Originally posted on October 16, 2019 at the New Economic Perspectives blog.
In this part, I’ll resume with comments on the critical contributions to the special issue of rwer. We finished Part 2 with a discussion of the shocking lack of citations to MMT literature in the critiques—especially the dearth of citations to the more academic contributions (as opposed to the summaries of MMT written for undergrads and the general public). Let me return to the oversight of contributions made by scholars such as Fullwiler and Tymoigne—who have mostly written academic pieces.
Sawyer does cite Fullwiler (although with the name misspelled! If he was my undergrad student, I would chew him out—at least get the damned names spelled correctly!). In his piece, which is largely an exposition that parallels MMT but is disguised as a critique, he wants to argue that MMT doesn’t properly distinguish between what circuitistes call initial versus final finance (Davidson has a similar distinction). But in reality, I have long used the circuit approach in my exposition—including in my own contribution to the rwer issue. The initial finance of government spending is created when the spending occurs, and today takes the form of two balance sheet credits: the deposit account of the recipient and the reserve account of the recipient’s bank. Sawyer seems to mostly agree with that. But according to Sawyer, MMT ignores the point that because bond sales and tax revenues logically follow government spending and can be seen as the funding stage. However, Eric Tymoigne made exactly this point in a 2014 article, arguing: “Put in terms of the circuit approach, taxes and bond offerings are part of final finance (funding).” So Sawyer is just wrong about this.
The problem with Sawyer’s analysis is that he then takes the distinction too literally, imagining that lack of final funding acts as a potential constraint—and he even invokes the orthodox “government budget constraint”, which is not a constraint but an identity (as explained in our textbook). This then leads to some missteps as he claims that independent central banks could just say no to providing initial finance and that “The limitation on the use of money funding of budget deficit then comes from limits on the willingness of people to hold their (additional) savings in the form of bank deposits (and for the banks to accept holding reserves with the central bank as assets corresponding to their liabilities in the form of bank deposits).” That is pure nonsense. Central banks have a laser-like focus on the payments system and are not going to start bouncing checks and producing havoc. Dealer banks stand ready to buy government bonds and must place bids to have a seat at the table. And, finally, why should the government care what form the nongovernment sector holds its net financial assets in? If they want bonds, give them bonds; if they want reserves, give them reserves; if they want cash, give them cash. In any case, portfolio preferences affect interest rates, not the government’s ability to finance or fund its spending. The spending comes first and should be seen as creating the finance as well as the funding (using his terms).
Sawyer repeats his old and tired warnings about the ELR/JG proposal. I found nothing really new in the arguments, which he laid out long ago and which Bill and I countered at the time. He continues to worry that the ELR/JG program will take jobs away from the public and private sectors and somehow depress wages while causing inflation (deflation of wages and inflation of prices at the same time????). He presumes that the program wage will be some very low minimum wage although recent proposals have used a target of $15 per hour. We have simulated such a proposal and find that the inflationary effects are minimal. Inflation disappeared two generations ago—but many of our old PK friends still worry about it.
Kregel’s paper argues that MMT has not taken sufficient account of Keynes’s theory of liquidity preference—a theory of asset pricing—and has an interesting discussion of possible payments systems of the future. I have also written on liquidity preference theory (as has Tymoigne) but I do agree that it would be useful to do this in the context of discussion of MMT. The problem—as readers of his piece will find—is that Keynes’s liquidity preference and asset pricing theory is rough going for most readers. But this is a very useful antidote to the typical Post Keynesian “horizontalist” approach that denies any role for liquidity preference theory.
