The IMF and the World Bank are in Washington this week for their 6 monthly…
US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics
Regular readers will know that for the last few years I have been documenting the way that the dominant paradigm in macroeconomics (New Keynesianism) is slowly disintegrating as the dissonance between its empirical predictions and reality becomes too great to ignore and justify. The once-in-a-century pandemic hasn’t given us much to celebrate in 2020. One cause for optimism, perhaps, is that we might finally jettison the mainstream economics fictions about government deficits and debt, which have hampered prosperity over several decades. Last week (August 27, 2020), the US Federal Reserve Bank Chairman, Jerome Powell made a path breaking speech – New Economic Challenges and the Fed’s Monetary Policy Review – at the annual economic policy symposium sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole. On the same day, the Federal Reserve Bank released a statement – Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. We have now entered a new phase of the paradigm shift in macroeconomics.
German physicist Max Planck wrote in his 1950 publication Scientific Autobiography and other Papers that (pp.33-34):
A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it …
Max Planck’s observation is often shortened to “Science progresses one funeral at a time”.
For macroeconomics, we might think of progress as occurring one crisis at a time, because it is the sequence of crises – 1991 recession, the Global Financial Crisis (GFC) and, now the COVID-19 pandemic – that has generated an accumulated awareness of the failure of mainstream macroeconomics.
This has progressively opened the door for Modern Monetary Theory (MMT), the emerging rival paradigm.
The conjecture here is that while some want to hang on to the debt and deficit scaremongering that has cruelled policy choices and left a trail of human damage over the last four decades, it is increasingly obvious to people that there is little substance in those narratives.
Jerome Powell’s speech at Jackson Hole was described by a Reuters’ report (August 28, 2020) – With new monetary policy approach, Fed lays Phillips curve to rest – in this way:
One of the fundamental theories of modern economics may have finally been put to rest.
The Phillips curve is the framework that claims there is a trade-off between unemployment and inflation. The nature of that trade-off has defined the macroeconomics debate over the last 60 years or so.
My PhD work was on this topic and one of the motivations I had in developing ideas such as the Job Guarantee, which I argue is one of the differentiating features of Modern Monetary Theory (MMT).
I wrote about that topic most recently in this blog post – Flattening the curve – the Phillips curve that is (April 7, 2020).
The dominant usage of the Phillips curve framework among mainstream economists is to, perhaps, allow for a short-run trade-off, but deny that governments can exploit such a policy choice continuously.
They claim that ultimately there is only one unemployment rate (the ‘natural rate’) that is consistent with stable inflation and attempts by government to reduce that unemployment rate via aggregate demand policy (spending and taxation) only results in accelerating inflation.
This view has dominated since the 1970s, and, is one of the lynch pins of the resistance to active fiscal policy and the reliance on monetary policy as the primary counter-stabilisation tool.
The empirical record hasn’t been kind to the mainstream conception.
During the 1990s, for example, unemployment was driven down in many nations with no increase in the inflation rates.
Again, pre-pandemic, US unemployment fell to levels not seen since the 1960s, and again there was no increase in inflation rates.
If there was a trade-off, it was clearly so flat as to be not worthy of policy consideration.
The Federal Reserve Chairman was releasing the Bank’s new monetary policy approach which reflects on the taboo against monetary authorities directly buying government debt.
That taboo is breaking down as central banks continue purchasing large proportions of debt, effectively eliminating the charade that private bond investors provide the funding for government spending in excess of its taxation take.
Jerome Powell told his audience that:
1. The fear of “high and rising inflation”, which dominated public debate “Forty years ago” no longer applies.
2. The dominance of ‘inflation-first’ monetary policy has led to situations where “expansions had been more likely to end with episodes of financial instability, prompting essential efforts to substantially increase the strength and resilience of the financial system.”
3. The need to review the conduct of monetary policy is driven by the failures to achieve their dual goals of “maximum-employment and price-stability”.
4. This failure is demonstrated by:
– “assessments of the potential, or longer-run, growth rate of the economy have declined … since January 2012, the median estimate of potential growth from FOMC participants has fallen from 2.5 percent to 1.8 percent …”
– “More troubling has been the decline in productivity growth, which is the primary driver of improving living standards over time … the Fed has less scope to support the economy during an economic downturn by simply cutting the federal funds rate.”
– Maintaining elevated levels of unemployment means that “the costs of such outcomes likely falling hardest on those least able to bear them”.
– Even so, “The unemployment rate hovered near 50-year lows for roughly 2 years, well below most estimates of its sustainable level … the labor force participation rate flattened out and began rising even though the aging of the population suggested that it should keep falling.”
– “the historically strong labor market did not trigger a significant rise in inflation. Over the years, forecasts from FOMC participants and private-sector analysts routinely showed a return to 2 percent inflation, but these forecasts were never realized on a sustained basis” – this is a serious indictment of the mainstream theoretical framework.
– “The muted responsiveness of inflation to labor market tightness, which we refer to as the flattening of the Phillips curve, also contributed to low inflation outcomes.”
– This is not a US-centric issue given that: “Other advanced economies have also struggled to achieve their inflation goals in recent decades.”
– Now, the claim that inflationary expectations fed on themselves to push accelerating inflation is working in the reverse – “inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.”
– Which then causes interest rates to fall further and monetary policy has “less scope to cut interest rates to boost employment during an economic downturn”.
