Bill Mitchell and Chris Williamson Podcast

The GIMMS organised Labour Fringe Meeting with Bill Mitchell on the Green New Deal successfully happened and there will be a forthcoming video on this from GIMMS shortly.

A second meeting, organised by Greg Hadfield at the Rialto Brighton (no surprises there on either count with respect to Chris Williamson alone), involved both Chris Williamson and Bill Mitchell. I was not able to attend either meeting but, thanks to the MMT Podcast team,  there is an audio podcast of the latter.

This is primarily Williamson introducing and mc’ing a talk by Bill on MMT and Labour and. also, MMT in general. It is a good talk with some decent and serious questions with interesting answers in the Q&A. I do recommend it, whether you are a Labour supporter or not. There is much to gain there, especially if you are not familiar with MMT.

Still I think a major opportunity was missed by GIMMS and Bill, on both the topic and fellow participants. Given Bill”s last two books (not the text book) and the situation in the Uk over Brexit I thought a three way talk/debate between a hard Lexiter such as Bill, a soft Lexiter such as Stephen Kinnock and a Remainer such as Kier Starmer could have drawn much interest from across Labour and possibly achieved national media coverage.

Once I had heard there was going to be a GIMMS Labour Fringe meeting, I thought of then suggested this to a couple of Labour activist friends who are well connected in Labour and with whom I have discussed MMT before and had recommended they read Bill’s blog. They thought this was an excellent idea and very doable but there were a number of caveats.

Whether we could have got the MPs I suggested, still possible they said but given the official evolving stance of the Labour Party was moot but, certainly, we could have got speakers significant to Labour, MPs or not, to represent those other positions.

Yes, this would have been more than just an MMT meeting but Bill (or someone else) could have started with an introduction to MMT, noting that, even within the MMT lens, one could be for any of those three positions (as is the case across the different members of GIMMS and the advisory board).

When GIMMS was  planning this meeting, surely something like this was thought of as a possibility? Maybe this was preferred but not feasible in the end – unlikely given the feedback I received? Surely someone in the advisory board would have suggested something like this, if not by GIMMS executives? Were the board consulted? I suspect that nothing like this were ever considered and the board were not consulted.  which would be a failing of the GIMMS team.

From my chats with these activists we all thought this could have far more potential than just a GND/MMT meeting with one MP. Which brings us to the other caveats.

Of course they said : “it’s a bit late to suggest this now”,  “you need a venue”, “who is going to organise/promote/fund it” , “too late to get on the official fringe program”. When they found out that there was a venue, organiser, topic and speakers already, we still all thought my suggestion was better. The killer, go on guess,  was when I said it was currently with Chris Williamson. They both said this might make it harder for GIMMS, and  Bill, for any future such meetings especially with other MPs such as I suggested. Neither I nor they knew the personal stance of these specific MPs on each other (one signed the letter to re-suspend him, one did not) but they noted it as a general concern.

Now I am sure that GIMMS executives are far better connected with Labour than I am and they will disagree with this, but this is what two people I know, both very long time Labour activists, that I happened come across recently said. In old internet parlance YYMV, your mileage might vary.

Following on this note, I have to add a few comments given the background of my issues over Chris Williamson  with regard to the promotion of MMT.

On the one hand, this talk alleviates 99% of my concerns in  my previous post. There was nothing contentious or controversial that would have caused me problems to have attended. I was going attend anyway and the training meeting the next day but was unable to attend either in the end. Certainly, even though, as should be clear, I dislike Chris Williamson, and continue to hold the position that our  only official MMT organisation should not be promoting him, should there any further such meetings, I would have no qualms about attending. I will continue to criticise GIMMS if it were them doing the promotion, in the future. In this case, and only through force majeur, the second meeting was not organised by GIMMS.

On the other hand, this podcast was weirdly edited. Williamson’s introduction to Bill sounds like it starts mid flow and that likely other prior statements had been omitted, or it could have just been an engineering/sound issue? At around 14 minutes, Bill comments on social media controversies over him talking with Williamson. Apart from me defending Bill against an insinuation of antisemitism by a well know UK economist, there was apparently much I missed out on. I could not find the particular phrase Bill stated was associated with him (or MMT?) “the dark side of fascism” in online searches.

On a side note, I did find something intriguing although not do with Bill directly, but I imagine it is of the same ilk – Statement Against Stephanie Kelton’s Meeting With the Far Right in Japan –  since I know Bill has met up with Japanese politicians too. This goes to the point that I have made  calling MMT a ‘framework’ and, what Bill calls a “lens”, it is independent  of ideology and values. Bill makes this clear in the talk and I fully agree and have stated the equivalent myself. We want all parties to use the MMT framework, this will manifest different policy implementations given differing value sets. For just illustration one could imagine both Labour and the Conservatives agreeing that the Job Guarantee is a better macroeconomic stabilization tool than the alternative of unemployment, but Labour might do this with a Basic Income too and the Tories without. (Bill uses another example).