Collander’s piece addresses three big ideas he finds in MMT, and agrees with two. Well, two out of three coming from a critic is pretty darned good, so I’ll take it. The third concerns application of the first two ideas to actual real world policy making. For example, he argues “Where I have problems with MMT’s focus on functional finance is when it is extended to real world government monetary and fiscal policy.” He argues that good real world policy should be both sound and functional (poor old Abba Lerner is rolling in his grave) basically for the same reason that Samuelson argued that the role of the economist is to preach the old time religion of balanced budgets: we cannot really trust our dysfunctional politicians. So it is the economist’s job to lie. But not any old lie will do. Collander goes on to emphasize the role of maintaining trust by telling good lies, quoting Keynes: “Keynes, after he looked around the room to see that no newspaper reporters could hear, replied “It’s the art of statesmanship to tell lies but they must be ‘plausible lies.’”
I guess that’s how Trump maintains the trust of his base—his are all plausible lies, no matter how implausible they might be (oh yeah, that hurricane was heading for Alabama and he has the Sharpie to prove it). As readers will know, Keynes was an elitist—not his most redeeming feature–but in any event he was talking about statesmanship, not the role of the scientist. I prefer to tell the truth and let the “statesmen” do the lying. And to hope for the day when we can run the liars out of office.
Finally let’s take a look at Mayhew’s piece, which begins by proclaiming she’s one of the “friendly critics” of MMT. (When a piece begins like that, it triggers an automatic flinch. A friendly critic would tackle this like a scientist: trying to fill holes by making a contribution to the theory—but our critics usually just want to complain.) She continues: “I am, however, a critic, because in their pursuit of policy relevance, MMT advocates too often offer apparently simple solutions to complex issues of political economy. That they do so in the cause of political relevance and journalistic attention does not absolve them…” How so? “in carrying out their analysis, MMT advocates often come ever so close to denying the endogeneity of money; they use a severely truncated form of flow-of-funds analysis; they do not employ an accurate description of the relationship of the FED to the rest of government.”
Yet another one who seems to forget that I wrote the damned book on endogenous money. She claims that MMT has eroded the endogeneity of money by insisting there is a special arrangement between the government and money.
Well, that is because there is. It is enshrined in our Constitution—which gives to Congress the sole power to issue currency. Throughout history and around the world today most governments choose the money of account (the measuring unit in which debts and credits—whether or not they are government’s or someone else’s—are denominated), issue a currency denominated in that unit, and accept back currency in payments made to itself. That sounds pretty special to me. But it doesn’t erode endogenous money—it provides the foundation for it. Since she rejects the notion of this special arrangement, she also implicitly rejects Chartalism (or State Money). Although she doesn’t realize it, that means she is the one who also rejects endogenous money—even the endogenous money approach of the Post Keynesian Horizontalists. All of them do see a special relationship between the central bank’s reserves and bank deposits; they reject the deposit multiplier story because they reverse causation: causation runs from loans to deposits to reserves. But they accept that reserves are a special “money”—with a direct relationship to the government–used for clearing. What the Horizontalists had not understood is that far more reserves are normally created through treasury spending than through central bank lending or open market purchases. That is what MMT adds. (Again, I am not claiming that this is a new contribution—I learned it first from John Ranlett.)
She goes on to reject the taxes-drive-money view: “Of course, it is true that acceptance of payment of tax obligations provides some “backing,” but it is also true that dollars in the U.S., pounds in the U.K. and etc. are “backed” by the willingness of businesses and others to accept them as payment.” That is, she adopts the P.T. Barnum greater fool theory of money: “I accept dollars because I think there’s some dope dumber than me that I can fob them off to.” Several of the critics similarly cite “trust” as the force behind money, the financial system, and government itself.
There’s no denying that trust is nice. But my trust in Trump is pretty much limited to the belief that he will continue to act like a buffoon. Don’t get me wrong, I like the long trajectory of civilization as it moved from ruthless authorities who could be trusted to enslave much of the population in brutal conditions to Medieval monarchs who could be trusted to rape and pillage with abandon to fascist dictatorships that ran concentration camps and gas chambers and on to a hoped-for-future in which AOC becomes the Democratic Socialists of America’s first President of the USA. Trust is nice but it doesn’t explain much of the history of money or of government—unless you are referring to the trust that the authorities who imposed monetary tax obligations will enforce that obligation with substantial penalties for nonpayment. Often death. Today, up to and including incarceration.
