Ramanan put up a must-read Kaldor quote of which the festival of Diwali reminded him. The festival of Diwali celebrates the victory of good over evil, symbolized by the gods vanquishing the demons.
Why are these two things important for our understanding. First, we are dealing with a fundamental cognitive mistake, indeed, a mathematical one. Secondly, this mistake is not one that highly intelligent people would be likely to make analytically. Moreover, they exhibit strong resistance to analytical counter-argument, even though the math is not only clear but simple, indeed, elementary. This sends an important signal.
The signal is that we are not dealing with reason alone here, and so rational argument is not likely to change either minds or hearts. In fact, recent psychological research reveals that when indisputable fact is marshaled to counter such arguments, those holding the position tend to double down instead of retreating — even the most intelligent measured by conventional standards. Clearly something other than reason is involved.
Kaldor apparently realized this judging from his metaphor. While the ancient sages were cognitively advanced, they realized that communicate with the people of their eras they needed to speak in context. So they used metaphors like battles between gods and demons in their teaching stories. These stories were heard by children who took them literally but the object of such storytelling was to plant seeds that would later mature into deeper understanding. The stories of heavenly battles were meant to symbolize the inner struggle of all between the "angels of their better nature" and the forces of temptation.
Carl Jung was probably the first Western scientist to approach the ancient teaching stories analytically. He realized that they were actually about the tension between conscious cognitive-volitional-affective operations and unconscious ones. Can we see the dialectic going on in the social, political, and economic arena among ideologies in this light. I think so.
Therefore what is needed is an approach that is not only cognitive but one that addresses all levels. For example, arguments involving debt tend to be moralistic and rhetorical more than factual or logical. In fact, when monetary economics is first explained to them, many people recoil in horror at the notion that public debt is actually "good" and, indeed, usually necessary.
We have talked quite a bit about framing counter-arguments previously. I strongly suggest reading The Debunking Handbook, suggested in the comments by modernmoney. It's a short and easy read.
I would also encouraging looking at cognitive bias and informal fallacy. Here is list of cognitive biases. Here and here are lists of informal fallacies.
40 comments:
many people recoil in horror at the notion that public debt is actually "good" and, indeed, usually necessary.
Say what? Professor Bill Mitchell calls borrowing by the monetary sovereign "corporate welfare." What is good is deficit spending by the monetary sovereign since it provides new money to the economy but that process does not require that the monetary sovereign provide a risk-free return to those with money to lend. And if you say that fiat spent into existence without borrowing is still debt then I say it's a unique form of monetary debt - one that does not require interest to be paid and one that does not even need to be repaid assuming the monetary sovereign never runs a budget surplus.
Excellent -
Kaldor/Ramanan/Hickey...
pls insert at Sumnerville
- under any/all posts there
before we all die of this:
"I regard ‘monetarism’ as a terrible curse, a visitation of evil spirits, with particularly unfortunate, one could say devastating, effects"
:)
The more I read these debates, the more it strikes me that the real core of the problem is not so much Monetarism, but the theoretical development of Monetarism into what I have called "Central Bankism".
There isn't a whole lot of difference between the monetarists' claim that in order to fight recessions the money supply has to be increased until the "demand to hold money" has been satisfied, on the one hand, and Mosler's claim that the government has to spend money into existence until "savings desires" have been fulfilled.
Also, there seems to be a feeling afoot that MMT denies the quantity theory of money. But for many people the quantity theory of money is just the assertion of the validity of the equation of exchange, and as far as I can tell the MMT economists all accept that equation.
So what's the difference?
The difference is that MMT and friends have a much clearer, more detailed, more realistic and more nuanced understanding of the institutional structure of the actual monetary system; while monetarist tend to adopt extremely simplistic and uninformed textbook models of the role of the central bank in the system, including some very fanciful models of the role of expectations and central bank signaling, and therefore exaggerate the impact that the central bank can have.
There is also an ideological component that turns most monetarists into Central Bankists. Monetarists seem to hate democratic government, legislative power and the political expression of public aspirations through popularly enacted economic policy. They want a few bankers to run everything.
