The following quote is what I wish to discuss.
I dispute the premise of this argument—the part that Mitchell said is "undeniable"—but for the sake of argument, I'm going to accept it here. So exports are a cost, imports are a benefit, and for its own good, a country should attempt to run a trade deficit.
MMT advocates take this as an argument in favour of attempting to achieve a trade deficit.
If this argument were correct—and when I have time later (much later), I'll argue that it is not—then I would take it instead as a reason to set up an international body and policy standards to stop economies deliberately running trade deficits.
Why? Because unlike government deficits, which all countries in the world can run simultaneously, a trade deficit for one country necessarily means an equivalent trade surplus for the rest of the world. If there are countries deliberately running trade deficits, then they are forcing others to run trade surpluses. Since on this MMT argument, the trade deficit countries are the winners and the trade surplus countries are the losers, the former are behaving parasitically towards the latter. That should not be allowed if we are trying to achieve a harmonious global economy.There are two problems with the argument.
- The "imports are a benefit" idea is usually discussed in the context of developed country macroeconomics. If you are a developing country, export-led growth behind trade barriers is a standard strategy. The U.S. followed this, as did Canada, then a string of countries after World War II (starting with Germany and Japan; China is the current exemplar of the strategy). Having a competitive export sector is viewed as a benefit. However, this advantage disappears once your country has reached a comparable level of development. Until every country on the globe reaches a similar level of development (I am not exactly holding my breath waiting for that event), this "every country wants to run deficits" story does not apply.
- If we confine the discussion to intra-developed country trade, there is no mechanism to set the level of the trade balance under current institutional arrangements. Trade is managed by various bilateral and multilateral pacts, and tariffs are generally not supposed to happen (although Republican presidents love slapping around Canada early in their presidencies). The only way to directly create a trade deficit is to deliberately destroy one of your industries that faces international competition. Domestic politicians are too beholden to business interests to pursue that option. Alternatively, you are stuck with indirect means -- loosen fiscal policy, for example. However, what matters for trade would be the relative fiscal stance: if everyone loosens fiscal policy simultaneously, we would just be making a simultaneous run at the dreaded "inflation barrier," and trade balances would remain where they were.* There are arguments that loosening fiscal policy is somewhat of a free lunch, but no body politic in 2018 wants to test that theory to destruction.
Steve Keen is transitioning towards the post-Keynesian economist preference for hoping that we are back in 1945, and re-negotiating Bretton Woods. Let us all throw away our national economic sovereignty and hand it to multi-national institutions! Observers on this side of the Atlantic point out how well that worked out for Greece, whereas Europeans appear to think that situation was just a minor misunderstanding.
In reality, this discussion has very little to do with MMT, rather the world view of post-Keynesians. Despite being told "no thanks" for decades, they appear to believe that just a little bit more lecturing will win everyone else over to the joys of handing over your economic sovereignty to an unelected multi-national bureaucracy.
* If we put aside cases involving large price swings in some goods (key example being oil prices), the usual reason a country has a greater trade deficit versus developed peers is that its domestic demand is growing faster than its competitors. (The total trade balance at present for developed countries is largely determined by how fast Asian exporters are hollowing out a country's manufacturers.) Loosening fiscal policy leads to faster growth, and thus imports grow faster than exports. This is often viewed as a "demand leakage," but it can be viewed as a bit of a free lunch. By drawing in exports, it is taking advantage of excess capacity in the foreign countries. This means that it will face less inflationary pressures. However, this can be cancelled out by the other country also loosening fiscal policy to stimulate its growth, in which case both country's exports and imports grow at the same pace. This is why multi-lateral control of trade imbalances is politically toxic, it would give foreigners veto power over fiscal policy. In a country like Canada -- where fiscal policy is shared at the provincial level, and even the Federal government does not have veto power over provincial policy -- "non-starter" is the most polite description I can give such proposals.
Chapter 6 of An Introduction to SFC Models Using Python discusses such effects using simple stock-flow consistent models.
(c) Brian Romanchuk 2018
" If there are countries deliberately running trade deficits, then they are forcing others to run trade surpluses."ReplyDelete
It's this that is plainly wrong-headed. Countries have been told to operate 'export led growth' by all the powers that be. And that is what they have done. They sell stuff for foreign money *and then discount that into their own currency* via the standard banking mechanisms. The foreign assets form "reserves" that hide the fact that any nation running its own currency discounts 'Other assets' to create its own money.