MMT emphasizes the role of trust in the issuer of the currency instead of the role of trust among users of it (which is the P.T. Barnum infinite regress story). What is the nature of that trust? Obligations to pay taxes—and many other contracts—will be enforced in the money of account, with the currency (cash as well as reserve deposits at the central bank) the ultimate means of settlement.
MMT does not argue that promotion of other kinds of trust—enforcement of equal rights and protection of recognized human rights, for example—are unimportant. Broader trust in government can increase its power—for better and possibly for worse. When she argues “To single out the power of taxation as the primary source of acceptability of our dollars or pounds or pesos in their various forms is to use a logical relationship to establish causal sequence: first taxes give value to dollars and then dollars have value in other uses” she is missing the point. Our logical argument is that from inception, a tax (or similar) obligation is sufficient to create a demand for currency. We’ve always argued that it may not be a necessary condition. We are willing to accept an alternative logic if anyone can come up with one. And kudos to someone who can not only come up with an alternative logic but can also find some historical evidence to support it. Mayhew does not—after rejecting ours, she provides no logical alternative, and ducks the challenge to find historical evidence against it, simply stating “It is beyond the scope of this essay to provide a detailed explanation of why this is not an historically accurate account of the development of the various units of account and of banking in the western world.” Why does that sound like evasion?
Another issue she raises is our supposed truncation of flow of funds. She criticizes us for citing Ritter and following Godley’s sectoral balance approach in our textbook. She prefers Copeland. We use Ritter because he uses a consolidated framework that shows the relations between sources and uses and he provides a flow of funds matrix (similar to that used by Godley). When we present the sectoral balance approach we use NIPA accounting rather than flow of funds for two reasons: first, most countries do not have flow of funds data, but most do follow international conventions regarding NIPA. Hence we can approximate the sectoral balances using the NIPA data. Second, all macro texts introduce NIPA accounting—and so do we—so it is convenient to use that framework to present Godley’s approach. While are not dismissing the usefulness of Copeland, we do not believe an undergrad text—that is already too long–is the right place.
What she wants to do is to claim that our approach “truncates” analysis of financing within sectors and puts too much emphasis on government control, arguing that we hold “that households and businesses will adjust to what government does”, and concludes that in our approach “Government will be the sector that will determine the level of national income, the level of employment, and how rapidly the overall price level will rise or fall. The private sector plays a secondary role in this analysis.”
This is not an accurate statement. First, we have presented the usual Keynesian argument that instability of private sector spending (especially investment, but in recent years consumption spending has played a destabilizing role) plays a significant role in the cycle—although, as Murphy argues in his piece, taxes can have a big influence on that (in an expansion, tax revenues increase sharply, taking income out of the economy with differential effects across households and firms). Second, what we are actually arguing is that sovereign government alone does not face a financial constraint. At the aggregate level, the private sector doesn’t really face a financial constraint, either, since spending determines income. However, at the level of each entity, there is a financial constraint. And since the capitalist economy suffers from the “anarchy of production” (it is not centrally planned), it is up to the government to act as the stabilizing force. Finally—and related to this point—the sovereign currency issuer has a special role to play as both spender and lender of “last resort”, as well as taxer of “first resort” that can put a crimp in paychecks.
We are well aware that causation is complex—the activities of the private sector impact spending and thus income and thus tax revenue. Government spending is also affected by private sector behavior; for example, some social spending is triggered by economic performance as well as by means testing and other legislated triggers. Hence, the outcome of the government’s budget is “endogenous”—we emphasize that government cannot really decide independently to run a surplus, balance, or deficit. However, it can decide to spend more or spend less on specific programs; and it can decide to increase or reduce tax rates on specific activities. But the end-of-period impact on the outcome of the government’s budget is not determined by that behavior.