Monetarists are the big champions of the theoretical concept of a helicopter drop. But doing an actual helicopter drop in a society like ours requires spending by the legislature. And trying to get a monetarist to support elected legislatures making economic policy is like trying to get the Pope to allow priests to marry.
@ frlbane
Agreed that interest payments are a subsidy that can be eliminated. However, interest payments are basically meaningless operationally for the sovereign since interest payments being just another item funded by currency issuance and tsy issuance does not finance govt deficits in spite of appearances that deceive those who do not understand monetary ops.
I don't think that is unanimity among MMT economists on whether to abolish public debt altogether (Mitchell), or to limit it to 3 mo T-bills max (Mosler).
While I agree that tsy issuance should be separate from currency issuance, ie., no offset of the deficit with tsys, I am ambivalent between no bonds and bond issuance on demand comparable to EE/E bonds now, or consols. While I agree that the interest on tsys is currently a subsidy, there may be a supervening argument concerning public purpose in certain cases.
"the forces of temptation."
Tom,
I would point out that there does not exist a word in the sacred Greek scriptures that can be accurately translated into the English word "temptation"... it's "trial" peirasmon ('attempt'/'probe').
"And mayest Thou not be bringing us into trial, but rescue us from the wicked one.'" Mat 6:13
the use of this non-scriptural term "temptation" brings with it an assumption of a priori or "built in" human corruption, and is an entryway into the concept of "free will" and the 'Hell Doctrine'...
rsp,
It has a pretty venerable pedigree in the biblical tradition, too, going back to the "temptation" of Eve by the talking snake, which may be interpreted as symbolic of the ego (Genesis 3). Similarly, Jesus was reportedly "tempted" after his forty day fast in the wilderness (Matthew 4).
Dan,
“Until the "demand to hold money" has been satisfied... until "savings desires" have been fulfilled."
Disagree there
The critical point of the MMT objective is not the form of saving but the fact of saving.
The critical point of the MM objective is not saving at all – it is the form of financial assets held. Their own definition of money is preferred. And monetary policy to get there is preferred. Fiscal policy is only a last resort in order to pump out more of what they view as required money, if it’s necessary to resort to fiscal policy to get there. The fact that fiscal policy produces income and saving is something they mostly ignore.
So the two are VERY different in that sense, IMO
What is similar as you say is that you can retrofit the required financial asset objective into an equation of exchange, ex post, in both cases. But the prescription for how that financial asset should be achieved and why is still very different
JKH (Mr Hatzius is it ) ; )
Can I take your statement;
" Fiscal policy is only a last resort in order to pump out more of what they view as required money, if it’s necessary to resort to fiscal policy to get there."
to mean that monetarists only see *govt tax credits*(MOE) as a means to the end of holding and controlling other "higher" forms of money (MOA)so to speak.
I see it like there are at least two forms of money, the MOE we all use and then the other money the 1% uses which is priced in dollars(MOA) but takes many forms. And the purpose of its existence is to generate MOE for them selves AND serve as a way to extract MOE from the rest of us.
Greg -- Please write out what MOE and MOA stand for the first time you use them. I know they have been used here before, but it can take me awhile to remember abbreviations sometimes.
Thanks very much.
Dan,
"Mosler's claim that the government has to spend money into existence until "savings desires" have been fulfilled."
I dont know if that is exactly what Warren means here.
IOW it is about a flow rather than a stock. MMT examines flows (SBE) where the monetarists examine stocks (M1, M2, etc).
Savings desires are never extinguished. The malady is pleonexia or "more having"; not "more having until some point at which it stops".
Firms seek to increase $NFA retained earnings every year. The external sector seeks to acquire $NFA every year. Households seek to save %NFA every year. This never stops.