Those export-led nations then hold that money and assets hostage, and by doing so drain the circulation from the import nation, suppressing its domestic circulation - which creates more space for exports as investment goods decline.
The result is that an export-led nation can, in effect, export its unemployment to another nation - as long as that nation is running the same degenerate monetary theory the export-led nation is.
*MMT says there is a unilateral way of dealing with that*. You just accommodate the drain to foreign nations via your banking system. You discount nothing at your Central bank just as we have with QE, and keep your domestic circulation up. You will stop paying foreigners interest and income because you know they have no choice but to take your money. Then you will have full employment at home *and* you will have a greater standard of living as all those foreign nations hand over goods and services for nothing much of value in return.
And very quickly those foreign nations will realise they have been had and switch back to a domestic focus, and the trade balances will decline. Except in nations trying to avoid the Dutch Disease like Norway where they are using excess external savings to avoid being entirely honest about the actual level of taxation in place.
What classic Post-Keynesians don't seem to like, and why they like to put the cart before the horse, is that MMT has found a way of *unilaterally* solving this dilemma via floating-rate currencies. And that puts the Big Hug club - and all those technocrats required to staff it - out of a job.
I tried watching the debate between Steve Keen and Warren Mosler live but the technical issues caused me to abort the effort. I think there was an effort by Keen to argue that central banks and/or central governments must support the bank sector with swap lines or something of the sort; and an effort by Mosler to discuss the currency swap (FX) markets as the primary mechanism for financing a persistent trade deficit/surplus between nations. I have never read a definitive paper on these topics showing how balance sheets and finance deals actually operate in the respective bank sectors of each country and how central banks might assist the bank sectors.Delete
Suppose Chimerica includes billionaires in China who sell export goods to customers in US of America. Those billionaires could hold dollars for investment in Treasury securities or other US assets. Can they convert dollars to Chinese currency in perpetuity via commercial bank deposits swaps arranged in FX markets without any support from the Chimerica governments? Intuition says a persistent trade deficit would swamp the speculators in FX markets and cause problems for the domestic banks if it never reverses over a long period of time.
There is little point trying to imagine every conceivable mechanism embedded in the foreign exchange market. Currency swaps are just one way of hedging currency risk, and their economic role is to allow investors to take foreign credit risk without taking currency risk. That’s why they are important for international investing, as large fixed income investors and banks are typically barred from taking currency risk. However, all we know for sure is that the net currency exposure in a time period matches the current account balance; the underlying transactions can be structured in an infinite number of ways.Delete
The reason why the Chinese government is involved is because they have capital controls; the idea was that only the government itself owned foreign financial assets. (I believe that’s been somewhat relaxed.) As a result, it has to be involved in the balancing capital flows. For countries without capital controls, the only reason to get involved is as the result of back-door bailouts of their banks, which is what happened in 2008.
When you say "discount" do you mean "trade into"?
Can you explain what you mean by:
"The foreign assets form "reserves" that hide the fact that any nation running its own currency discounts 'Other assets' to create its own money. "
Who do you say holds these reserves?
What are these "Other Assets"?
"Those export-led nations then hold that money and assets hostage, and by doing so drain the circulation from the import nation, suppressing its domestic circulation"
In a system of floating currencies, hows does this happen - seems unlikely?
I would appreciate responses from anyone else that can answer these questions.
Henry, my understanding of what Neil says is that the export surplus nation either actually has their central bank create domestic currency in exchange for the import nation's currency, or that they allow their banking system to (in effect) do the same thing by treating holdings of foreign currency as assets that the CB will lend against. Either way, the foreign currency from the importing nation does not get spent back into that economy in any market driven time span. And the currency really can't be considered to be floating either. And if that is actually what Neil meant, I agree with him.Delete
"my understanding of what Neil says is that the export surplus nation either actually has their central bank create domestic currency in exchange for the import nation's currency"
Why does that happen? Why should that happen?
