An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
By George he’s got it. Summers tumbles to the fact that raising demand increases numbers employed. Amazing. No more than what Keynes said 70 years ago, but never mind.
As to Summers's criticism of “unsustainable finance” and his advocacy of “proper regulation” (bank regulation) well who can disagree with that? But the big question is: what should that regulation actually consist of? Dodd Frank is useless: it’s just 10,000 pages of Byzantine complexity which smart lawyers will work their way round and make megabucks in the process.
My suggestion is the system I set out in a recent article on this blog of Mike Norman’s. Milton Friedman also advocated that system. See respectively:
Huh? I guess I missed the part. It sounds more like generic Keynesianism demand-side policy to me. And he explicitly argues that more public investment would reduce the debt/GDP ratio:
To start, this means ending the disastrous trends toward ever less government spending and employment each year and taking advantage of the current period of economic slack to renew and build out our infrastructure. If the federal government had invested more over the past five years, the U.S. debt burden relative to income would be lower: allowing slackening in the economy has hurt its long-run potential.
Dan didnt you know that reducing the debt/gdp ratio was a big part of MMT ....
This kills me when these people say "We can do better." when Summers was the NEC head for most of the first term.
Who then is "WE"?
"WE" can do better than Summers that is for sure...
And as usual NO specifics other than "infrastructure".... all those pissed off Occupy kids somehow dont look like concrete workers and equipment operators...
Next up: Summers has an article in the Financial Times today arguing that we can avoid “secular stagnation”. Given that it was Summers who proposed the “secular stagnation” idea a mere two months ago (8th Nov. at the IMF), this a flagrant self-contradiction.
I must remember to talk self-contradictory bullshit in future: obviously that’s the way to fame, fortune and getting articles in the FT. His article is here:
Yglesias has a piece up this morning that clarifies the argument. He is not really claiming that Summers has gone MMT, but rather only that he has gone post-Keynesian.
http://www.slate.com/blogs/moneybox.html
But note that the whole framework Yglesias attributes to Summers is based on the natural equilibrium rate of interest and the NAIRU employment rate, which I think have been targets of skepticism within post-Keynesian economics.
It seems to me that Summers's thinking is probably still inside the New Keynesian saltwater economics paradigm. But there is some internal debate among those thinkers about whether the "reach for yield" promoted by low rates in low-risk vehicles will cause economically healthy risk-taking in the productive economy or economically unhealthy bubbles. The negative view is associated with Richard Koo, among others, who is a Berkeley/saltwater guy.
I don't think Summers is contradicting himself. Saying that we are facing secular stagnation is similar to saying we are in a depression. Just because someone thinks we are in a depression doesn't mean they think we should stay there and that the depression is incurable.
Dan, He didn’t simply say that we’re in a depression in his IMF speech. His basic point was that that depression might be incurable. To quote his final sentence:
“…we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”
Now why on Earth would a zero rate of interest for near risk free loans prevent government and central bank implementing stimulus? As Mosler's law states “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” I.e. if one simply creates new money and feeds it into household pockets, households will at some point up their spending. Demand rises. End of recession. And quite apart from that, the mere fact of raising government spending (in as far as that’s the form that stimulus takes) will raise demand.
"Now why on Earth would a zero rate of interest for near risk free loans prevent government and central bank implementing stimulus?"
Nothing, Ralph. I don't think that was Summers's argument. His analysis is based on the "natural rate of interest" framework that is built into the IS-LM and other mainstream models. He thinks that there might be a negative real natural rate right now, and that as a result adequate private sector investment (enough to generate full employment) won't occur given the zero bound. It's just another variant on Krugman's picture
So he basically said in that original talk, "We have to think more about how to do economic policy in the context of a negative natural rate." And now he's giving us part of his answer to the question. In the original talk he took some hits, because at one point it sounded like he was arguing that to deal with the problem we need to take off the regulatory brakes and permit bubbles. But now he seems to be repudiating bubbles, blaming unconventional monetary policy for promoting them, and opting for public investment and fiscal expansion.
I think Summers thinks we are facing bigger systemic problems then just a cyclical aggregate demand shortfall that can be fixed with monetary stimulus, tax cuts, helicopter drops, etc. I don't think he is right about the negative natural rate business. But I do think he is right that the problems are more systemic and structural and can't be fixed with simple money injections.
I don't think there is any reason to believe that full employment can be guaranteed through monetary tools alone; or to think that even if we did get full employment it would be full employment of the right kind: the kind that is building a good and just society rather than an immoral consumerist, exploitative hellhole.