Govt has to continuously accommodate the flows not to the point at which all "have enough" (never will happen), but rather to the point where there are quantity=0 bodies in the unemployment lines....
rsp,
Greg,
:)
I think you’ll find Scott Sumner saying that if the CB buys up all the assets in the world (except for those produced by current output in the current GDP accounting period), in exchange for bank reserves, the result will be sufficient “money” to satisfy the demand for money. The increase in reserves would be mostly matched by bank deposits, since most of the assets would be sold by non-banks. But Sumner focuses only on the essential MM requirement that the monetary base be expanded – which means bank reserves and any part of bank reserves that might be switched into banknote currency. He really doesn’t care about the effect on bank deposit liabilities – one of the many strange omissions in monetarism’s view of the world.
The MM required effect has no necessary implication for current output, income, GDP, or the government’s fiscal position – and none at all in the example above, which he would deem sufficient, IMO. The required monetary base expansion is produced exclusively by “asset swap” type transactions using monetary policy, not fiscal policy.
In that sense, fiscal policy becomes a secondary option for the MM required monetary effect, but not a focus nor a necessity in itself.
In contrasting the MMT approach with the MM approach, you can designate a “best definition” of money under MMT which is most appropriate to such a comparison. That definition is NFA, regardless of the monetary form of NFA.
So if you assume that the corresponding MMT definition of money is NFA, then the required “money supply” increase is in terms of NFA, which can only be produced by fiscal policy and not conventional monetary policy. And it represents an increase in saving and savings.
Thus, the defined MM money production function doesn’t change defined MMT money production at all, insofar as it focuses on monetary policy and not fiscal policy.
As to comparing the required FORM of money, MM insists on monetary base expansion. But MMT doesn’t really care whether the required NFA increase is reflected in bank reserves/deposits or with government bonds instead. Bonds aren’t necessary, but they are nevertheless an acceptable form of "NFA money".
The necessary MMT qualification is NFA – not whether NFA is bonds or monetary base or any particular definition of MOE.
Thus, NFA can be in the form of MOE or not. But it’s more the fiscal versus monetary source of the two different interpretations of money (above) that is important. I don’t think the MOE role in itself should be too controversial.
Tom,
In both of those cases, the Serpent/Adversary conducted a "trial".
Eve failed the "trial" (given no gifts to be able to survive it) and the Lord did not succumb (He of course given the gifts to defend Himself).
Paul termed the human "corruptible" not "corrupt".
Use of "temptation" implies a basic corrupt human nature that must be suppressed when "tempted" thru an act of our human "free will". This is all non-scriptural and false.
Corruptible humans undergo "trial" by the Adversary. Some of us, thru grace (unmerited favor) are given gifts to survive these trials, others (the disgraced among us) not so much...
rsp
Matt, I believe Mosler has frequently said that unemployment is a sign of excess private savings desires. The deficit has to be large enough that the satisfaction of the desire to save is accommodated along with sufficient spending to generate full employment.
I think the stocks and flows interact. If the government runs an extended surplus, for example, the non-government will have negative saving during that period and accumulate debt. This will increase the desire for saving during following period. "Saving" doesn't just denote an increase in a positive stock of savings, but also any decrease of a negative stock of savings. In other words, if people are indebted, the desire to save and their desire (need) to pay down debt are the same thing.
Dan,
"If the government runs an extended surplus, for example, the non-government will have negative saving during that period and accumulate debt."
Gets back to causation. (not taking sides)
I believe Warren would say that it is not that "govt is running a surplus" but rather that non-govt savings desires have led to a situation where there is an ex-post surplus... where it is the non-govt that is "in the drivers seat" so to speak...
ie the fiscal balance is a result of non-govt sector "desires" not the other way around...
may also be a semantic problem here as I believe the word "saving" designates the flow and the word "savings" designates the stock. Should probably nail this semantic point down too...
rsp,
May be better stated: " unemployment is a sign of excess private SAVING desires..." rsp,
JKH,
You're right that MMTers focus on NFAs and don't care much about what particular form they are in, and frequently argue that government securities are very liquid so are for all practical purposes a form of money.
But to me what really distinguishes the MMers is not their insistence on the specialness of money proper as opposed to other near-money financial assets, but their views on on how this stuff gets into the non-government economy in the first place, what increases its velocity etc. Even if they refocused on NFAs and elevated treasury debt to the special status, they would still be arguing that only the central bank can and should move the required variables.