Our point is just the usual Keynesian idea that government can lean against the wind. And following Godley we emphasize that the size of the deficit will always be “just right” to offset the sum of the domestic private sector plus foreign sector balances.
But sovereign government still has a very big impact over the level of economic activity at which those balances balance. And sovereign government can always maintain full employment of labor resources, as usually, defined through a Job Guarantee. If the program pays $15 per hour, making jobs universally available at that wage, then anyone who remains without a job is not involuntarily unemployed. While there could be very good reasons for them to refuse to accept the JG job offer, and while we might even want to develop policies to bring them into employment, the JG represents the minimum level of responsibility that a sovereign government ought to take to ensure a universal right to a job. We argue that this is a far better goal than pursuit of some arbitrary deficit or debt ratio. We also prefer this over a GDP growth target. However, clearly, full employment is not the only legitimate goal of good government.
Well this has already reached the blog word limit, so I’ll have to move on to the treatment of MMT by editors and conference organizers in Part 4.
11 RESPONSES TO “MMT: REPORT FROM THE FRONT (PART 3)”
- John Zelnicker | October 16, 2019 at 10:32 am |As an aside, there was a lot of laughter here in LA (Lower Alabama) about that Sharpie-edited weather map.
- Nicholas Haines | October 16, 2019 at 12:15 pm |To finance versus to fund – what is the difference?
- LRWray | October 17, 2019 at 7:32 am |Haines: for currency users there is a big difference. Finance refers to the original means used to purchase; fund refers to the long term liability that you service. For example, a firm might use a short term loan to buy capital equipment but then float a bond to change the liability from short term to long term (to match life of the equipment). For the currency issuer there isn’t a big difference–only the currency issuer can use its own IOU as final means of payment. The currency issuer can let the holder of that IOU decide whether to hold cash, reserves, or bonds.
- Yok | October 17, 2019 at 9:07 pm |Randy, much of what you see is an expression of envy. It hurts to become aware of another’s achievement, all the while having frittered away your time fruitlessly.
- Anne Mayhew | October 18, 2019 at 1:19 pm |Randy: I am curious to know what you mean when you write that “a special arrangement between the government and money” is enshrined in our Constitution. The U.S. Constitution says that Congress shall have the power to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. . . .”The Constitution also says that No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. . . .” Actually, the prohibition of the right of States to emit bills of credit and the absolute silence of the document on whether or not the Federal Congress could do so is interesting given that such Bills had been the state-issued money during the Colonial period. (Bray Hammond in his monumental BANKS AND POLITICS IN AMERICA provides the best interpretation of silence that I know of.)The Mint Act was passed in 1792, which gave official definition to the U.S. dollar. But that did not solve the problem of a shortage of that which, in Hamilton’s words, would “pass current as specie.” As we now all know, thanks to Lin Manuel Miranda, government debt and private (though sometimes Federally and sometimes State chartered) banks solved the problem. Bank notes and much later checks, and now electronic transactions, provided the money that allowed most (whether in number or in total value) payments to take place. I am and always have seen endogeneity of money in the story for it is a story of banks and merchants providing all different sorts of money, with government more or less successfully trying to ensure that it was more or less “good money.” But I do not see this system anywhere “enshrined in the Constitution.” If you mean that the Government, in the Mint Act of 1792, established an official definition (as a weight of gold) for the U.S. dollar, then I agree. That enshrined an official unit of account in which contracts, both public and private, would be denominated, something that the U.S. had not had during a long period when many different kinds of foreign coin and units of account were used. But that did not mean that the Govt thereby gained the power to determine the issuance of official dollars. Far from it.Of perhaps greater importance is your (mis)understanding that I accept some kind of “P.T. Barnum greater fool theory of money.” Not so. Over many centuries a system of courts and contracts have developed that serve to enforce and create confidence in the system of payments that has coevolved with market systems and with what we identify as money. You ask that I give you an “alternative logic” to the “taxes first” story. That I cannot do as I do not think that logic is the source of good social explanation. Rather I can, should you wish, provide you with an extensive reading list that describes the coevolution of money/contracts/governmental powers/taxation. This would go back to the Medieval Fairs, continue through the creation of the U.S. Constitution, and so on to the present.From this history I do gain the understanding that there are special relationships between states and the monetary systems that operate in their domain, but I do not find evidence of THE special relationship that you assert: that it is taxation that first gives value to money. That is the special relationship that you use to assert your circumscribed view of endogeneity and it is that which I reject.