Still Bill does make some unfortunate and ill judged comments, in the talk and online. He unnecessarily defends Williamson over his antisemitism issues in Labour in the talk. He does the same online and, it seems,  he continues to encourage a silly and non-existent division in the MMT community when he says, in conspiratorial tones:

As a result of Chris’s suspension from the Labour Party for spurious claims he made anti-Semitic comments, some characters (unknown – not enough courage to reveal themselves) threatened the venue where our event was to take place.     

Well every MMTer I have (UPDATE: I meant privately, most, cowardly in my view, go public on this)  corresponded to on Bill’s position with respect to Chris Williamson, given my previous posts and tweets, is of the view, explicitly or implicitly,  that Bill is simply blinded to the failings of Williamson, because Williamson is the only UK MP who promotes MMT, thats it.  Whilst I can’t speak for anyone else, from my correspondences, I doubt that any MMTer would have tried to sabotage that event.  Far more likely, in my view, it would have been either a campaigner against Labour Antisemitism or a local resident, as this was public knowledge given the Independent article: Labour facing fresh Chris Williamson row as suspended MP set to speak at ‘multiple’ events at party conference, 

Making such insinuations is pathetic and unbecoming of an economist of your stature  Bill. Grow up.






Quora answers on Quantitative Easing

A couple of Quora answers here.

How is QE different from MMT

My answer:

These are not comparable as they are entirely different – one is a policy evaluation framework and the other is a specific policy tool.

Modern Monetary Theory (MMT) is a macroeconomic paradigm that can be used as a policy science framework to evaluate the context specific economics of any policy.

Quantitative Easing (QE) is an “unconventional” monetary policy.

MMT can be used to evaluate the claimed benefits and deficits of a monetary policy such as QE.

So what is Quantitative Easing anyway? My answer   to the question Where can I find a theoretical framework for quantitative easing?:

The German Professor of Economics at the University of Southampton, UK, Richard Werner, invented the term, developed in advising the Japan government on fiscal and monetary policy in the 1990s. How QE is actually applied now is different but you should start with some of his arguments such as Quantitative Easing and the Quantity Theory of Credit. This starts:

“‘Quantitative easing’ (QE), has received much publicity in the past five years. However, its effectiveness remains disputed. Moreover, there are different views about what constitutes QE. It is the purpose of this contribution to review the origins and varying applications of QE, using and thereby explaining the macroeconomic model that gave rise to the concept. Called the ‘Quantity Theory of Credit’, this is arguably the simplest empirically-grounded model that incorporates the key macroeconomic role of the banking sector — a task belatedly recognised as crucial by researchers in the aftermath of the 2008 crisis.

The Quantity Theory of Credit after 20 years (QTC)
“The central argument is a dichotomous equation of exchange distinguishing between money used for GDP-transactions (determining nominal GDP) and money used for non-GDP transactions (determining the value of asset transactions). Money is not defined as bank deposits or other aggregates of private sector savings. Banks are recognised as not being financial intermediaries that lend existing money, but creators of new money through the process of lending. Growth requires increased transactions that are part of GDP, which in turn requires a larger amount of money to be used for such transactions. The amount of money used for transactions can only rise if banks create more credit. Banks newly invent the money that they lend by pretending that the borrowers have deposited it and thus crediting their accounts without transferring any money from elsewhere. This expands the money supply and it suggests that the accurate way to measure this money is by bank credit.It can be disaggregated into credit for GDP transactions (CR) and credit for non-GDP (i.e. asset) transactions (CF). ”

The Origins of Quantitative Easing

“The QTC suggests that neither interest rate reductions nor fiscal expansion, nor reserve expansion, nor structural reforms would be able to stimulate nominal GDP growth. Based on this model I proposed in 1994 and 1995 that a new type of monetary policy be implemented in Japan, which aimed not at lowering the price of money, or expanding monetary aggregates, but at the expansion of credit creation for GDP transactions. Since the expression ‘credit creation’ was considered difficult to understand in Japanese, I prefaced the standard Japanese expression for monetary stimulation (‘monetary easing’ or ‘easing’) with the word ‘quantitative’ to declare that ‘Quantitative Easing’, defined as credit creation for GDP transactions, would create a recovery”

“ I suggested in numerous publications that the central bank purchase non-performing assets from the banks to clean up their balance sheets, that the successful system of ‘guidance’ of bank credit should be re-introduced, that capital adequacy rules should be loosened not tightened, and that the government could kick-start bank credit creation and thus trigger a rapid recovery by stopping the issuance of bonds and instead entering into loan contracts with the commercial banks ”[My emphasis]

Abuse of the term Quantitative Easing

“While my recommendations were not heeded, the label I used caught on. Critics from both the Keynesian and monetarist camps began to redefine QE as an expansion in bank reserves — despite the fact that I had been arguing that such a policy would not work. A new name for an old policy was only likely to cause confusion.”