Also, note that Warren's slogan is just about the way to cure a financial crisis. Is there any reason to think that we are still facing a financial crisis? I don't think so. There is no liquidity crunch or solvency terror in the financial sector. There is a shortage of viable projects to invest in.
"I don't think there is any reason to believe that full employment can be guaranteed through monetary tools alone; or to think that even if we did get full employment it would be full employment of the right kind: the kind that is building a good and just society rather than an immoral consumerist, exploitative hellhole."
Bravo! I'd buy you a bottle of Le Grand Bouqueteau after reading that very perceptive sentence.
Even here among ourselves we overlook the fundamental nature of the problem. Since the end of reserve constraints on banking (1971), private debt had outpaced Govt deficits in money creation at an increasing rate (up until 2008):
80 to 1990 = ~$5T to $14T = $.9T per year (GDP Growth N=100% ~3000 to 6000 & R= 33% 6000 to 8000)
1990 to 2000 = ~$14T to $28T = $1.4T per year (GDP Growth N=67% ~6000 to 10K and R= 44% 8000 to 11.5K) Of this, only a net of $879B came from deficits. Thats less than 1% of the total money growth, compared with 75% below.
2000 to 2010 = ~$28T to $53T = $2.5T per year (GDP Growth N=33% 10K to 15K and R = 17% 11.5K to 13.5K)
and so far in this decade: 2010 to 2013 = ~$53T to $58T = $1.67T per year. And of this almost all of its come from deficits ($3.6T or $1.2T per year, 75% of total) http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
http://research.stlouisfed.org/fred2/series/TCMDO http://im-an-economist.blogspot.com/2011/11/ngdp-targeting-licence-for-inflation.html (Ignore the insanity in the article, the site is simply the source for the GDP graph)
If the amount of money created on average per year grows slower than the $2.5T per year of the last decade due to an epochal shift in debt demand, where will the rate of growth in the money supply come from? Once deficits get back into the $500B a year range (if thats even possible without a recession right now), will the private sector be able to leverage up to 400% or 500% to GDP? 2008 peaked at 300%. http://static.seekingalpha.com/uploads/2012/1/9/1066626-132608573651625-marchahead_origin.png
Econ Law #1 in my book: A growing economy with a growing population must have a growing supply of money.
Once that fundamental logic is accepted, we can talk rationally about how much new money is optimal and the best distribution of its origin.
Excellent Dan, thanks for reminding me, I forgot about his excellent series of posts on the subject. His methodology is obviously much deeper than mine and most likely more accurate (although objectively I don't know enough of the details to even judge).
I was simply using some broad numbers to make the logical point that Paul makes. Its Law #1 for a reason.
OK: Mosler’s law does specifically deal with financial crises. But I’m 95% certain Warren would be happy to broaden that out to recessions of ALL SORTS. I’ll contact him and suggest that change to his “law”.
Next, what exactly are these “systemic and structural” problems that make it impossible for “full employment to be guaranteed through monetary tools alone”? The only one you cite is “a shortage of viable projects to invest in”. But if there is such a shortage, then great: that means we can simply consume more without having of forgo consumption so as to make investments. In fact plant capacity utilisation is at a historically low level at the moment, thus it’s quite possible that a big increase in consumption IS INDEED possible with relatively little investment.
As to “building a good and just society rather than an immoral consumerist, exploitative hellhole” I’m all in favor of raising taxes so as to cut down on consumer spending and spend more on stuff like publicly funded education, if that’s what the electorate votes for. That way we employ more teachers and fewer car workers etc. But if that’s not what the electorate votes for, then so be it: full employment (making more cars, etc) is still achievable.
In an open economy there is no guarantee that effects of monetary policy will be exclusively or primarily domestic under free trade and free capital flow. Embedded labor and materials are imported, while saving and investment are exported. The cb can set the nominal interest rate but not the real rate of interest or the exchange rate. Not only is the assumption of loanable funds wrong but it would be made largely irrelevant in open economies anyway.
On the other hand, fiscal policy can be tightly targeted domestically.
17 comments:
By George he’s got it. Summers tumbles to the fact that raising demand increases numbers employed. Amazing. No more than what Keynes said 70 years ago, but never mind.
As to Summers's criticism of “unsustainable finance” and his advocacy of “proper regulation” (bank regulation) well who can disagree with that? But the big question is: what should that regulation actually consist of? Dodd Frank is useless: it’s just 10,000 pages of Byzantine complexity which smart lawyers will work their way round and make megabucks in the process.