When I first encountered the MMers, they seemed to have a very conventional picture of how those processes occurred, based mainly on the conventional money multiplier model of CB monetary policy. Then they seemed to drop that model, along with some huffy talk about how they never believed it in the first place and regarded the money multiplier as just the ex post reciprocal of the de facto reserve ratio with no great causal significance, but still leaned on the "hot potato" model of the bank reserves transmission mechanism. Then the hot potato seemed to be de-emphasized, and it all turned into expectations management and coordination games via announced targets, forward guidance etc. Then it became a quasi-mystical metaphysics of money in which thinking about causation is decried backward overly concrete thinking, and the variables simultaneously cause each other.
My feeling now is that those guys just have a stubborn ideological opposition to fiscal policy, and a commitment to moving as much of economic policy as possible from elected representatives to bankers and central bankers, and will invent whatever intellectual tools they need on the fly to try to achieve this ideological goal.
Matt, on the causation point, while it is true that the government cannot fine-tune its deficit or surplus, since the exact size of the budget balance is an ex post consequence of the interplay between existing tax policies and spending policies - many of which are automatically adjusting - and phenomena in the real economy, it is still true that the government has some substantial control over it. If it didn't, there would be no point in adjusting tax policies or spending policies in response to economic events. If the government finds itself with a surplus in conditions of stagnant activity and unemployment - whether the surplus is the result of an unintended accident or a deliberate policy - then that is a sign that the current budget stance is too tight, and government should cut taxes, increase spending or both.
On "savings desires" vs. "saving desires", I don't think the choice matters much. Savings are what you have, and saving is what you do. The former is a stock and the latter is a flow - a change in that stock during a given time period. And each can be either positive or negative. If you desire to change the level of your stock of savings then you desire to change the rate of your saving, and if you desire to change the rate of your saving then you desire to change the level of your savings. No?
Matt, don't want to argue the theology. My point is simply that the commonly understood narrative across cultural traditions is "good and evil" impulses within the individual.
While I agree that the interest on tsys is currently a subsidy, there may be a supervening argument concerning public purpose in certain cases. Tom Hickey
The debt of a monetary sovereign is basically disguised welfare for the rich but welfare should be reserved for the poor. Also, though the monetary sovereign can afford to pay any amount of interest, it wastes the purchasing power of its money by doing so. Not only that, but providing a risk-free return hinders progress since progress requires true investment and true investment requires taking risks.
Yes, but I am making room for special cases exceptions based on a defensible argument that public purpose is served with some tsy issuance. For example, what about EE/E bonds, which are tendered "retail." Also worker pension funds hold a significant portion of their portfolios in tsys.
Settling this this would require elaborating a criterion of public purpose, if public purpose be admitted as an option.
Dan,
I share your deep skepticism of the MM story.
And you may be closer to and right on the issue of how averse they are to fiscal policy.
For me, it’s hard to tell, when they seem barely to understand that helicopter drops are fiscal policy, just to take one example. In general, I find an enormous murkiness in their ideas and their language when measured in terms of stock/flow consistency. And most importantly, I see fundamental confusion about how the monetary base actually “works” as part of the banking and financial system. They do obsess about the monetary base and its "capabilities" in terms of generating aggregate demand.
Dan,
Suppose someone were to ask you why they should care about "how this stuff gets into the economy in the first place"--what would you tell them?
Suppose also that an "MMT government" was elected. The president intends to come up with some kind of fiscal policy rule that sets the level of government spending as an increasing function of the unemployment rate-- a kind of MMT version of the Taylor Rule.
To ensure that the fiscal response it both timely and believable, he means to insulate it somehow from the political process.
How would you feel about this?
Tom,
Agree that is the "commonly understood narrative"... so is a lot of things though...
"Yes, but I am making room for special cases exceptions based on a defensible argument that public purpose is served with some tsy issuance."