- Greg Hannsgen | October 18, 2019 at 1:38 pm |Quoting from Randy’s post: “What the Horizontalists had not understood is that far more reserves are normally created through treasury spending than through central bank lending or open market purchases. That is what MMT adds. (Again, I am not claiming that this is a new contribution—I learned it first from John Ranlett.)”This seems about right to me, now that you mention it. I had read the main horizontalist works before I ran across MMT or functional finance. When I read them, Moore’s book and other horizontalist works did not change the picture I had in my mind of (1) the government auctioning securities to cover deficits and (2) the Fed later buying securities if necessary to maintain the target for the short-term interest rate. Of course, MMT research has documented that the true story is that the Treasury spends by creating new money, with the central bank soaking up through its operations any extra reserves that are thereby created.I continue to find myself in agreement after reading this post. I hope readers will think about looking at the MMT resources on my website, including the following page containing links to authoritative statements of MMT by Randy and others:
https://greghannsgen.org/links-to-authoritative-works-on-mmt/
What does the theory really say? On way to find out is to have a look at some of the resources listed there. - Nathan Tankus | October 19, 2019 at 8:56 pm |@ Mayhew:“Randy: I am curious to know what you mean when you write that “a special arrangement between the government and money” is enshrined in our Constitution. The U.S. Constitution says that Congress shall have the power to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. . . .”The Constitution also says that No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. . . .” Actually, the prohibition of the right of States to emit bills of credit and the absolute silence of the document on whether or not the Federal Congress could do so is interesting given that such Bills had been the state-issued money during the Colonial period. (Bray Hammond in his monumental BANKS AND POLITICS IN AMERICA provides the best interpretation of silence that I know of.)”NT: It is indeed “interesting” but Wray’s statement was about current interpretation, not a statement of originalism. The U.S. Constitution’s “power to coin money” clause has for the past 150 years at least been interpreted as a monopoly on the power of money creation by the courts. Additionally, it has been treated as a federal government prerogative since Alexander Hamilton’s Administrative Guidance that the federal government has discretion over what is receivable in payment of public dues (this is most famously illustrated by the “specie circular” under Jackson). See for more my presentation at the Harvard Law “Money as a Democratic Medium” conference https://www.youtube.com/watch?v=o8k8lLKjL6A‘The Shaky Constitutional Foundations of Antebellum American Money: Bank Charters as Delegations of Power’
“The Mint Act was passed in 1792, which gave official definition to the U.S. dollar. But that did not solve the problem of a shortage of that which, in Hamilton’s words, would “pass current as specie.” As we now all know, thanks to Lin Manuel Miranda, government debt and private (though sometimes Federally and sometimes State chartered) banks solved the problem. Bank notes and much later checks, and now electronic transactions, provided the money that allowed most (whether in number or in total value) payments to take place. I am and always have seen endogeneity of money in the story for it is a story of banks and merchants providing all different sorts of money, with government more or less successfully trying to ensure that it was more or less “good money.” But I do not see this system anywhere “enshrined in the Constitution.” If you mean that the Government, in the Mint Act of 1792, established an official definition (as a weight of gold) for the U.S. dollar, then I agree. That enshrined an official unit of account in which contracts, both public and private, would be denominated, something that the U.S. had not had during a long period when many different kinds of foreign coin and units of account were used. But that did not mean that the Govt thereby gained the power to determine the issuance of official dollars. Far from it.”