Leading MMT economist, Australian Bill Mitchell, Professor of Economics at the University of NewcastleNew South Wales, Australia analyses what is actually QE – an expansion in bank reserves – arguing a) that that is just an asset swap of primarily Treasury Securities for Central bank Reserves, neither adding nor subtracting to private sector assets, only changing their composition and the interest rate channel and b) that, since banks do not lend out deposits and that, instead, loans create deposits, therefore they are not reserve constrained and, therefore reserve expansion has no direct affect on banks willingness to create new bank credit “loans” – which was the purported goal of QE.

For more see Quantitative easing 101

Note that some QE, such as part of QE1 in the USA did buy “bad” loans from the banking sector, such as some Mortgage Backed Securities and this is closer to the original design of Werner’s QE but, on the whole, QE is reserve expansion.

It is important to note that Werner and Mitchell both disagree on the model of bank credit – particularly on the second emphasis point above in the Werner quote, that is, banks loans to the government – although they are more closely aligned than, by contrast, the Monetarists and “Keynesians” (actually New Keynesianism) that Werner discusses.

How does MMT avoid the results experienced in Weimar Germany?

Another quora answer. The question was “How does MMT avoid the results experienced in Weimar Germany?”

MMT (Modern Monetary Theory) is a description of economic reality, arguably better than alternatives such as New Classical and New Keynesian etc. approaches.

Hence it can be applied to any economy, including the Weimar Public and to identify whether policies were fit for purpose, that is to achieve what the policy makers claim.

A government can only buy available real resources including the unemployed. If its balance is more than available resources, inflation will result since there is too much money chasing too few resources. It also recommends not to have foreign currency denominated debt, as this diverts and prevents efforts to successfully manage the domestic economy

In the Wiemar’s case, due to the Treaty of Versailles, Germany both had unsustainable gold denominated debt (which is equivalent to foreign currency denominated debt) and there was a supply side resource crash, due to the actions of France over Rhine resources. In such a scenario MMT shows that inflation would result, and, with positive feedback due to these two process, likely to turn into hyperinflation.

If people had understood MMT (or the equivalent then), they would have argued against the terms and conditions of the Treaty of Versailles and predicted the result. This is pretty much what Keynes did in The Economic Consequences of the Peace – Wikipedia.

So if MMT had existed then, it would have evaluated and criticised the Treaty of Versailles economic policy proposals, warning of the consequences of those policies and it would have been shown to be correct for that scenario.

Is Modern Monetary Theory Legitimate

I am going through some old answers of mine to Quora questions. Here the question was “Is Modern Monetary Theory Legitimate“. The following is a copy of my answer:

It depends on what you mean by “legitimate”. I take it to mean as in an effective and successful explanation of a phenomena, better than alternatives. That is more sound, valid and likely than alternatives.

This would apply to, say, the standard model theory of matter, the theory of evolution through natural selection, the genetic theory of inheritance and so on. These are all legitimate, whereas,say, the Lamarckian theory of evolution is not. By contrast, Newton’s theory of gravitational attraction is still legitimate but not as a complete explanation but, rather, as a special instance of Einstein’s General Theory of Relativity.

Macroeconomics as a distinct field within economics was launched by Keynes’ General Theory arguing that classical, marginalist, market economics was only a special case – legitimate within its constraints. The main Post-Keynesian position is that that and it’s successors such as neo-classical, Real Business Cycles and New Keynesian theories and so on are not just special rather than general but also fail to apply in the real world.

Well Modern Monetary Theory is, by design, an internally coherent and externally consistent systematic formulation and enhancement of some of the best discoveries in Post-Keynesian macroeconomics. It more effectively explains many real world financial phenomena such as how government finance actually works and what tools the government has to manage unemployment, inflation/deflation, productivity, investment, consumption, trade and so on.

If you agree in this scientific sense rather than just due your subjective opinion, politics and preferences, it is legitimate and more legitimate than its aforementioned conventional/mainstream/ orthodox competitors as well as Austrian and Marxist alternatives.

Do not confuse this, as other answers do, with it being a critique of Neoliberalism and/or of left or right political values. MMT does indeed undermine Neoliberalism (but you do not need MMT to do that), showing not only what are the myths that neoliberalism requires as a political ideology but also why these are myths and what the implications are of freeing us from these myths. Neoliberalism has long infected not just right but also left political views.

So debunking Neoliberalism is not a specific attack on the right, just on an empirically unsound ideology that they more commonly employ. Too many on the left are opposed to austerity but still drink the Neoliberal Kool-Aid without realising it. Whilst, as a result, MMT appears to be more popular amongst some left thinkers, MMT itself, as a legitimate theory is not bound to any political value sets. Given whatever value sets one has, MMT can better and more legitimately show what the real likely outcomes of proposed policies than alternative and less legitimate theories.

What is MMT and how does it work?

I have been replying to some questions on Quora, some on Modern Monetary Theory (MMT). Here is my answer to the question in the title:

There are two questions here.