Speaking for the generation of "defined contribution", we have been trained to save for retirement and also have been trained for the last 30 YEARS to expect a 6% or so RoR on the 10-yr UST which are now set at one forth of that... so we are f-ed unless the govt raises the policy rate or otherwise offers a new series of govt bonds for savers to create an income stream for retirement beyond social security.... rsp,
Also worker pension funds hold a significant portion of their portfolios in tsys. Tom Hickey
If pensioners need welfare, we should just give it to them in a straight forward manner. And to maximize the probability that real resources will be available for them we need an optimum economy and an optimum economy does not provide risk-free returns or create money unethically.
That said, the monetary sovereign should provide a risk-free fiat storage and transaction service for all its citizens that pays no interest and makes no loans and government deposit insurance and the lender of last resort abolished. That would enable people to save fiat without it being devalued much by the banking system. That would still leave devalument by the monetary sovereign as a possibility but if that became a problem then genuine private currencies for private debts only could be allowed.
@vimothy,
To ensure that the fiscal response it both timely and believable, he means to insulate it somehow from the political process.
What amazes me is that there was a time when tools for on-the-fly fiscal adjustments were considered. In 1969 the president's economic advisers were suggesting things like this:
A more permanent arrangement to provide the desirable flexibility could take various forms, including:
1. Presidential discretion to propose temporary changes in personal income tax rates within certain specified limits—such as 5 percent in either direction—subject to veto by the Congress within (say) 30 days. This year's Budget Message contains such a proposal
2. A streamlined Congressional procedure for ensuring a prompt vote on Presidential proposals for changes in tax rates within certain specified limits. This would not shift any of the traditional powers of Congress to the President; the Congress would simply change its own rules.
Then somewhere in the 1970s they went to sleep next to alien pods, woke up as monetarists and 1945-1970 never happened.
frlbane,
"If pensioners need welfare,.."
Negatory good buddy... these folks have foregone current consumption in order to save for retirement trained to expect a 6% 10yr... this is NOT "welfare" and will never be "sold" that way...
govt is going to have to accommodate these people to keep "their end of the bargain"...
perhaps this would be during some sort of transitory policy period, as things have deteriorated to the point where our current young have no ability to save and these young folks should be made to expect some sort of expanded public pension defined benefit at retirement...
But if you want to kill MMT politically, start talking about returns on defined benefit/contribution plans as "welfare"... we start doing that and IT'S OVER.
rsp,
And most importantly, I see fundamental confusion about how the monetary base actually “works” as part of the banking and financial system.
They seem to view their lack of concern with that stuff as a badge of honor, JKH. REAL economists are only concerned with aggregate macroeconomic quantities and supposed Newtonian law-like relationships between those quantities. They don't concern themselves with mechanisms and causation.
Dan,
It's like they "dont want to get their hands dirty"... or dont prefer to see direct "concerted action" by people as necessary...
they think all they have to do is have the Fed antiseptically buy some OTR Financial Assets with newly created Reserve Balances and this is somehow going to help... hasnt worked in 4 years now.
rsp,
To ensure that the fiscal response it both timely and believable, he means to insulate it somehow from the political process.
Not bad, Vimothy. It would have to be approved by Congress, and Congress would always reserve the right to put their hands back on the wheel if they want to.
I suppose one possibility would be to have a tax system based entirely on automatic deductions of various kinds, where taxpayers were not assigned a fixed tax rate but a tax range. For example, a particular payer may have a tax in the 30% to 35% range set by law. If the economy is overheating, a macroeconomic policy board (something like the central bank, but in the Treasury department) could jack up everybody's rate by a percentage suggested by policy need, not to exceed the ceiling; and if the economy is sluggish or in recession, taxes could be lowered by some amount, not to go below the floor. If there is a felt need to lower taxes below the current floor or above the current ceiling, it has to go back to Congress.
You could do the same with spending. Congress could pre-approve certain kinds of reserve spending for a 5 and 10 year period, and then the macroeconomic policy board would have the discretion to release funds when needed to stimulate the economy.
