line.

      Either way, the logistics involved in the creation of a JG are not far-fetched when compared to the sort of services that the State already is charged with no matter where: healthcare (ok, maybe not in America!), housing, education, welfare programs, etc. and most would never agree with having the State not provide those services, no matter how imperfect they may be rendered at the time.

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