What is MMT?

Modern Monetary Theory (not the most descriptive or accurate name, in my view) is a combination of key ideas and concepts in the empirical macroeconomics field known as Post-Keynesianism.

There are a number of dimensions, including:

A) Both Knapp’s State Theory of Money (explaining bank reserves, coins, notes and Treasury Securities -“high powered money” or “tax credits”) and Mitchell’s Credit Theory of Money (ATM money/liability accounts – “bank credits”) are combined and MMT shows how they relate – that whilst bank issued bank credits trade at par with state issued tax credits in the private sector, they cannot be used to extinguish outstanding tax liabilities to the state – which has significant implications for fiscal and monetary policy.

B) Keynes/Kalecki’s monetary production economy, showing that there can be macroeconomic equilibrium at less than full capacity with involuntary unemployment and that any economy needs to be understood in terms of monetary flows and stocks as well as real exchanges. This justifies fiscal activism as the Government therefore needs to be pro-active in handling private sector labour underutilisation, if it is a Government for the people.

(C) Godley’s Stock-Flow Consistent (SFC) accounting and balance sheet based models of such economies showing the actual relations between monetary and real exchanges. This shows that many accepted ideas are incorrect since, for example, it shows that Government/Public Sector Debts are actually Private Sector Assets.

D) It incorporates Lerner’s functional finance approach to fiscal and monetary policy. In combination with (A) and (F) it argues that fiscal policy is more effective than monetary policy in macroeconomic management and at all times, not just under some specific scenarios such as the “Liquidity Trap” – the mostly post GFC conditions.

E) It incorporates Minsky’s Instability Hypothesis and others, examining the actual and possible finance operations of states and banks and their effectiveness. This can guide bank reform and help show how to avoid or minimise financially caused recessions.

F) It identifies a macroeconomic policy tool to achieve both loose full employment and price level (inflation) stability called the Job Guarantee. This is derived from Minsky’s Employment of Last Resort, Mitchell’s Buffer Stock Employment and Molser’s Transition Jobs. This is a path not taken compared to the typical (Mitchell) “unemployment buffer stock” or (Marx) “reserve army of the unemployed” and one that specifically rejects Phillips Curve derived models that argue that there is an unavoidable tradeoff between employment and inflation. Whilst Phillips Curve derived models dominate (in the background) employment and inflation policies, the Job Guarantee is always a policy option, even though it is mostly ignored or misunderstood.

Overall it provides a coherent descriptive macro-economic framework, within which to examine current and past differing currency regimes – to identify their strengths and weakness and the actual (even if unrecognised or denied) scope of fiscal and monetary tools available. It can be used to evaluate the implications of existing and alternate fiscal and monetary policies, in any currency regime, on key macroeconomic factors such as unemployment, productivity, growth and inflation.

Being empirically based it rejects many foundational assumptions in various other economic theories such as neoclassical/New Keynesian/Austrian/Marxists including : that banks are originators of credit and are not intermediaries; that deposits do not create loans, it is loans that create deposits; that focusing on government deficits/debt is concern with the wrong form of debt – the real issue is private debt, its type, distribution, stability and sustainability; that government net financial liabilities are nothing more than private sector net financial assets – state spending in the private sector and saved there; that both the labour theory and marginalist theories of value are wrong; that whilst Hayek correctly saw that economies are complicated and so limited in top-down planning but that they are also complex and so capable of being modelled and understood and can be better managed with feedback mechanisms through enhanced automatic stabilisers (tax/benefit fiscal flows and bottom-up localised tools such as job guarantees) to handle unemployment and inflation; that is such automated fiscal policy is superior to ineffective “independent” monetary policy; that one cannot model the economy by ignoring money, banks and private debt; that trade and markets do not work the way that mainstream economists assume; it rejects “sound” government finance as being dysfunctional and irresponsible; that government finance is radically different to household finance; that recognising and exercising these policy tools would enhance the business, employment, productivity, inflation and growth prospects for everyone compared to the status quo.

If you think there is a lot of information above, you are correct. There is much to this that the various simplistic straw man caricatures in some answers to various Quora questions completely misrepresent and misunderstand. In short this is a realistic heliocentric framework overturning the dominant geocentric and ptolemaic fantasies. (But is it more like Galileo or Copernicus?) Still this is just a very high-level description of some of the key aspects and implications of MMT.

There is no argument for any of the above, you asked what it is, not whether it is correct. This leads to the second question:

How does it work?

This is simpler to state, although much needs to be done to understand and implement its insights.

It works because it is a more accurate, empirically based description of our world than conventional macroeconomic frameworks which rely assumptions of a fictional or fantasy world that does not exist and without the use of out of date, mis-stated, flawed mathematical models that are inadequately curve fitted and adapted on an ad hoc and post hoc basis to mis-describe the real world.

I made the contrast large but note that MMT is no panacea. Reality is too complex for any simplifying model to successfully capture.