I think it would also be good to pre-authorize the monetary authority to give direct credits to Treasury's accounts in order to enable the government to expand spending without doing additional borrowing or taxing. So if economic conditions deteriorate, the board might be able to (a) reduce the floating tax rates closer to the floor value, (b) release some quantity X of pre-authorized infrastructure spending or transfers, and (c)directly credit Y dollars to Treasury. The deficit goes up, debt doesn't go up, and the money is steered into the right places instead of just into bank reserve accounts and the bank accounts of bond-holders. The public doesn't freak about rising public debt, and yet there is still some discipline involved in the monetization of the deficit.
"To ensure that the fiscal response it both timely and believable, he means to insulate it somehow from the political process."
This is where the Job Guarantee is supposed to fit in…automatic stabilizer. No Congress necessary.
The point that I'm trying to make is that it's not that hard to see the logic of taking some things outside of the normal political decision making process.
If the economy goes into recession, and then your legislative body spends one year trying to agree on a response, which, when it finally arrives, is minimal and takes another year to implement, that could be seen to be suboptimal.
It might be better to say, okay, given that we're going to have these cycles over and over again, let's agree on some broad principles beforehand that establish how we'll respond, and charge some institution with the responsibility of implementing them.
Imagine if Congress had to pass a law every time the Fed wanted to do something. They'd probably still be arguing over what to do about Bear Stearns.
Automatic stabilization is already variable over a cycle. It could be tuned even better than it is.
Not a big thing to make tax rates variable also. As I recall, beowulf has already suggested several ways to do this pretty seamlessly.
The MMT JG's buffer of employed is also variable over a cycle to mop up what fiscal changes don't catch.
It's really quite simple and straightforward to accomplish under the existing system. Only a few tweaks, really, once there is the political will.
Of course, the devil is in the details politically, but once the general principles are recognized and monetary economics more widely understood, compromises should be able to be worked out.
With greater understanding of operational reality and possibilities flowing from this, the public would be demanding it.
Right--this already exists to some extent in the form of automatic stabilisers.
So I think that Dan was being a bit unfair to the Market Monetarists when he described them as (I'm paraphrasing) anti-democratic.
So I think that Dan was being a bit unfair to the Market Monetarists when he described them as (I'm paraphrasing) anti-democratic.
Maybe, but here is a passage from Sumner back in April:
Yes, the Fed is bad. But Congress is downright ugly. Deep down most economists are technocrats. They see the central bank as being the best and the brightest, the guys who are above politics, who will “do the right thing.” And how do economists view our Congress? The terms ’stupid’ and ‘incompetent’ don’t even come close to describing the disdain. So are we supposed to change our textbooks in such a way that the fiscal multiplier is no longer zero under an inflation targeting regime (as the new Keynesians had taught us for several decades?) And on what basis? Because the Fed might be so incompetent that we need Congress to rescue the economy? In what world does that policy regime actually work? If you have a culture that has its act together, such as Sweden or Australia, the central bank will do the right thing. If not, then all hope is lost.
Right, the monetarist are central planners that like a command system with politically independent technocrats in charge instead of representatives of the people in charge who are periodically accountable to the people in elections. The technocrats, being politically independent, are accountable to no one.
Thanks for the response JKH.
As usual there is much there I am still digesting.
I must be dense but I dont follow this;
"Thus, NFA can be in the form of MOE or not"
Arent NFA's all in the form of MOE?
@John Zelnicker
Sorry, I have been using this MOE/MOA nomenclature a lot lately so its just rolling off my keyboard.
MOE= Medium of Exchange
MOA= Medium of Account
I think of one as dollars and the other as dollar signs
"And how do economists view our Congress? The terms ’stupid’ and ‘incompetent’ don’t even come close to describing the disdain."
Hello Pot? .... Yes... Pot, this is Kettle ... Pot, you're black!
Right Matt
As if *Economists * should be the final arbiters on the views of our congress. While I agree that our congress has much to disdain, they have done virtually all their economic pontificating with the help of economists. They only say what there economists tell them to say.
Fuck the economists. They are lower than drug dealers.
" with the help of economists."
Right!
Are we the only ones who can see this hypocrisy!?!?!!?
UFB!
rsp,
Greg -- Got it. Thanks.
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