In a floating currency regime, the exporter sells his goods to a foreigner in exchange for foreign currency. The exporter can either hold that foreign currency as an offshore balance (there a range of reasons he might do this) or trade his foreign currency position for his domestic currency (or any other currency for that matter). Presumably there are people wanting to sell his domestic currency. This is normal foreign exchange market behaviour.
"Either way, the foreign currency from the importing nation does not get spent back into that economy in any market driven time span."
Depends. The exporter might leave his foreign currency in an offshore bank account and earn interest. He might use his foreign currency position to extinguish a liability he has in the foreign currency in which case what happens to the foreign currency depends on what the new holder of the foreign currency does with it. The exporter might sell his foreign currency position. What happens to the foreign currency position depends on what the new holder of the foreign currency does with it.
Henry, I have little personal knowledge about how large manufacturing concerns operate even in my own country. Except that it seems to take forever to get paid from the few I have done work for as a contractor. I am working off the assumption that they need to meet payroll and materials cost in a sort of timely manner and therefore do not have the option of holding on to their sales receipts as interest earning investments or whatever. Pretty much I am assuming they need their domestic currency quick to meet their ongoing costs. Much as I needed payment from them to meet the costs of the work I did. This could be a very wrong assumption on my part. But the exporter country's central bank faces no time constraint like that if it issues its own currency in exchange for the foreign currency. And if they do that the central bank can end up holding trillions of dollars of the foreign currency (obviously I'm thinking US dollars and China or Japan). That situation is not a market based situation at all- it is a policy driven situation based on the policy of the exporting country. Designed by the exporting country for the benefit of that country- not the importing country. In my opinion.Delete
Bill says it is still all good, don't worry about it, its a real benefit to import and a real cost to export. I disagree for at least some cases.
Anyways, Neil wrote the comment you were asking about and I only have speculations as to what he meant by it. Hopefully they are reasonable but maybe they aren't. If they aren't, he has, in the past, amply demonstrated his ability to correct me :)
Can't see why the domestic CB has anything to do with it unless they have decided to increase their foreign reserves and enter the foreign exchange market to purchase foreign currency with domestic currency they have "printed".
Henry, What? I'm positing that it is the central bank/government of the export surplus country that is the actor here. And yes, they in effect enter the foreign exchange market and purchase the foreign currency of the importing nation by creating their own currency. That is how they might end up with giant reserves of a foreign currency.Delete
So why does the domestic CB (i.e. of export surplus country) necessarily have to be involved when there is a CAB surplus? They can buy exchange any time they want.
How is it that the foreign country's (importer) money is held "hostage"?
I wish Neil would explain himself and in straight forward language.
I never said that the CB necessarily has to be involved. But if they are involved they will be manipulating the value of their currency such that the foreign exchange market does not really reflect whatever impact the trade balance would have had on it. Generally by keeping the value of their own currency lower than it would have been, so that their export prices are lower than otherwise for the consumers in the importing nation, and therefore more competitive. If a central bank is doing this, then it is buying the foreign currency and holding it by creating its own currency rather than the foreign currency getting spent back into the economy it came from. Holding it 'hostage' is a bit of an exaggeration for effect, I assume. But it represents a loss of demand for the goods and services produced in the importing country.Delete
MMT says that is good because the government of the importing country can always adjust policy to replace that lost demand, which I guess is technically true but might be a cost all by itself even if it ever actually happened.
Yes, I wish Neil would explain it also. Every time I try to I am increasing the risk of botching it or completely misrepresenting it. That risk has probably increased to near 100% by this point.
OK, so the exporting country CB sells domestic currency and buys foreign currency. You say this curtails demand in the importing country. Someone had to buy the exporter's currency, probably someone in the importer's country. They can use that currency to purchase more import goods. MMT tells us this is good, a benefit. So what's the problem? Whose being held hostage?
And furthermore, the fact that the exporter's CB had to purchase the foreign currency to keep the domestic currency down is heading towards admitting there is a BOPs constraint.Delete
Ooh my, can't have that! :-)
Henry, on the off chance you are not trolling me at this point- no- no one has to buy the exporter's currency if they are selling their products for the importing nation's currency. No one had to buy that currency and no one has to for that exchange to be made.Delete
And pretty much just from logic, if an exporting nation's central bank is purchasing a foreign currency as an ongoing policy, those issuing that foreign currency, or using that currency, will not be facing a balance of payments constraint with the exporting country while that policy is in effect.