There are a handful of economists who have developed this framework to date. If some of the many thousands of professional economists in industry, finance, academia, governments, treasuries and institutions gave up their fantasies and started to use this framework this could have a remarkable benefit in providing better identification, evaluation and implementation of national and international policies across the world.


Issues with “Issues in the Design of Fiscal Policy Rules”

Bill Mitchell drew my attention to a paper that has purportedly influenced the economic policies of the UK Labour Party. This is Discussion Paper No. 429 from the National Institute of Economic and Social Research – Issues in the Design of Fiscal Policy Rules – written by the then Director of the NIESRJonathan Portes  and the well-known Oxford economist and blogger Simon Wren-Lewis.

Before I examine this paper, please permit me a prelude.

We are all very familiar with the common trope “glass half empty/glass half full”. If you think the glass of water is half empty, you are a pessimist; if you think it half full, you are an optimist. Which one are you?

I have long thought that there are two problems with this “insight”.

The first is that it excludes any alternatives, if you are not one, then you are necessarily the other. When viewed this way, one should look for other alternatives, in this case there is (at least) one. I say ‘at least’, because a single other alternative is all that is required to show this is not a real dichotomy. The realist view is that it is just half a glass of water, with reference to being half full or half empty adding nothing. Now it appears the dichotomy is false, so if you reject one view, it does not automatically follow that you endorse the opposite.

The second issue expands on the realist view in showing is that this is simply the wrong way to look at a glass of water. If I am thirsty the question is: is the half glass of water sufficient to satiate my thirst? Maybe it is, maybe not.  If I am in a country with near deficient water issues, they do not leave the tap running when washing their teeth but, often, use a partly filled glass of water. In that case, a mother might tell off her child for using a glass of water that is half full – now that means it is too much and more empty would be better. Nothing to do with being an optimist or pessimist. In other words, in order to establish the relevance of a half glass of water, context is required.

These two points of a false dichotomy and context are sufficient tools to examine this paper. You will be relieved to know that no great maths skills nor economic training required. Let us proceed.

The key question the paper seeks to address is

there was no equivalent for fiscal policy of the Taylor rule for monetary policy: no simple rule to guide fiscal policymakers…This paper is about the search for such a rule.

The Taylor rule is a simple algorithm to guide Central Banks in setting their interest rate to manage inflation, which is the primary tool for a nation’s Monetary Policy.  In reality Central Banks do not blindly implement this rule, although in the type of economic models that JP and SWL colleagues use, this is often used as a  ‘simplifying assumption’ when modelling Central Bank policy settings.  To the degree that Central Bankers do use the Taylor Rule as guidance that might be a reasonable simplification in modelling an economy, or maybe not.

Ok then, this paper is about fiscal rules. Now there are a few approaches to this, one I am very familiar with is Abba Lerner’s Functional Finance. Now, whilst I had zero expectation that SWL and JP would be advocating anything like this, what I did expect in something called a ‘paper’ on this very topic, was an examination of alternative rules and why they do not apply compared to the rule that the paper’s authors argue for. However there was no even a mention of this (or others), if only to be dismissed by, say, referencing another paper which did the presumed actual refutation. Nothing. In the whole paper. Nada.

Now I have read many papers in many fields in my time, including physics, biology, cognitive science, quantitative finance, philosophy, public health, paranormal studies and alternative medicine amongst others. Without any attempt at some coverage of views on this and arguments in favour of their approach, this paper is already beginning to look like the papers in the certain fields that are full of junk science and pseudo-scientific arguments.

This concern is further confirmed when I read in the second paragraph of the introduction that

basic theory suggests that fiscal policy actions should be very different when monetary policy is constrained in a fundamental way, while the reverse is not in general the case. There are two major examples of where this will be true. The first is when interest rates are at the zero lower bound”[My emphasis].

Basic theory”? “Basic Theory”!!

Now one cannot make all the arguments for a theory to apply to it a particular problem in every paper. That would be an absurd demand. However having studied various macro-economic models such as VARs, ISLM, AD/AS, DSGEs, CGEs and SFCs, to create a hidden or implicit presupposition that their approach is so far from being debatable that it is “basic” is very, very dubious. I knew in advance that  they were never going to argue for it, but to call it “basic” is quite underhand but would, of course, be accepted as standard gospel within the echo chamber of fellow orthodox economists and their acolytes or dupes (if Bill Mitchell’s concern re the Labour Party is correct) in political parties they are addressing. (I have concerns over the Zero Lower Bound argument but will not address that further in this post)

The second is where a country is part of a monetary union or a fixed exchange rate regime.

Here I can agree. The currency regime of a Eurozone economy is quite different to that if the UK’s. However my patience in examining their later policy analysis as a result of their core model will have run out long before I get to that and I will not discuss this any further here.

They complete their introduction, by noting the proposal of an optimum fiscal rule has to, most of the time, be ameliorated by managing “non-benevolent” government’s fiscal policies creating a “deficit-bias”. That is one might have to diverge from the rule to explicitly prevent profligacy and so on. However this is beginning to look like that false dichotomy is discussed in my prelude.