NT: That the U.S. government established the U.S. dollar and it did so in a chartal way does not mean that there is no “shortage” of money. Chartalism doesn’t require there to be no shortage of money. And what you skip over in your explanation is that those banks were only able to meet the “shortage” because they got charters from state governments, those charters granted receivability in public dues explicitly (I know, I’ve read many of them. This is my historical research focus, hence the Harvard Law presentation). Nothing in what Wray said (or in NeoChartalism) requires the power of granting bank charters to state banks to be reserved by the Federal Government. Note that this is a question of constitutional law, not any Generic Post-Keynesian mechanism of “endogeneity”. As I argue in my talk, I think there was a very strong argument that the granting of state bank charters was a violation of constitutional law in that it delegated powers (the ability to emit bills of credit) that they had no right to delegate. Regardless of this constitutional debate, it still was up to the federal government whether state chartered bank notes would be receivable in payment of public dues and it actively reduced their moneyness at times by restricting that receivability (again Specie circular being the famous example). I’d note that Hammond is one of the few sources that touches at all on the tax receivability of state chartered bank notes. As I explain in my talk, the dominant position at the time was what Schumpeter would call “theoretical Chartalism” and “practical metallism”. So for American lawmakers, receivability for public dues would be seen as the essence of the money power and the banning of the emission of bills of credit was thus supposed to be sufficient to preserve the Federal Government’s monopoly. It obviously didn’t work out that way, as my talk discusses. (the Modern Money Network actually did an event on constitutional history that covers a lot of this ground 6 years ago now. https://modernmoneynetwork.org/symposia/money-democracy-and-constitution )“Of perhaps greater importance is your (mis)understanding that I accept some kind of “P.T. Barnum greater fool theory of money.” Not so. Over many centuries a system of courts and contracts have developed that serve to enforce and create confidence in the system of payments that has coevolved with market systems and with what we identify as money. You ask that I give you an “alternative logic” to the “taxes first” story. That I cannot do as I do not think that logic is the source of good social explanation. Rather I can, should you wish, provide you with an extensive reading list that describes the coevolution of money/contracts/governmental powers/taxation. This would go back to the Medieval Fairs, continue through the creation of the U.S. Constitution, and so on to the present.
From this history I do gain the understanding that there are special relationships between states and the monetary systems that operate in their domain, but I do not find evidence of THE special relationship that you assert: that it is taxation that first gives value to money. That is the special relationship that you use to assert your circumscribed view of endogeneity and it is that which I reject.”
NT:This final comment is extremely misleading. Wray and other MMT scholars who have written about money have always said that taxes is a shorthand term for all the non-reciprocal obligations imposed by legal systems. Remember Wergild?http://neweconomicperspectives.org/2017/07/memo-mmts-legal-department.htmlThey were not taxes in the literal narrow sense but no one (except seemingly MMT critics) are confused on this point. Fines, Fees, court imposed damages. These are obligations that we accept without our permission which drive us to seek what can settle those debts- money. Medieval fairs are a particularly strange example as they are royal chartered entities who have the power to make rulings based on the authority of the King. There’s not much argument for a lack of state authority here. Your comment seems to invoke the myth of the medieval law merchant, which is just that.https://academic.oup.com/jla/article/7/2/251/1751833I’d also be interested in these critiques being directed at Christine Desan as well, since they apply just as much to her work as MMT scholarship. Yet why doesn’t that ever happen? For a fresh review essay, see Eric Tymoignee’s review essay. It also doubles as a review of Fox et al’s gigantic edited collection “Money in the Western Legal Tradition”… which Wray had a chapter in as a historically and legally minded economist.https://www.tandfonline.com/doi/abs/10.1080/01603477.2019.1672563?journalCode=mpke20 - LRWray | October 20, 2019 at 1:12 pm |Anne: yes you put your finger on it: The U.S. Constitution says that Congress shall have the power to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…” That is a special relationship. I wish the Constitution gave to me that power. I’d also like the power to impose