Trolling? I figured you were up for a discussion. Apparently not.
" No one had to buy that currency and no one has to for that exchange to be made. "
Did I say that? Don't think so. To the contrary. See above.
"....those issuing that foreign currency, or using that currency, will not be facing a balance of payments constraint... "
I am saying the exporting country apparently faces a BOPs constraint given its CB has to manage it currency down.
End of discussion for me.
Perhaps I made a mistake- it happens unfortunately. I'm usually up for an argument but it was not my understanding that a BOP constraint would ever force a country to lower the value of its currency. I'm sorry if it has to end this way Henry. But we'll always have Paris.Delete
"But we'll always have Paris."Delete
Ah yes. Spring time wasn't it?
Barring Donald Trump deciding to nuke Russia/North Korea/Iran, the 2018 FIFA World Cup should start next June. Thirty two soccer teams from all over the world will be doing their best to win. You can imagine the pep talks the coaches will be giving their players.ReplyDelete
I suppose Steve Keen would say that's silly: after all, not everyone can win, so play to lose, folks!
God, give me strength.
His arguments make sense if we assume that we have a fixed exchange rate scheme. If you fix currencies, in order to keep the scheme alive, you need to balance out trade/capital flows. Many post-Keynesians want fixed currency schemes, so they end up arguing that we must have balanced trade flows. So this whole “debate” is really about post-Keynesian premises regarding the external sector...Delete
Thanks for your reply, Brian.Delete
Our readings of that article are very different.
In your reading, Keen is assuming a fixed exchange rate regime. Well, maybe he is (for that matter, maybe he is assuming the gold standard or garden variety barter) but I see no indication whatsoever of that: after reading and re-reading that piece I could not find the phrase "fixed exchange rate" regime (or any reasonable synonym) anywhere. So, what makes you believe it?
In fact, in my reading at least, the point Keen tries to make is more general and independent of exchange regime. In the quote which you reproduce above the argument is straightforward:
(1) According to Keen, it cannot be true that "exports are a cost and imports are a benefit".
(2) If that were so, he says, then all governments would try to run trade deficits.
(3) Then, he produces the ace he had in his sleeve: But not all countries can run trade deficits.
(4) Therefore, he concludes triumphantly, it cannot be true that "exports are a cost and imports are a benefit".
That is evidently a non sequitur, but is what's written there, in black and white. Is there any other way of reading that quote?
After that he just digs himself deeper:
If there are countries deliberately running trade deficits, then they are forcing others to run trade surpluses.
I mean, really? Someone willing to buy doesn't need to find a willing seller; her mere will forces someone else to sell.
Again, God, give me strength.
Yes, that’s my interpretation. In my view, he’s working backwards from the post-Keynesian policy prescription. The usual argument is that in a fixed exchange rate regime, countries want to run surpluses to keep their policy options open. (E.g. look at Germany’s position in the euro vs.Greece.) That consideration does not apply here, so he flipped the logic.Delete
"The "imports are a benefit" idea is usually discussed in the context of developed country macroeconomics."
Warren Mosley in his "Seven Deadly Frauds of Economic Policy" (the MMT Bible) does not mention developing economies at all.
Anyway, he goes on to say this when discussing Fraud 5:
"...going to work to produce goods to export for someone else to consume does you no economic good at all, unless you get to import and consume the real goods and services others produce in return."
Mosley acknowledges that exports are not a dead loss if they are used to purchase imports - which is usually what happens.
On the other hand, Bill Mitchell says "exports are a loss and imports a benefit" and leaves it at that, causing himself to become entangled in all kinds of circumlocutory rationales that only serve to confuse.