– Again, not a US-centric issue given that: “We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome.”
So what does this all mean for the conduct of monetary policy?
1. “Our new statement explicitly acknowledges the challenges posed by the proximity of interest rates to the effective lower bound. By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation.22 To counter these risks, we are prepared to use our full range of tools to support the economy.”
2. “our revised statement emphasizes that maximum employment is a broad-based and inclusive goal” – in other words, they will try to do more to increase employment in the knowledge that the mainstream view that it would increase inflation is incorrect.
3. They will no longer tighten monetary policy as employment growth strengthens before there are inflationary effects – that is, they are rejecting all the ‘forward-looking’ bias that mainstream theory imparted that policy had to kill off employment growth before unemployment had fallen significantly.
Now: “going forward, employment can run at or above real-time estimates of its maximum level without causing concern … Of course, when employment is below its maximum level, as is clearly the case now, we will actively seek to minimize that shortfall by using our tools to support economic growth and job creation.”
A big shift.
4. On its conception of price stability:
… if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Which, in the historical context amounts to an admission of total failure.
The Bank of Japan, the Bank of England, the ECB and the Federal Reserve Bank have publicly stated they have been trying to lift inflation rates towards their conception of inflation stability – usually around 2 per cent per annum.
They have all failed.
But think about what they have been doing in pursuit of those goals.
They have produced zero or negative interest rates.
They have bought massive quantities (and proportions) of government debt, effectively taking the private bond markets out of the picture – thus abandoning the taboo that neoliberalism exploited to prevent central banks buying government debt.
And despite these major shifts in monetary policy conduct – as far back as the 1990s in Japan – inflation has been benign and hovering around deflationary levels.
So while the Federal Reserve statement declares failure it also continues to hang onto the notion that it can actually push inflation rates above the 2 per cent level to achieve a long-term ‘average’ of 2 per cent.
The next step will be for policy makers to abandon that delusion.
But we are making progress.
And, if you scanned the textbook market in macroeconomics looking for guidance to all of this, then you would find only ONE offering that allows you to understand all of this – yes – Macroeconomics (William Mitchell, L. Randall Wray and Martin Watts).
Small sales pitch – but that is the fact.
None of the mainstream textbooks allow students to understand any of these developments.
What the statement means is that the obsession with the ‘natural rate’ of unemployment, or, as it is more commonly known – the Non-Accelerating-Inflation-Rate-of-Unemployment (NAIRU) – is being abandoned.
The US central bank is now not going to start pushing rates up as unemployment falls to low levels, while inflation remains low.
What this means is that instead of being ‘pre-emptive’, the bank will be ‘reactive’, which means that unemployment can be pushed much lower than average levels over the last several decades.
Of course, as noted above, much of this is moot in actual policy conduct, because the Bank’s interventions have not been very effective for a long period.
Recognising that reality is the next step in the paradigm shift.
Prospect debate
Related to this discussion, I was invited to join by the British public policy magazine – Prospect.
My antagonist in the debate was Jonathan Portes, who was a key player in designing the British Labour Party’s Fiscal Credibility Rule. I was a strong critic of that rule, given its neoliberal overtones and its unworkable constraints.
The Labour Party didn’t advertise it widely, but just before last December’s general election they altered the Rule, abandoning aspects that I had pointed out as being unviable, against much resistance from the likes of Jonathan Portes and others.
So it was interesting that we were invited to participate in this debate.
The question was: Are tax rises now inescapable?
And the question was clearly in the British context.
The format began with the Yes position (Jonathan) leading the way, and then my response, with three, alternating interventions overall.
The full debate was published over the weekend – The duel: are tax rises now inescapable? (August 29, 2020).
Several people commented after the publication suggesting that there wasn’t much difference between the two positions expressed.
I disagree.
The debate really highlights the differences between the mainstream New Keynesian framework, within which Jonathan works and Modern Monetary Theory (MMT).
For a New Keynesian, rising interest rates and inflation rates are inevitable consequences of continuous fiscal deficits that are matched (‘funded’ in their framing) through debt issuance.
An MMT economist refutes that inevitability. History supports our position. A New Keynesian cannot explain the last three decades of Japanese monetary history, for example. MMT has consistently been able to explain that history.
Sadly, the British Labour Party still hasn’t understood any of this.
I woke up this morning to this article in the UK Guardian (August 31, 2020) – Ditching tax on tech firms will mean less money for key workers, says Labour.
The Shadow Chancellor was out there claiming that:
… if the UK Treasury scraps a tax on technology companies such as Facebook, Google and Amazon it would mean losing out on enough money to pay for tens of thousands of key workers in Britain.
She has been tweeting her head of about this.
Basically, just signalling to everyone that the Labour Party remains unelectable.
Whoever is giving them economic advice should be sacked. But the Labour Party has ‘laboured’ with the poor advice it has been getting.
It lost the last election because it was not believed by the electorate, and, abandoned a significant number of communities over Brexit.
They do not seem capable of shifting out of this moribund economic mindset.
Conclusion
I will write further about other elements in this on-going paradigm shift.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
I read the debate it was yet another example of mainstream GROUPTHINK.
They just can’t let the myths go even though these myths never show up in the real data. They can make them show up by using their complex Dynamic Stochastic General Equilibrium models. However, these models don’t reflect the real world.
Simon Wren Lewis lacks the listening gene. To listen is a great skill but GROUPTHINK does not allow for it. Simon says..