and enforce a few taxes.Perhaps you have confused two separate issues, however. We say that from inception, taxes, fees, fines, tribute, tithes (ie “obligations”) create a demand for the currency. We do not claim these determine the value. “Regulate the value” is difficult, as we know.You refer to attempts to do so by pricing gold. Fortunately, we have abandoned that.As you suggest, the “endogenous money” may well be the vast majority of the “money” used to circulate output as well as to circulate financial assets. It is denominated in the money of account. It puts one in debt to the issuer (and simultaneously puts the issuer into debt). MMT does not circumscribe endogeneity. I wrote the book on endogenous money. There has been a campaign by a couple of disgruntled Post Keynesians who’ve tried to claim that I/we abandoned endogenous money. It is a lie.Further, not only did I write the book on endogenous money, a large percent–probably the majority–of the some 300 articles, books, chapters, policy briefs, and grant-funded reports that I’ve published have been on the private part of the financial system. There are very few heterodox economists who have written more than me on this topic. Why are you claiming that I’ve somehow ignored private banking?The rule is that the state establishes the money of account and issues a currency denominated in it. We are open to exceptions, but they appear to be very (vanishingly) rare. Your endogenous money is almost without exception denominated in a State money. States can choose to accept payment in foreign coins as well as privately issued notes (etc)–it is the state’s prerogative, as Knapp says. Modern states operating with central banks don’t do it.Much of your comment is lamenting failure of the Federal government to take full advantage of the opportunities available to it as the currency issuer. I agree. This continues up to the present day. (I recognize that there are many different kinds of impediments to so doing. MMT’s goal has always been to remove misunderstanding–but that still leaves political barriers.) The “lack of money” you discuss (filled partially by private credit) is really a lack of spending–they are conceptually distinct although I realize that popular accounts of the time do not make that distinction.Logic is a first step, and helps to avoid errors. It is not the end of the story.Over the years (well, decades now), as you know, I have asked for and received many recommendations from you for reading. None of them has provided convincing evidence and argument against the State Money/MMT approach. So far. I welcome others, and perhaps other readers of NEP do so also.For the sake of argument, let us say that our interpretation of the history is correct (and many legal historians do agree with us). Or if you prefer, let us say that it is wrong. Better yet, let’s just leave it to the side. Do you assert that the US does not today have a system in which we have adopted a state money of account, called the dollar? Do you deny that our government issues a currency (defined as notes, coins, and central bank reserves)? Do you deny that all payments made and received by Treasury take the form of that currency? Do you claim that Treasury can run out of currency? Do you deny that the Fed and Treasury have created over the past century operating procedures to ensure that Treasury checks always clear? Do you deny that private banks use currency for final net clearing? Is it your claim that our sovereign federal government faces financial constraints other than those that Congress imposes on it? And if these are not your claims, just what is it about MMT that you reject?
- Anne Mayhew | October 20, 2019 at 5:35 pm |Randy: We seem to be stuck on a fundamental disagreement about the relative importance of the power of the state to determine a commonly used money of account and the power of the state to control the flow of funds that are denominated in that unit of account. In 1792 the U.S. Congress recognized the reality of widespread use of something called a dollar as a unit of account and defined that as the coin that would be minted. Similar processes of encoding common practice can be found in many other nations. I understand that. What I don’t get is why that leads to the MMT conclusion that this somehow gives unlimited space to the U.S. government (or any other government that has effective control over the unit of account in which contracts are written) to issue some form of means of exchange. That is not how it works. I absolutely agree that U.S. fiscal policy could be much more expansionary at the present with good effect. But that is a time and place specific conclusion and does not seem to be the modest conclusion of MMT. It is in the reach for a more universal conclusion that I find fault and I still think that it is only by circumscribing endogeneity that you can support that more universal conclusion.That said, I am going to say over and out to this discussion. There are other things to be done.
