This article was triggered by the following comment by Neil Wilson on a previous article on my site:
What is interesting about Wren-Lewis, as well as your [another commenter -BR] comment, is this seeming inability to see the automatic stabilisers (particularly the spend side auto-stabilisers) - which require *no* human beings involved at all. They just work - instantly, spatially, automatically.
Money: Still Not AbolishedAs one might expect, some of the internet discussion veered off into discussions of money. As I would expect, these discussions had little value-added. This is yet another example of why money needs to be abolished from economic theory. (To be clear, abolishing money from economic theory is my personal crusade, and is not a feature of MMT. However, MMT is not greatly harmed by its abolition, which is why I am in the MMT camp. Also, many people do not understand what I mean by abolishing money from economic theory, to which I respond: my book is available at all major internet booksellers.)
We need to drop our mystical debates about the origins of money (which appears to occur before the advent of writing as we know it) or semantic arguments about the definition of "money," and just ask ourselves: why do "modern" states use money?
The answer is straightforward: to provision itself. The alternative to using money is to directly requisition goods and services -- such as press-ganging unfortunate bystanders into the Royal Navy. Direct requisition was essentially used during the World War II command economy (in many combatant nations), but we prefer to avoid its use during "peacetime."
In most developed economies, governments issue their own money, and they use this same money to pay for goods and services. In some countries, an external currency is used, but this generally only makes sense for small countries, or badly-managed ones.
The reason why governments need to impose taxes is that they need to reduce demand in the private sector to make goods and services available to the government. Alternatively, they need to use taxes to create a demand for the currency they issue so that it is valued by the private sector (and hence, the government can buy real goods and services for its fiat currency).
We can now circle back to automatic stabilisers. One of the insights from MMT -- that is completely missed by most critiques -- is that the "value of money" that matters to the government is the exchange ratio of real goods and services the private sector is willing to provide in exchange for money. As implied in my article on price levels -- there is no guarantee that this measure of the value of money matches any other measured price level. The fact that this is divorced from how households value money is probably the cause of a great amount of confusion. From the standpoint of economic policy, the government's view matters, not households'.
One of the failures of modern policy is that governments ignore their role in the setting of the price level. There is an unquestioned belief in the supremacy of market prices. Since government spending policies adapt to prevailing private sector prices, it easily becomes an engine of inflation. (Rising private sector prices are met by increased government spending, perpetuating excess demand.) In other words, the existing institutional regime in government finance is an automatic destabiliser with regards to the price level. This entire possibility is swept under the rug by conventional approaches to macro analysis. Since the possibility is assumed out of existence, the MMT insight is ignored.
Automatic Government Finance PolicyI do not have a reference handy, but I believe the following three rules would summarise Warren Mosler's suggested reforms of government finance.
- The rate of interest on settlement balances (reserves) at the central bank are 0%.
- Treasury bills (3-months) would be issued at a fixed (annual) yield of 0.25% in whatever quantity bidders want to pay.
- The central bank would be institutionally consolidated with the Treasury, and there will be no chance of default on any government cheque. (I am unsure how he phrases this point.)
Under this regime, the percentage of government liabilities held as government debt levels (Treasury bills) would be entirely determined by the private sector portfolio allocation desires. (Which matches up with the description in mainstream or stock-flow consistent models.) Government debt managers would have nothing to do.
Since government debt managers would just be accountants (making sure no funds go astray), they do not need to be staffed by New Keynesian doctorates that are churned out by the Ivy League/Oxbridge.
The Job GuaranteeArguing that MMT is just a return to the old Keynesian belief in fiscal policy stabilisation is disingenuous. The "brain trust" behind Old Keynesian macro believed that central planners could manage the business cycle through "stop-and-go" fiscal policies. That policy stance was diagnosed by heterodox economists (such as Hyman Minsky) in the 1960s, and is not the core of the MMT approach. Instead, the reliance is upon the automatic stabilisation provided by the Job Guarantee.
One can imagine a hypothetical world where the Job Guarantee essentially eliminates the need to worry about the business cycle from a policy perspective. (Equity investors would still need to worry about the cycle, as discussed later.) Let us assume that all workers are paid a uniform wage, whether they are working for the private sector, or enrolled in the Job Guarantee. (Employers would need to compete on the basis of the attractiveness of the work environment, or non-wage benefits.) In this situation, if a worker lost a private sector job, it would be replaced by a Job Guarantee job with equivalent pay. There would be no need to worry about the household's capacity to meet debt obligations, etc. The total wage bill will always equal the number of people who want a job times the uniform wage.
This set up does not imply that the business cycle would be abolished: wages might be largely invariant, but profits would not be. Firms might rise and fall in line with patterns of fixed investment. That said, why should policymakers care about that? Capitalists earn profits by risk taking; the possibility of failure the counter-weight to their dividend cheques. We would no longer liquidate labour during the downturn, just capital. (To do: insert patriotic appeal to creative destruction here.)
(Of course, we do not live in a world of perfect equality of incomes. The main limitation of the Job Guarantee to act as an automatic stabiliser is wage inequality: highly paid workers will take a severe income hit if they end up in the Job Guarantee programme.)
In any event, there is once again no need for New Keynesian economists to fine tune policy. As a result, it is not entirely a surprise that such automatic stabiliser effects are white-washed out of New Keynesian models. Once again, the insights of MMT are ignored -- because it is assumed they do not exist.
Concluding RemarksModern Monetary Theory involves analysis of economic institutions. It seems clear that such analysis is not popular, and so the focus shifts to less important aspects of the theory.
(c) Brian Romanchuk 2017