” Mainstream macroeconomics addiction to microfoundations methodology has given heterodox economists an opportunity. If mainstream macro continues to shun what it calls policy models (models that use aggregate relationships justified by an eclectic mix of theory and data), then this space can be occupied by others. But to do that heterodox economists have to stop being heterodox, by which I mean defining themselves by being against almost all mainstream theory. ”
Jo Mitchell adds
” The problem with heterdox economics is that it is self-definition in terms of the other. As the scope and diversity of mainstream theory gets larger and wider, the space that can be occupied by those who reject the mainstream shrinks. ”
These are primetime GROUPTHINK quotes. Absorb the different economic view points place them under the mainstream banner so we can hide the fact that the mainstream has been wrong for nearly 50 years.
Critics who highlighted clearly that their DSGE models were wrong. Got placed in a box called Heterdox. After that their voices were taken away from them by the politics of GROUPTHINK. The “big insight” from DSGE macro is that recessions are caused by inexplicable collapses in productivity. That is setting the bar very low for competing approaches.
There you have it in a nutshell. Even though the mainstream have been wrong for decades GROUPTHINK dictates Heterdox economists have to adapt to fit in. The politics involved are worse if not more backward than the politics in parliament.
They refuse to admit they were wrong. They made well paying careers out of it. Produced many papers and books and gained a worldwide reputation. In short their career defines who they are as human beings. When your career defines who you are as a human being. You would rather go down the Japanese route with a Samurai sword than admit the mistakes you’ve made. You are certainly never going to give ground in a debate or admit any wrong doing on social media in full view of your own reputation.
We knew all along. MMT is nothing new was a lie.
We all knew it was a lie. It was GROUPTHINK’s way of dealing with a problem to save their reputation. When you read the debate between Bill and Portes it is very clear they never knew MMT and that MMT is a refreshing new approach. The differences are clear.
If you have been a MMT’r for any length of time as Portes was making his case. You could tick the points off one by one as he said them. Beside each point written the word debunked and the year it was debunked in brackets. By now he must know several of the points he was making have been debunked and the year they were debunked but carried on anyway. He had no choice because most of it was his life’s work and he made money from book sales from these myths. GROUPTHINK in action and why they have to die out before change happens.
We knew all along. MMT is nothing new
Was just political marketing. A clear bottle of chemicals with bright colours and fancy smells. A label saying Foaming Bath Comfort & Calm with Chamomile with Crème Brulée Honey Bath, from the yet undiscovered Island of bubbling volcano. TINA there is no alernative.
A Meme to protect yourself when your career defines who you are as a human.
Seems like the mainstream neoliberal politicians/economists have maintained the myth of the Phillips Curve while they converted mass unemployment to mass low paid job instability and hidden unemployment. The trick depended upon that mass remaining insufficient to be heard/represented in ‘democracies’. When squeezing and indebting the left behinds starts to spread more widely and destabilise the economy for a larger mass, then central bank chiefs are sent out to spout the ‘use our full range of tools’ line, unable to admit that the toolbox is empty without sufficient fiscal policy tooling. Just recently the covid outbreak in Leicester, UK, has drawn a little attention to how home competition with the Bangladesh garment industry works – with very light touch health and safety, fire and minimum wage inspection with the emphasis on workers’ whistleblowing. Seems to me yet another reason for the necessity of a real and not just a theoretical Job Guarantee to stop the race to the bottom.
I wonder if it’s not time to accuse of Labour of being in the pockets of the city, pushing ever more private debt on poor people when they advocate lower deficits.
It might be a bridge too far though. But it would drive the message home.
@Derek Henry
Do you think that ‘groupthink’ and flawed modelling only apply to the economics profession?
A short interview on the BBC ‘Today’ programme this morning with Yanis Varoufakis and Gerard Lyons (he addressed Yanis as ‘Mr Varoufakis’…I wonder if he would have Yanis in a pin-stripe suit, bowler and an umbrella); https://www.bbc.co.uk/sounds/play/m000m567 ; starts 2:46, Yanis between 2:49:00 and 2:50:00; “….the only way is by converting this unimaginably huge bubble of liquidity into investment” . This quote is consistent with Yanis’s position over time. I post this as a member of DiEM25 because it seems to me that the key MMT insights about tax and about governments (with their own sovereign currency) ability to spend being limited only by real resource (available for purchase in their own currency including all idle labour) and not money, together with the central position of the Job Guarantee are pivotal concepts to grasp for a meaningful democratic process to flourish. It would be so good if this could be explicitly acknowledged and broadcast by DiEM25. There is so much MMT and DiEM25 have in common that at this global pivotal moment when those holding the levers of power do not seem ‘to get it’, solidarity within and between those groups who share common objectives is surely crucial.
I tried again today, and failed, to find Anneliese Dodd’s advisors. We met her some time ago when she was a junior Shadow Treasury team member (for Labour Land Campaign) and liked her because she listened, unlike most MPs. I spoke to her at last year’s Labour Party conference about MMT and she said she was looking into it. So disappointed. Lots of egg-on-face to come – all round.
At least the discussion on MMT is still ongoing in the Morning Star, with kickback from the Commies.
“I wonder if it’s not time to accuse of Labour of being in the pockets of the city, pushing ever more private debt on poor people when they advocate lower deficits”
What do you think Gordon Brown’s cosy chats with the City were about?