- LRWray | October 20, 2019 at 8:03 pm |Anne: we never claim unlimited space. We claim that the constraint is real resources, not finance. Treasury, today, can spend up to what Congress authorizes. Do you reject that and if so on what basis?Sorry I think that you have responded (the second time) to my incomplete response–I accidentally hit send while I was still writing. Devin replaced the incomplete version with the finished one rather than posting 2 responses. I don’t want to mislead anyone–the version on display here has a few more sentences than the one that Anne was responding to, but I did not see either the response by Nathan or Anne before I finished the one displayed.I thank Nathan for some very important details. Let me add that I’ve worked with legal historians for the past decade and am well aware of the rather vast literature that confirms the state money approach adopted by MMT–a literature that covers the past 2000 years. I am not swayed by Anne’s discussion of historical details of a period of the history of a rather insignificant, backward, and weak sovereign slave owning and genocidal nation–that is, the USA’s first century of existence, no matter how important the USA eventually became. Seems to me that the history of Rome is more significant if we want to shed light on the history of state money. The USA does have a very interesting and quite unusually troubled monetary history–linked, no doubt to its quite troubled history of the treatment of enslaved people and native Americans. It’s national government was purposely kept weak; it did not even begin to modernize its financial system until the 20th century. But that said, it is very hard for me to understand Mayhew’s objection to application of state money and MMT to the modern US financial system. If we do not have a state money system, why on earth didn’t our bankster class just bail itself out during the GFC? Why did Uncle Sam have to spend and lend $29 trillion? Why couldn’t “endogenous money” just take care of all the problems? This is, I think, a big problem for all those who believe that private money runs the whole system. When there is a hiccup, only state money can save the day. According to MMT this is because all the private monies leverage the state’s currency.
- Greg Hannsgen | October 22, 2019 at 2:18 am |Quoting Randy above on Jan’s contribution: “The problem—as readers of [Jan’s] piece will find—is that Keynes’s liquidity preference and asset pricing theory is rough going for most readers. But this is a very useful antidote to the typical Post Keynesian ‘horizontalist’ approach that denies any role for liquidity preference theory.”You mention “typical” horizontalism. Just to mention some horizontalist contributions that _do_ allow for liquidity preference, to demonstrate that they do exist:A piece by Kaldor from 1960 combines horizontalism for the “bank rate” with a Chapter 17-like liquidity preference theory for returns on other assets, as advocated by Jan. I ran across a citation to this article in a book by Colin Rogers from the 1980s–a fascinating book for Post Keynesians who are interested in monetary models. Rogers, too, adopts this combination of theories–horizontalism for the short-term rate with the Chapter 17 approach for long-term government paper. Of course, Rogers cites Jan, and Jan will be aware of Rogers’s book.Tai Young-Taft in some conference papers also used an approach that combines the horizontalism with Keynesian asset pricing in various ways in some recent papers that I hope to one day revise and finish. (He unfortunately can no longer be involved with our joint efforts, given his other professional commitments. In a manner of speaking, I can only afford to work on economics part-time, given my current situation.) The sole available effort springing from my collaboration with Tai that already appears in a working paper series is Levy Institute working paper 839, which can be downloaded at this URL (or from researchgate or the SSRN or repec working paper archives).http://www.levyinstitute.org/publications/?docid=2284 (abstract)
http://www.levyinstitute.org/pubs/wp_839.pdf (stable URL for a pdf of the paper itself)This particular working paper by Tai and me actually has a changing stock price valuation, rather than government bonds whose relative yield is determined by liquidity preference.I note that a comment on the previous post by Randy has been posted here, beneath Randy’s third on this topic, perhaps through an error of my own. My apologies if I have confused other contributors to this interesting discussion. I plan to reply to some of the other comments on this latest post by Randy.Those who wish for yet more chances to discuss MMT (!) may want to subscribe to or bookmark my economics blog. (The system adds a link to my website from my name automatically because I fill in the relevant blank in the form.) I hope those who sympathize with my views will read and even make a small donation at my site to support this small Post Keynesian effort in a small way! Thanks.