Everything they are doing is to preclude seeing what alternatives there are to their approach. The subtle (but not so subtle later) is that a government is either benevolent or not with respect to deficits and so, therefore “deficit-bias”. Is this the correct thing to be looking at in the first place? Where is the context, productivity (never mentioned), unemployment (mentioned once in passing), inflation – ok that is mentioned 18 times in this paper, you are beginning to see a bias – in the authors.

This post is beginning to turn into a fisk of their paper but I have neither the inclination nor the time to do that for the whole paper, nor  do I think would my readers have the patience! I am going to instead complete my analysis of section 2 on Optimum Fiscal Policy.

Suppose social welfare declines as taxes rise, because taxes are distortionary.

(They discuss a 1% from 20% and 50% base – the 50% base being worse in their view – but that is really irrelevant here). Well I would like to see their definition of social welfare, it is a key concept mentioned 6 times but with no explanation.

I can easily imagine two scenarios where a tax increase can increase social welfare.  The first is when the nation has demand  pull inflation – too much money chasing too few goods – in which case a tax increase reduces aggregate disposable income and reduces demand-driven inflation pressure. The second is with a nation around full employment and there are not sufficient real resources for the government to fulfill its elected social welfare agenda, a tax increase reduces demand – for real resources – and so frees up those resources – people, goods and services – that can be employed by the government to achieve those goals. In both cases, a tax increase serves to increase social welfare.

Now one can posit various objections to my points such as the lead/lag relationships with respect to inflation – but this same objection can also be made with respect to monetary policy with interest change lag effects on inflation. The point I am making is that they are again making assumptions, with many hidden presuppositions,  leaving no room for analysis or debate. A key ever-present, at least in my view, tacit dichotomy implying that if you reject these arguments you must be for non-benevolent government;s and their “deficit-bias”. In fact I am waiting for them to establish that their way of looking at this problem is the correct way to look at it. As I proceed, it appears I am waiting in vain.

They then derive or, rather mostly state but do not argue for, a  straightforward difference equation to minimise as their basic optimum fiscal rule. One that any  A-Level Maths student should be able to comprehend. I understand that many readers may have not studied A-Level Maths but do appreciate that this is not even of university level difficulty. (OK, we might not teach Lagrange multipliers – a technique to help solve minimisation problems – at A-Level but the maths itself, we do)

My unplanned fisking of this paper will be finished when I have completed analysis of this equation.

They assume in the multiplier that there is a government budget constraint not to default on its debt. Well that can come out of a simple balance sheet analysis, as a constraint they make it appear it is of a behavioural consequence but the whole point of their analysis is that it is not.

They examine the interest rate as a cost on the Government, but fail to consider that the interest rate channel is an income source to the private sector, in addition the primary budget balance (which excludes government debt interest payments), both increase private sector sterling reserves – which are not discussed. Of  course, they are fully aware of the difference between the primary budget balance and the fiscal balance (which includes transfer payments – payments not exchanged for goods and services – such as debt interest payments)

They do not explain how the  government can control their deficits, they assume that a benevolent Government can – although they do pay some lip service to automatic stabilizers but these are not in their model! They acknowledge that plans can be disrupted by shocks but that is a woefully deficient approach.

They note that the debt is a stock and the deficit is a flow. However they fail to develop a proper stock-flow view on the relation between Government and Non-Government – the Private and International sectors together.  Their model assumes away by not even considering the level of control that the Government can have on its deficit. There is no  discussion on the effect that the savings desires of the private sector can have on the deficit. No discussion on the Government – Non Government financial flows. No discussion on how trade and capital flows and real terms of trade can affect the Government deficit. No discussion on the goals of government policy that affects the deficit – reducing unemployment, increasing productivity, improving real terms of trade or any such like – only GDP and inflation are discussed – in other words the social welfare considerations that premised the motivation for this paper.

There is scant empirical evidence provided for supporting their view on managing Government Debt or even what it is. Should we just consider outstanding Treasury Issued Gilts or the net outstanding liabilities of the Whole Government – there is zero mention of Japan and its debt/gdp ratios.

However when they end up taking one version of their minimisation process to an, admittedly by them extreme, they say

If 𝛽(1 + 𝑟) > 1, then we get a very different and equally surprising result. Taxes gradually fall over time, until they eventually decline to zero. How can this happen, given that the government has spending to finance? The answer is that debt gradually declines to zero, and then the government starts to build up assets. Eventually it has enough assets that it can finance all its spending from the interest on those assets, and so taxes can be completely eliminated.