Portes is a Blairite. His name is on the “Debt Management Review” document from 1995 when he worked at Treasury as part of the Debt and Reserves Management Team. https://www.dmo.gov.uk/media/2083/report95.pdf
The whole structure of the current offering of corporate welfare to bankers and financiers is down to him and his colleagues
Labour is, and remains, a disgrace. The Treasury remains infected with the sort of idiots who are proposing tax rises at a time of crisis.
The modern Treasury View has been just as damaging as the 1920s one.
A paradigm shift is what we all want, lets hope this gets locked in. If this all turns out for the better may I suggest a crate of champagne will need to be sent to all the leading MMT proponents for changing history. 🙂
Now that more spending or tax cuts may move economies closer to maximum employment it becomes even more important to actually implement the NAIBER and JG. Any talk of that over there?
Lets also hope that Wall Street’s representatives don’t replace the Federal Reserve Chairman with one of their own so as to ‘repair Donald Trump’s maladministration’?
I tried to make sense of what Portes was saying, such as…
“I’m saving more and so are people like me. The data shows money held in banks and building society deposits has soared. And yes, we are lending to the government, indirectly, because the banking sector has effectively put that money on deposit at the Bank of England”
But if you spend less, and save more, this doesn’t change the overall level of deposits in the banking system, it just means the deposit accounts of pret and starbucks have less money going into them. And it’s like Portes isn’t aware of QE, coz maybe the reason deposits have soared is because the BoE has been busily stuffing the banking system with £300Bn worth of them.
I am struggling to believe that Portes was seriously arguing that banks were loaning reserves to the Bank of England by deposting them there?!? As if they could put them somewhere else??? I dunno like they have the electronic equivalent of a mattress to stuff them in or something??
“I am struggling to believe that Portes was seriously arguing that banks were loaning reserves to the Bank of England by deposting them there?!?”
As ever with Portes, given he is a master of spin, what he says is technically true but it is framed in such a way as to trap the ordinary person who doesn’t understand bank accounting is backwards.
Any deposit with a bank is technically a loan to that bank. That’s why you are ‘in credit’ – credit being the accounting term for a liability.
The difference with this ‘loan to government’ is that the government sector determines the interest rate, the repayment period, whether it is repaid at all and can force any and all commercial banks to lend to it whenever it wants – simply by issuing a payment to somebody at that bank.
If you could do that would you actually say you are borrowing at that point, even though technically you are.
We all “put money on deposit at the Bank of England” every time we hold a £20 note. That’s why it says on the front “I promise to pay the bearer on demand the sum of £20”.
Tom,
No.
There was a fantastic debate on here in 2009 called -Debates in modern monetary macro
https://billmitchell.org/blog/?p=3921
Portes learned nothing from these debates over a decade ago. GROUPTHINK demands he learnt nothing he has to protect the group instead. That’s his political role within the group the group has to be protected at all times.
I am not the Tom above.
Just want to brag that I am proud to have bought macroeconomics textbook. =)
That Max planck quote never gets old.
“During the 1990s, for example, unemployment was driven down in many nations with no increase in the inflation rates.”
I would say that this was the case for two reasons.
The 1990s was the culmination of globalization. Labour markets globally became one. Primarily, workers in China competed with workers in the US and Europe. Prior to that, it was workers in the Asian Tigers and prior to that it was workers in Japan. These workers were willing to work for much lower rates of pay than workers in the West. Western investment progressively swept through these areas, having been diverted from domestic use. These workers produced cheap reasonable quality goods. Together, these two factors kept down prices in the West.
They were the supply side factors. The unravelling of globalization, the take down of Chinese exports by the US, will re-institute the old relationships to some extent in the medium term to longer term.
On the demand side, the gross mal-distribution of income in the West weakened demand pressures (relative to what might have been the case). Western workers had to borrow effectively the income they would have had to keep up their living standards. But borrowings have to be repaid at some stage, taking income away again from workers.
The Phillips Curve did not disappear, it merely changed shape.
And MMT relies on the Phillips Curve. In an inflationary environment, demand is quelled (by taxation increases) which increases unemployment which is then soaked up by a JGS.
Yes, the ‘paradigm shift’; where, it still remains essential that the current class and power dynamic is unaffected by whatever economic hocus pocus might transpire as the current game continues to unfold.
In any case, no one knows what inning we are currently in and no one knows with absolute certainty that a ‘Minsky moment’, or a ‘crack-up boom’ is not part of any future development(s).
“we might finally jettison the mainstream economics fictions about government deficits and debt, which have hampered prosperity over several decades”
There has been no “hampered prosperity” for the top income earners and/or for all those at the top; where, wealth is concentrated. Further, there has been no lack of ‘inflation’ in the speculative securities markets; which, central bank and government policy has fixated on.
In that sense, the policy choices have been a roaring success.
“And MMT relies on the Phillips Curve.”
Debatable. I would argue that MMT says that generally a currency issuing government is going to need to spend more than it taxes back- as in a budget deficit will be the norm. This would be due to private sector desires to save in the currency. And as government spending is a large component of total demand, varying that spending will increase or decrease the likelihood of demand driven inflation. The JG program automatically varies some of that government spending according to the degree of private sector demand for the real resource called labor. Ideally, as the economy heats up, the automatic reduction in government spending that occurs every time a JG worker is hired by the private sector withdraws some of the government supplied boost to aggregate demand, thereby moderating the inflationary tendencies.