"Seven Deadly Frauds of Economic Policy"Delete
Should be "The Seven Deadly Innocent Frauds of Economic Policy"
Warren Mosler’s a pretty sharp guy, but he’s not an academic. If you want an academic treatise, you need to go beyond the “Seven Frauds”. He worked in developed country fixed income, like myself, and the usual practice is to discuss macro from the perspective of developed countries, and not obsess about the different circumstances of developing countries. The only reason I mention them at all is because I know I will draw flak in the comments. MMT is part of a larger academic tradition, and if you want to go through the academic literature, you might find more of a discussion. (Since I don’t cover emerging markets nor care much about the external sector, I don’t spend any time tracking down that part of the literature.)Delete
I wrote my piece before Bill Mitchell posted his (I queue my articles in advance). I was doing client work yesterday, and did not get a chance to look at his article in depth. My guess that the difference between what he wrote and what I did could be viewed as cosmetic. I’m arguing that net exports are a raw economic loss, but some policymakers can reasonably view that the offset of technology transfer is worth it. One could disagree about the calculus of that trade off. If you don’t think that the technology transfer is important, you would skip over the apparent exception.
My feelings on this are mixed. Although Canada did develop as a result of the National Policy, my prairie populist forebears hated that policy. Furthermore, I don’t see a lot of advantages to having your citizens working in sweat shops just so some local bottom feeders can make a quick buck. Sweat shops do not exactly constitute meaningful technology transfer. Say what you want about the Chinese, they did drive hard bargains in return for access to their workers and markets, and so their strategy does make sense.
I am perplexed by the arguments made by Bill M. It seems to me every nation on the planet is striving to develop export industries. If exports are a loss why the focus on exports?Delete
Being cynical, I think the MMT rationale is geared to defusing a CAD as a negative. If you argue imports are a benefit then it's OK to argue that the CAD doesn't matter. Now, MMT is all about printing money to achieve full employment. Printing money and its spending adds to aggregate demand which spills over to increased imports and a CAD. Conventional economists would say this weakens the currency and increases inflationary pressure. If you can argue that imports are a benefit, the conventional argument can be defused to some extent. MMTers are wont to argue there is no BOPs constraint.
Every country does its best to help out its national champions, yes. We have managed trade deals - not “free trade” deals - and the negotiating position of every country to represent their business sector’s interests, not the national interest.Delete
Beyond that, the *developed world* demonstrably does not care about its trade balance. If we did, there would be no way these countries would have granted China WTO accession. We collectively threw our domestic manufacturing industry under the bus, and everyone other than free market ideologues knew it.
So yes, the whole MMT thing about exports relates to defusing the knee-jerk policy responses that are proposed by the people who are stuck in a Gold Standard mentality (which to be blunt, includes some post-Keynesians with their muttering about “external constraints”). You let your currency float, which implies letting the trade balance seek its own level. You just set fiscal policy to cushion the blows to your domestic work force (capital does a very good job of looking after itself). This annoys a lot of post-Keynesians - which is why they are a good source of whiny sniping at MMT - since the MMT view is pretty close the North American mainstream view on trade. (Even the Europeam mainstream are bugs on fixing exchange rates.)
There is a huge cultural difference on this issue. Europeans are focussed on exchange rate versus each other, and the big countries are at least of comparable size. On this side of the Atlantic, the Americans are not going to budge an inch on their policy sovereignty. As for us Canadians, we figured out decades ago that fixed exchange rates meant surrendering our policy sovereignty to the United States. Canada was only loosely attached to Bretton Woods at the best of times, and there is no serious discussion of fixed exchange rates by anyone who knows anything about economics. (However, every five years some free market supporter proposes abandoning the Canadian dollar, and gets a flurry of excited book reviews and op eds - that are promptly forgotten.)
The inflationary impact of currency changes is close to nil. Look at the Canadian CPI data since the early 1990s, compare it to the US experience, and try to see any effect of the CAD/USD rate. That exchange rate was hardly stable, yet there are no effects on the broad inflation aggregates. (You will obviously see some sector effects.)
The only interesting debate on trade policy is geopolitics. This does not apply to trade within NATO countries, but shows up when discussing trade with other large power blocs. I am not a fan of foreign intervention, but at the same time, self-preservation is a thing.