So what they are saying is that the private sector becomes in debt to the Government, after all if the Government can perform all its services through assets they own and the revenue they generate, then these assets can only come from the private sector, since, on the pain of double entry accounting, they are also liabilities of the private sector. The government does not tax us, partly since none of us have any ‘money’  issued by the government to pay its tax in! That is the previous now retired government debt (or its net financial liabilities)  were financial assets, issued by the Government to purchase goods and services from the private sector, that had not yet been reclaimed in tax – that is equivalent to all taxes not yet paid – these, on the pain of double entry accounting, were our assets and they have now all been paid. How does the Government build up assets? Somehow we have to pay the government taxes even though there are no longer any reserves from which to pay them and the Government continues (presumably it was already doing this before ‘s debt was retired) to buy our assets – presumably from bank issued credit? But there are no reserves so how do banks settle!  I could go but lets stop! (A proper analysis of is really needed but is outside the scope of my critique, I was only being very simplistic and brief in my comments just above).

Now it is one thing to develop a model and realise it has unusual and surprising consequences. These might very well be worthwhile pursuing and understanding. However in this case, even though it is an extreme outcome, it should tell the modeller there is something wrong with their model.

There may be some interesting things they say in the following sections but I cannot accept their model to use as a basis to consider any of that. Further they immediately provide add a  number  ad hoc assumptions – to the model  (not the policy arguments which follow) which makes this whole enterprise initially based on a clearly stated model, as far as I can see, completely pointless.

So are most everyone is a pessimist about government debt, and everyone should be concerned about a government’s deficit bias. Otherwise you are, or believe or want to be,  beneficiary of a non-benevolent government’s deficit bias.

And it is here I have to stop. There is much more I could say but I am out of time. For further critique of these please see Bill Mitchell’s posts, the one noted at the beginning of this post, one published today and one to come tomorrow.

The whole framing of this discussion is entirely misleading. Where is the context? What is the purpose of Government? What is social welfare? What are the macroeconomic implications, measures and tools? How do the price level (inflation), unemployment, productivity, poverty, terms of trade, taxes and other more specific concerns relate to social welfare. When looked this way the concerns of deficits and debts are secondary, not be ignored but not be the drivers either. Does it matter if a fiscal committee take over driving from politicians, if both are trying to drive by steering with the rear view mirror?!


Bretton Woods and the Golden Age Of Capitalism

Last night I went to a presentation for William Mitchell’s and Thomas Fazi’s new book “Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World” . I am long familiar with Bill’s work, have read draft notes of his book published at his blog, Billy Blog. Thomas Fazi is new to me but I heard enough to buy his own book The Battle for Europe: How an Elite Hijacked a Continent – and How we Can Take it Back

The presentation was by Peter Ramsey, Professor of Law at the LSE and a blogger at the group blog The Current Moment:

This is neither a review of either book nor the presentation itself, which I did thoroughly enjoy. I think Peter did a stellar job summing the issues up. He was concerned that he was not an academic economist but I view that as a positive, since if this debate were to remain amongst only academic economists and interested laymen, who have put considerable work into to economics – such as myself – then the debate is lost. We need a far broader base rather than to be dismissed as dealing in complicated and obscure economic debates.

Anyway I really want to just make two comments here, one about Billy blog and the other about a question I asked in the Q&A.

I chatted with Bill in the pub afterwards and was asking about the effort into writing his blog.

Now, if you are not familiar with it, it is prodigious with high quality output, published 6 days a week, 4 of which are very well referenced arguments promoting and applying Bill’s take on the macroeconomics framework he co-founded, called Modern monetary Theory or MMT. Indeed I have not recently seen or followed any other blog in any area with the consistent quality of output from one person as his blog.

That does not mean I agree with everything he says, but I have certainly learnt far more from it, than I have found disagreement with. My learning method is to seek flaws and find challenges to whatever argument is presented, and see how the argument deals with them. I will get back to this just stated point in my following comment below, which was what I perceived as a challenge to his one of his arguments.

What really astounded me is that Bill claims that he tries to limit the time spent on each post to an hour, with a maximum of 90 minutes! If you start reading his blog you will realise why I am astounded. Many of his posts take around 15 or 20 minutes to read and digest! (Heck, maybe I am a bit slow, feel free to claim better). Clearly he does not included the actual research and he must have a very good index system, plus, I guess he knows how to touch type.

This, at least currently, is serving as an inspiration to me. I probably spend far more than 90 minutes a day on this field, including reading Bill’s blog, as well as many others, doing some other research, reading books and writing/building models (not ready to publish just yet), all slotted in amongst my many other commitments. I actually need to save some time on this and focus on other more pressing needs, as passionate as I am on this topic of evidence based macroeconomics. So I have resolved to when I have a clear idea write it up as soon as possible, limited to 90 minutes maximum and publish it, worts and all. I will note (for my own edification how long it took to write – 26 minutes so far, so the target is another 30 minutes, then the rest is references, proof reading etc.).

As a long-term programmer, I am a fast typist, but could far better, both for writing and programming, if I were a copy typist. In my typical maverick way, when I last learnt to type, I chose Dvorak rather than Qwerty. Have to think about that but need to properly learn one or the other soon. I will devote 30 minutes a day to that. I will report back as to whether that helps me writes these posts, if nothing else.