Not really a Phillips Curve argument.
@Neil Wilson
thx… ahhh I get it, describe the reserve banking system as depositors lending money to the Government, because then you can say BORROWING, while describing people taking money out of the cashpoint as PRINTING MONEY.
Not that the ability of the Bank of England to supply the required reserves, is remotely affected by whether Portes is able to buy latte’s or not. Nor do Portes’s latte buying habits affect whether people can get the cash they want from cashpoints either…
… but doesn’t matter, because you can say borrowing AND printing money.
Jerry, I suppose it is safe to assume the neoclassical conception of the Phillips Curve is a gross simplification and is generally wrong and has caused great damage to most developed nations. Economies are more realistically made up of thousands and thousands of Phillips Curves that cover all resources not just labour which is itself multifaceted and these ‘curves’ may be bumpy, may be flat before going exponential or just stay flat with a minor blip at the end, vary regionally and through time and would be as easy to control as a herd of cats pulling a plow.
MMT makes everything so much simpler and easier by anchoring the primary resource of labour with a buffer stock of employed workers in the JG and also informing governments which levers to pull to negate excursions off the desired path. This I am sure you understand better than I, but I added for completeness.
“The difference with this ‘loan to government’ is that the government sector determines the interest rate, the repayment period, whether it is repaid at all and can force any and all commercial banks to lend to it whenever it wants – simply by issuing a payment to somebody at that bank.”
Could you add to that definition: (1) they pay interest by getting another ‘loan’; (2) the loans are refunded to the government through taxation.
Of course the problem with the Labour Party is that it is not the Labor Party. It is bought off. The Phillips Curve – all that domain of thinking is a corruption by wealth. The Labour Party holds tightly to a theory of action that implies that the problem, central problem of inflation, is caused by working people, who, when they can, push for wage increases they don’t deserve. And the way to discipline this greedy, selfish mob of people is by un-employing them. That the so-called labour party is associated with this position is stunning.
Aristotle observed, (Tragedy of the Commons) ‘What is common to the greatest number has
the least care bestowed on it’. Excessive use of the earth’s resources by so few, and has negatively impacted the environment of us all. Greed will always be a part of human nature, some individuals will always act in their own self-interest no matter what the cost. In my opinion the last few decades have mapped out Aristotle’s philosophy. Thank you for an excellent read, lets hope for increased State ‘public good’ investment. You have my admiration Bill, for all you have endured, for continuing to talk truth to power.
“Ultimately, this just means interest rates are going to stay very, very low for even longer than we expected,” said Esty Dwek, head of global market strategy at Natixis Investment Managers.”
In other words, more dollars will be flowing into risk assets and the financialization industry; where, further asset inflation is the gift that central banks keep on giving.
Which; also means, that, the “government deficits and debt, which have hampered prosperity over several decades.”, have not hampered the prosperity of the financially well off and their offshore bank accounts.
So much for “paradigm shifts”.
@Derek Henry
It has being occurring to me for some time that these sorts of distributed patronage networks must require some form of countersigns to signal insider status.
Obviously non-factual statements serve best as countersigns as it is more difficult for the uninitiated to stumble on them.
As non-factual statements go, outright and even outrageous lies would, of course, serve the countersign purpose very well indeed.
Yok I hope your disgust with the Labour Party doesn’t extend to those advocating for a buffer stock of workers employed in a JG for the same purpose of inflation control and for dampening the peaks and troughs of economic cycles? After all sustained wage increases and rising living standards can only occur in a relatively stable environment preferably with low inflation.
The other issues of extreme wealth inequality, fair wages and conditions, speculation, cronyism, rent extraction, tax evasion, political manipulation and corruption, media manipulation of the populace and so on require political solutions.
“And MMT relies on the Phillips Curve. In an inflationary environment, demand is quelled (by taxation increases) which increases unemployment which is then soaked up by a JGS.”
Interestingly that doesn’t appear to be the case, as my latest blog post attempts to show. The JG can stabilise without any taxation at all.
The process is essentially the other way around. Demand is quelled by the natural drain to net savings and the Job Guarantee just prevents that turning into a wage squeeze. Instead capital reconfigures against the Job Guarantee competition to avoid damage to the business. So they won’t cut wages as all the staff would disappear, neither do they raise prices to avoid loss of market share.
The JG acts more like an Oil sump in an engine. Maintaining the flow.
What’s interesting from the dynamics I’ve done is that seems to be best achieved by giving away the Job Guarantee output rather than charging for it. Largely I suspect because charging for JG output is essentially a tax and that drains the savings people are wanting to achieve. Instead we are best just accommodating savings.
“In other words, more dollars will be flowing into risk assets and the financialization industry; where, further asset inflation is the gift that central banks keep on giving.”
It’s more the other way around.
Central bank interest intervention *suppresses* asset prices. When the interest rate moves to its natural rate of zero, asset prices return to their higher actual market price.
The last 40 years has been an exercise in suppression of asset prices to maintain higher yields. And of course high interest rates meant free money from the state for bankers and bond holders.
We are moving to an “asset rich, cash poor” system where having money requires a greater fool to buy your overpriced assets. Those greater fools are ordinary people who suddenly find they are paying “compulsory pension contributions”.