You may have missed my point a little, mainly because I wasn't so explicit. MMT wants to immunize itself from the critique that it rationalizes away the BOPs constraint that conventional economics levels at it. This constraint not only operates with fixed rates but is also applicable with floating rates. A weak currency is a mixed blessing. The effects of a weak currency impact on the real goods sector and the capital sector - the effects are not clearcut and controversial. MMT mounts the convoluted, almost inverted argument, that "exports are a loss and imports are a benefit" seeking to deflect attention from the conventional notion of the BOPs constraint. It cannot bring itself to make this admission just like it can bring itself to use the word "recession" when invoking the JG scheme to stabilize (quell inflation) an economy at full employment. It prefers to use euphemisms such as “If inflation gets too high, pressure can be relieved by transferring labour from the Private Sector to the Buffer Stock Sector……”. This is code for cause a recession in the private sector.Delete
Come on Henry, I thought we got past that part about MMT policy 'trying' to cause recessions.Delete
As you know, I have some problems, well a lot of problems with the MMT explanation that imports are always a benefit and exports always a cost also. But what is this BOP (balance of payment?) constraint of which you write? I think it is about 40 years that the US has had a trade deficit- when does the BOP constraint start constraining? Maybe if it kicks in soon I won't have to argue with Bill about this anymore...
Let's say we have an economy at full employment and with inflation well above what is acceptable.
How do you deal with it?
Regarding the BOPs constraint. Firstly, the logic as far as I am concerned is inescapable. The question is how much currency weakness occurs and how much is tolerable? Secondly, the US dollar has been the world reserve currency for decades. The US is in a unique and quite a different position than just about any other country. Thirdly, how do we know how an economy might have performed had there been no BOPs constraint so that we can compare that performance with the same economy with a BOPs constraint. Unfortunately, economists can not do these kinds of experiment - so we are left with conjecture.
"Maybe if it kicks in soon I won't have to argue with Bill about this anymore... "
Having been denied the ability to comment in his blog I won't be arguing directly with Bill any time soon. :-)
I should have said:
"How do you deal with it given a JG scheme is in operation?"
That's too easy Henry- I just maintain that the automatic stabilizer aspect of the proper Job Guarantee coupled with the proper tax system will eliminate the possibility of demand induced inflation happening in the first place :) Any observed decrease in private employment will be attributed to private sector decisions while increases in JG employment will be a reaction to those decisions. You really need to ask harder questions :)Delete
Bill says he came upon the idea studying agricultural economics and the Australian wool price stabilization scheme. I am a few years older than Bill and I remember studying the same. Bill omits to tell that the scheme eventually collapsed (the buffer stock grew to unsustainable levels). Every commodity price stabilization scheme I can ever remember collapsed. Managing an unemployed bale of wool is unlike managing an unemployed human being (mainly, human beings have free will). MMT claims the government has unlimited spending power, but happily, seems to ignore the constraints.
"You really need to ask harder questions"ReplyDelete
Jerry, you're just too clever for me.
At what point will you decide that inflation is becoming problematic?
The data you have might be weeks even months old - how do you compensate for recognition lag?
You analyse the data and then make a decision on tax changes. How do you compensate for execution lag?
How long do you wait to see how the data has changed?
What if the policy action appears to have been not strong enough? Hit the tax brake harder? How do you know if by the time you implement the new tax regime whether the inflation had already turned down and you are going to add impetus to a down swing?
What if there is an election in the offing, how will that modify your policy changes?
Have you at all read Bill`s post on The A.P Thirlwall BOP growth constraint?
Henry is probably referring to The BOP growth constraint theory articulated by A.P Thirlwall. You will find an excellent book on it by J.S.L McCombie and A.P Thirlwall…..I won`t bother to bring the Export, Import discussion over here.
Just a "by the way". a BOP growth constraint is applicable to a small pegged exchange rate country like mine. It would not at all apply to a country like the USA.
Henry, thanks to PhilipO, I have read, or re-read more probably, the Mitchell post on BOP which I recommend to you. http://bilbo.economicoutlook.net/blog/?p=32931ReplyDelete
He dispatches concerns about a balance of payments constraint to my satisfaction given the current monetary system in the US at least. Thank you Howard Phillips or PhilopO.
I would love to discuss the tax system and the Job Guarantee, and the automatic nature of 'automatic stabilizers' but that is a bit far off the topic of Brian's post here. Which pretty much demolishes Keen's response as far as I can see- but not any of the points you or I were trying to make, or rather, asking about in the hopes of learning :)
The BOPs constraint I am talking about is the additional inflationary pressure that a weak currency can cause. And of course, Bill has a blog on that one also and as far as I am concerned, treats the subject very lightly. Inflation dynamics are complex. He cites various studies. Did those studies control for policy changes and expectations management?