As for frequency of posts, I make no promises on that. I need to build up more content get some ideas in my head on paper to really see where they fit. I am thinking of getting together some like-minded economic thinkers into a group blog. But that is for the future.

Now onto the second comment.

An issue that has bothered me in the writings of MMT theorists is the relation of the “Golden Age of Capitalism” – the Post War to  the beginning of the 1970s period which operated under the Bretton Woods fixed exchange rate regime. Compare that to the post Bretton Woods floating exchange rate regime (from the 1970s till now) period, where MMT argues that states with sovereign non-convertible floating currencies have the largest available policy space. That has been the case in the post Bretton Woods era, (not immediately in some cases, and not at all, more or less with others, due to various attempts at currency boards, and in the Eurozone, the evolution to the Euro). So why was the Golden Age of Capitalism, with full employment, decent GDP growth, growth shared between wages and profits, the era that operated under a fixed exchange rate regime?

Now I was totally confident that Bill would come up with a decent reply, my point really being it should be more clearly stated and answered by Bill and others when writing books on the topics of Europe and states. I think sometimes these authors suffers from not seeing the wood for the trees and those new to these topics need to be shown the trees first.

I also added two elements. The first was that this growth was after the devastation and destruction of people and land. This, surely, made it easier to create full employment, given the tragic loss of other working age able-bodied people in the war, and, given, the need for huge infrastructure repairs, across Europe, for both the victors and losers, for significant growth. Given this, could we hope to go back to such days, since we far from having a deficit of workers and skills have the opposite (mostly) and we have a far better level of infrastructure (yes London roads are still terrible compared to most of Europe) than starting after the war.

Bill answered the first part of this question and Thomas answered the second.

Now I probably made my question clearer here than when I asked from the floor at the presentation, as both Bill and Thomas seemed to not fully address my question until I probed further. Was this due to my inadequacy in how I asked, or was this due to their frames missing the point, possibly thinking I was an anti-MMTer looking to find flaws in their views? I don’t know. I do often find people making interesting points but not answering my question even online and the question is there in black and white. I wont dwell on their initial responses, which whilst somewhat missing the point, I quite agree with anyway.

I will flesh out Bill’s reply with one addition of my own (clearly implied in Bill’s answer), that do not alter the substance of his reply. This addition is the Mundell-Flemming Trilemma which states “The policy trilemma, also known as the impossible or inconsistent trinity, says a country must choose between free capital mobility, exchange-rate management and monetary autonomy (the three corners of the triangle in the diagram). Only two of the three are possible. A country that wants to fix the value of its currency and have an interest-rate policy that is free from outside influence (side C of the triangle) cannot allow capital to flow freely across its borders. If the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy (side A). And if a country chooses free capital mobility and wants monetary autonomy, it has to allow its currency to float (side B).” I chose this Economist quote, quite deliberately as it partly misrepresents the argument, which is not just about domestic monetary policy (interest rate management) but also domestic fiscal policy. That will be a topic for a future post.

Whilst states under a fixed exchange rate system need to earn the convertible base (in the case US dollars or the gold equivalent under Bretton Woods), they also had capital controls which prevented, mostly, capital flight and domestic currency destabilization and speculation. This did not prevent, in some cases, internal devaluation (austerity) or, failing that, currency revaluation (devaluation) but the rest of the time the social democratic policy of a mixed economy focused on full employment, with significant unemployment support (which was actually short-term in those days due to the full employment policies enable when possible), coupled with worker protection, and other welfare states provisions.

Now in the post Bretton Woods era there have been significant changes. Capital controls have been dismantled and the Monetarist/Supply-side Trickle-Down/Neoliberal ideology (there is no real empirical evidence for any of it), has also dismantled key worker and social protections and seek to demolish state regulation of the market and, with it, the whole mixed economy model that supported full employment.

We now live in a world of free capital and floating currencies and it looks like domestic monetary and fiscal policy suffers, with the increase of the capital share of growth and the decrease of worker share of growth. That is prior to the many new issues ensuing after the Great Recession of 2007/8.

Still it is not entirely clear to me how much of that Golden Age was specifically due to starting from both a lower infrastructure point and a surfeit of skills and workers, rather than this difference in the Policy Trilemma coupled with the Neoliberal versus “Keynesian” version of state governance. (I put Keynesian in scare quotes but this is also a topic for a future post).

So, with all this in mind, is it still feasible to get to the level and shares of worker in GDP and full employment?

Thomas answers yes but things will be different. The needs of today’s societies have changed to that period and require new and alternative skills and applications. The Job Guarantee and other state guided policies (such as Peoples QE – but drop the misleading label – Bill argues) can provide a range of jobs fit for social purpose that are invisible to the profit motivated private sector.

I want what Thomas (and Bill) says to be correct. One of the key thrusts of this blog is to investigate the Job Guarantee and other fiscal policy tools further.