“MMT makes everything so much simpler and easier by anchoring the primary resource of labour with a buffer stock of employed workers in the JG and also informing governments which levers to pull to negate excursions off the desired path.”
I think that is true and very well stated. Thanks Andreas.
“The relationship between interest rates and economic activity/growth has not been systematically evaluated
High time to do it: In Lee and Werner, Ecological Economics, 2018, we present half a century of evidence on the correlation & statistical causation between interest rates and economic activity in the US, Japan, Germany and the UK (quarterly data). In Lee & Werner (2018b) we present broader cross-country evidence from 19 countries and considering 3 different types of interest rates, using higher frequency monthly data
Conclusion: Concerning correlation, we found that despite allowing for 2 years of leads and lags, the hypothesis that interest rates are inversely correlated with economic growth is rejected in 8 out of 8 cases. Instead, we found that interest rates are positively correlated with economic growth in 8 of 8 cases.
Negative correlation clearly rejected in all cases. Positive correlation supported in all cases
(b) Statistical causation (Granger causality) between short-term and long-term interest rates on the one hand, and economic growth in the UK, US, Germany and Japan on the other: Conclusion: Causality from rates to growth rejected in 6 out of 8 cases. The alternative hypothesis that growth determines interest rates is supported in 8 out of 8 cases.
“Conclusion
Our empirical findings reject the canonical view that interest rates somehow affect economic growth in an inverse manner. To the contrary, long-term and short-term interest rates follow the trend of the business cycle, as measured by industrial production, in the same direction, in all countries examined.”
Neil,
“Interestingly that doesn’t appear to be the case, as my latest blog post attempts to show.”
Where’s your blog?
Jerry,
“….thereby moderating the inflationary tendencies. ”
Government spending is replaced by private sector spending – aggregate demand does not fall. The inflationary pressure remains if not increases as workers are getting higher incomes.
Yes Henry that is the point- aggregate demand does not fall as the government boost (required deficit spending) declines. But theoretically the former JG workers are contributing to aggregate supply in sectors experiencing increased demand also. This is just my personal take based on what I know of MMT- so don’t blame Bill for it.
I found Neil’s blog by clicking on his name. That might work for you if you go to the comment above at 15:55
Neil,
“When the interest rate moves to its natural rate of zero……”
In what sense is the natural rate of interest zero?
In the last three hundred years, how much of the time has the interest rate sat at zero?
Jerry,
“But theoretically the former JG workers are contributing to aggregate supply in sectors experiencing increased demand also. ”
Fair enough. But how is this any different from a situation without a JGS? Say business is getting more confident – employs more workers – increases output – same thing. Eventually, inflation winds up. The economy gets to a point where resources are overstretched.
Found Neil’s blog – thanks Jerry.
Well Henry, the way most taxes are imposed is also a countercyclical stabilizer and so as the economy increases output the government withdraws more and more through tax. And if that isn’t enough- well then the government might use Keynesian fiscal policies which is where I had a disagreement with Neil the other day.
I said ‘ideally’- very few things are ideal in my experience.
Jerry,
I thought the point was that MMT prescribes an increase in taxes to quell demand in a hot economy.
Isn’t that correct?
To my knowledge, MMT has recommended some combination of increased taxes, decreased discretionary government spending, and regulatory changes in bank lending as ways to reduce aggregate demand IF that became necessary to control inflation beyond what the JG program provided institutionally.
” In what sense is the natural rate of interest zero?”
Because, as I understand it, deficit spending results in excess reserves at the Central Bank, which no one then needs, thereby pushing the overnight rate to zero.
The soaking up of these excess reserves, via the sale of govt bonds at a rate set by the Treasury, forces a positive interest rate above zero, to support the target rate set by the Central bank.
Correct me if I’m wrong, MMTers.
“I thought the point was that MMT prescribes an increase in taxes to quell demand in a hot economy.
Isn’t that correct?”
No. It’s not correct.
Taxes work as an automatic stabiliser to the extent that they are a tax on a flow, and that’s it. The strain in the MMT inspired policy framework is taken by the withdrawal of the Job Guarantee and by the tendency for monetary economies to drain to net savings.
Tax policy is set to ensure that the JG buffer does not exhaust in any physical location at the top of the business cycle. And then you largely leave it alone. Then you don’t have the speed of response problem that you get with discretionary tax and spending decisions. They take too long and end up being badly targeted.
“” In what sense is the natural rate of interest zero?””
Mathew Forstater & Warren Mosler (2005) The Natural Rate of Interest Is Zero, Journal of Economic Issues, 39:2, 535-542, DOI: 10.1080/00213624.2005.11506832
August 29, 2009 “Why the “natural” interest rate is zero.” https://billmitchell.org/blog/?p=4656
“”When the interest rate moves to its natural rate of zero……”
In what sense is the natural rate of interest zero?”
In the sense of lending to the government/central bank, I guess.
Somebody somewhere made an interesting argument. The laws of bookkeeping say that the outstanding currency is a liability to the government. That liability is matched by an asset: the future value of tax collectable. But these two amounts are and are always the same, including the “future” value at present. And future value only equals present value when the interest rate is 0%.
Cute.
The “natural” rate of interest.
It is clear form Forstater and Mosler that the use of the word “natural” is inappropriate.
In fact, they mean the reverse to natural.
They are talking about a context sensitive description of the interest rate which is anything but natural (and invariably the argument always slips back to the Japanese experience).
Neil,
“No. It’s not correct.”
I’ve read in many places in this blog that tax increases are used to quell an overheated economy.
In fact, Bill said so in a response to one of my questions.
Driving down the country lane at night all I see is what is straight in front in a sort of monochrome but in daytime I see that the world is much more interesting and complex. I am not a certified MMT guru but I give each comment below a tick for being correct. 😉
Neil’s comment.
“Taxes work as an automatic stabiliser to the extent that they are a tax on a flow, and that’s it. The strain in the MMT inspired policy framework is taken by the withdrawal of the Job Guarantee and by the tendency for monetary economies to drain to net savings. Tax policy is set to ensure that the JG buffer does not exhaust in any physical location at the top of the business cycle. And then you largely leave it alone. Then you don’t have the speed of response problem that you get with discretionary tax and spending decisions. They take too long and end up being badly targeted.”
Jerry’s comment.
“To my knowledge, MMT has recommended some combination of increased taxes, decreased discretionary government spending, and regulatory changes in bank lending as ways to reduce aggregate demand IF that became necessary to control inflation beyond what the JG program provided institutionally.”
and Henry’s comment.
“I’ve read in many places in this blog that tax increases are used to quell an overheated economy. In fact, Bill said so in a response to one of my questions.”
Carol writes: “At least the discussion on MMT is still ongoing in the Morning Star, with kickback from the Commies”.
Actually I think “progressives” (social democrats) should note the similarity between the MMT JG and the ‘communist’ vision of above poverty participation by all (regardless of what the “commies” think about MMT).
This widespread ‘Rechian’ paranoia about the word “communism” (apologies to Henry Rech) has to be tackled by progressives, as part of disseminating the concept of money creation in the public sector, as well as in private banks.
I hope China has the sense to avoid conflict with bankster-funded western economies.
Then China may well pull ahead of the west in terms of improvement in living standards for ALL its citizens.
Neil,
“This widespread ‘Rechian’ paranoia about the word “communism….”
I’m paranoid about socialism not communism.
Communism is an ideal condition where the state has “withered away” and property is owned communally. It will only happen and work if there is a fundamental change in human nature.
Socialism and capitalism are similar in that base human nature is always at play.
“Then China may well pull ahead of the west in terms of improvement in living standards for ALL its citizens”
Including the muslim Uighurs happy in their prison-camps – sorry, re-education facilities?
I find it odd that for many on the Left, just as in the ‘thirties when it t was Stailn’s USSR which represented “the future of mankind”, now it should be another country under the rule of its Communist Party, China.
Why not N. Korea, Belarus, Chechnya…, for good measure?
“…the ‘communist’ vision of above poverty participation by all…”
What an uplifting vision! And all without the slightest hint of coercion too.
Securely ensconced in their own societies in which they enjoy complete freedom of expression and the protection of the law against persecution and arbitrary imprisonment, where they can freely and anonymously vote for their parliamentary representatives from among a diverse range of candidates with differing platforms, protest and demonstrate peacefully in the public spaces without fear of arrest, etc, etc – they hold up China as some sort of paradigm of the future of the world.
Are they deaf and blind?
“What an uplifting vision! And all without the slightest hint of coercion too.”
I can’t understand Neil’s fascination with China.
It’s not socialist and is communist in name only.
It is a brutal uncompromising totalitarian fascist state.
And it has only succeeded economically by allowing oligarchic capitalism to flourish.
Such irony.
Henry writes: “Socialism and capitalism are similar in that base human nature is always at play”.
Yes, and given an understanding of “base human nature” , we all need to sign up to the UNUDHR and get rid of the veto in the Security Council.
Then Pompeo won’t be able to lead us into a war with China……and governments can concentrate on sustainable development of resources and eradication of poverty, given the revelation of MMT that resources , not money, is the real issue to be dealt with.
Henry: “(China) is a brutal uncompromising totalitarian fascist state”.
Is it really?
This Harvard research (from a quick google search) says :
“The survey team found that compared to public opinion patterns in the U.S., in China there was very high satisfaction with the central government. In 2016, the last year the survey was conducted, 95.5 percent of respondents were either “relatively satisfied” or “highly satisfied” with Beijing.”
You comfortable democrats can’t see the failings in your own governments; a synthesis of communism and capitalism – partly realised in china by the public banking system – is required.
(Google Ellen Brown: the american dream is alive and well in China).
Meanwhile democrats allow generational poverty to go unattended in the US, which is fueling the BLM protests.
Robert H writes: “I find it odd that for many on the Left, just as in the ‘thirties when it t was Stailn’s USSR which represented “the future of mankind”, now it should be another country under the rule of its Communist Party, China”.
In the thirties, the capitalist west was an unemployment nightmare, in which Ford and the US government sanctioned the murder of workers wanting to get back to work in his factories…..hence Stalin’s USSR (from a distance) might have appeared to offer a better economic system.
See my comment about the Harvard survey of Chinese public opinion re the government in mainland China.
“Securely ensconced in their own societies in which they enjoy complete freedom of expression”.
Humans (with a vestigial reptilian brain) can’t be trusted with complete freedom of expression….see my reply to Henry above. It’s rule of Rule of Law or anarchy (which is what we have now, with failed states, war, poverty and economic dysfunction everywhere).
eg, now Trump is telling his supporters to vote twice, to ensure his own vision of the ‘survival of the fittest’ rules the world…
Disgraceful, and terrifying…. in the ‘democracy’ of “the brave and the free”…
“And (China) has only succeeded economically by allowing oligarchic capitalism to flourish.”
Ellen Brown, promoter of public banking, has a different view. Certainly if China introduced a JG, it would leave the west in its wake, and then their government could countenance more ‘personal expression’ amongst its citizens including those driven by the baser self-interested survival instincts.
Neil,
“In the thirties, the capitalist west was an unemployment nightmare, in which Ford and the US government sanctioned the murder of workers wanting to get back to work in his factories”
Could you explain/substantiate this?
Henry: from another quick google search:
“The USSR in the 1930s showed the benefits of having a planned economy. It entirely escaped the negative effects of the Great Depression, which was one more (and the most serious) of the periodic crises of overproduction which are inevitable in a capitalist economy. In fact, the USSR was regarded as an economic powerhouse in the 1930s.”
(Not sure I agree with the capitalist “overproduction” analysis, it was more a matter of miss-allocation and maldistribution of resources, IMO).
As for the ‘Ford massacre’ (1932), you can also google that event.
Neil,
“…..the survey was conducted, 95.5 percent of respondents were either “relatively satisfied” or “highly satisfied” with Beijing.”
How much credibility can be given to such a survey given the regime’s history regarding dissent?
Neil,
“….the american dream is alive and well in China…..”
I would say the American capitalist dream is alive and well in China.
Neil,
“….the american dream is alive and well in China…..”
And of course it has been paid for with massive job losses in the West.
Which three countries best harness the full fiscal capacity of their fiat currencies?
I would put Japan first, China second and the US third under the current rule of Trump.
Trump is an ogre but under his Presidency the previously demonised federal deficit greatly expanded, admittedly on poorly directed tax cuts and higher defence spending but aggregate demand did increase and unemployment pre pandemic had dropped quite substantially. Trump also very uniquely imposed tariffs on many imports from China and also some imports from Mexico, Canada and elsewhere, which has led to a moderate revival in the US manufacturing sector. As for the rest of Trump’s policies they really are appalling. Democrats take note as Trump could win based on relatively good macroeconomic policy alone and you have been wedged into being far too timid on fiscal policy by the right, the slow learning ‘balanced federal budgets over the economic cycle’ Keynesians and your own free market neoliberals for many decades now.
Now we have the Democrats under Slow Joe offering the same Wall Street dominated tight fiscal policy, crony capitalism and scams; free trade with everyone as well as a continuation of fossil fuel subsidies – much like Trump for the last point. To be fair in other areas of importance the Democrats are in my view much better than the Trumpian Republicans but what a shambles nevertheless.
What a shame that the current global poisonous political and mass media environment did not offer a fair path to a Sanders presidency, a Corbyn government or even a Shorten government in Oz; and to give alternative political movements like the Greens and the various Socialist parties a proportionate share of political power even at the risk of the more extreme right also getting to have its say as well on occasion.
Genuine democracy surely should entail that all views, within reasonable agreed bounds, should have their proportionate space in political office without the manipulation and domination by powerful external players.
‘Democracy’ in the US, the UK, Australia, Canada and in most of the nominally ‘democratic’ world is still only allowing governments that suit the wants of the main centres of the big business oligarchy and their allied vested interests; to be elected.
The fascist dictators of China and Russia are not political role models worth following but in the economic sphere few would doubt that China is histories stand out performer but certainly remains very deficient in many areas as well such as personal liberty, respect for human rights, fair justice, equality, territorial expansionism, democratic rule, social welfare, animal cruelty, environmental protection and so on. The so called West has also degenerated badly in most of these areas as well especially the last decade.
We can do so much better if we can reinvigorate our democracies. If not bring on the Revolution while I weed my garden and find a safe spot to meditate.
Robert H asks: “Including the muslim Uighurs happy in their prison-camps – sorry, re-education facilities?”.
Well the Chinese ambassador in Australia recently pointed to past extremist Uighur muslim terrorism; and speaking of “reeducation”, the whole world needs to acknowledge the limits of religious scripture claiming to be the ‘Word of God’, including the OT which Marcion (correctly) rejected 2000 years ago for its portrayal of a genocidal God……beliefs still causing chaos in the ME.
Such are the results of the misguided insistence on individual and cultural sovereignty, above international rule of law.
Neil,
“……. international rule of law.”
And of course China respects the rule of international law – not.
The best demonstration of smoke and mirrors Central Bank / Treasury accounting, has to be the UK “Funding for Lending Scheme”. The BoE hasn’t got any money to BUY anything. It can swap Treasury securities back into “reserves” (repo; QE); but, to buy anything outright, it has to be funded by the Treasury creating new money. Repos and QE don’t create new money. Hence, the BoE has bought very little corporate bonds. Have a read of Appendix A in the following. This is how you disguise a Treasury operation as a BoE monetary operation; it’s beautiful.
https://www.bankofengland.co.uk/quarterly-bulletin/2012/q4/the-funding-for-lending-scheme
Henry, of course China will insist on its UNSC veto, while the other permanent members do so.
(We could have got lucky, in the post Cold War era, if Trump was a man of vision, and – as the most powerful member – persuaded the others to ditch the UNSC veto, (when he was elected in 2016)….as envisioned by Doc Evatt and others in 1946…