My suggestion is the system I set out in a recent article on this blog of Mike Norman’s. Milton Friedman also advocated that system. See respectively:
http://mikenormaneconomics.blogspot.co.uk/2013/08/guest-post-ralph-musgrave-dodd-frank-is.html
http://ralphanomics.blogspot.co.uk/2014/01/milton-friedman-set-out-positive-money.html
Huh? I guess I missed the part. It sounds more like generic Keynesianism demand-side policy to me. And he explicitly argues that more public investment would reduce the debt/GDP ratio:
To start, this means ending the disastrous trends toward ever less government spending and employment each year and taking advantage of the current period of economic slack to renew and build out our infrastructure. If the federal government had invested more over the past five years, the U.S. debt burden relative to income would be lower: allowing slackening in the economy has hurt its long-run potential.
Dan didnt you know that reducing the debt/gdp ratio was a big part of MMT ....
This kills me when these people say "We can do better." when Summers was the NEC head for most of the first term.
Who then is "WE"?
"WE" can do better than Summers that is for sure...
And as usual NO specifics other than "infrastructure".... all those pissed off Occupy kids somehow dont look like concrete workers and equipment operators...
Yglesias knows jackshit about MMT.
Next up: Summers has an article in the Financial Times today arguing that we can avoid “secular stagnation”. Given that it was Summers who proposed the “secular stagnation” idea a mere two months ago (8th Nov. at the IMF), this a flagrant self-contradiction.
I must remember to talk self-contradictory bullshit in future: obviously that’s the way to fame, fortune and getting articles in the FT. His article is here:
http://www.ft.com/cms/s/2/ba0f1386-7169-11e3-8f92-00144feabdc0.html
Yglesias has a piece up this morning that clarifies the argument. He is not really claiming that Summers has gone MMT, but rather only that he has gone post-Keynesian.
http://www.slate.com/blogs/moneybox.html
But note that the whole framework Yglesias attributes to Summers is based on the natural equilibrium rate of interest and the NAIRU employment rate, which I think have been targets of skepticism within post-Keynesian economics.
It seems to me that Summers's thinking is probably still inside the New Keynesian saltwater economics paradigm. But there is some internal debate among those thinkers about whether the "reach for yield" promoted by low rates in low-risk vehicles will cause economically healthy risk-taking in the productive economy or economically unhealthy bubbles. The negative view is associated with Richard Koo, among others, who is a Berkeley/saltwater guy.
I don't think Summers is contradicting himself. Saying that we are facing secular stagnation is similar to saying we are in a depression. Just because someone thinks we are in a depression doesn't mean they think we should stay there and that the depression is incurable.
Dan, He didn’t simply say that we’re in a depression in his IMF speech. His basic point was that that depression might be incurable. To quote his final sentence:
“…we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”
Now why on Earth would a zero rate of interest for near risk free loans prevent government and central bank implementing stimulus? As Mosler's law states “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” I.e. if one simply creates new money and feeds it into household pockets, households will at some point up their spending. Demand rises. End of recession. And quite apart from that, the mere fact of raising government spending (in as far as that’s the form that stimulus takes) will raise demand.
"Now why on Earth would a zero rate of interest for near risk free loans prevent government and central bank implementing stimulus?"
Nothing, Ralph. I don't think that was Summers's argument. His analysis is based on the "natural rate of interest" framework that is built into the IS-LM and other mainstream models. He thinks that there might be a negative real natural rate right now, and that as a result adequate private sector investment (enough to generate full employment) won't occur given the zero bound. It's just another variant on Krugman's picture
So he basically said in that original talk, "We have to think more about how to do economic policy in the context of a negative natural rate." And now he's giving us part of his answer to the question. In the original talk he took some hits, because at one point it sounded like he was arguing that to deal with the problem we need to take off the regulatory brakes and permit bubbles. But now he seems to be repudiating bubbles, blaming unconventional monetary policy for promoting them, and opting for public investment and fiscal expansion.
I think Summers thinks we are facing bigger systemic problems then just a cyclical aggregate demand shortfall that can be fixed with monetary stimulus, tax cuts, helicopter drops, etc. I don't think he is right about the negative natural rate business. But I do think he is right that the problems are more systemic and structural and can't be fixed with simple money injections.
I don't think there is any reason to believe that full employment can be guaranteed through monetary tools alone; or to think that even if we did get full employment it would be full employment of the right kind: the kind that is building a good and just society rather than an immoral consumerist, exploitative hellhole.
Also, note that Warren's slogan is just about the way to cure a financial crisis. Is there any reason to think that we are still facing a financial crisis? I don't think so. There is no liquidity crunch or solvency terror in the financial sector. There is a shortage of viable projects to invest in.
We have Pinterest Dan... and don't forget about Snap Chat... ;)
"I don't think there is any reason to believe that full employment can be guaranteed through monetary tools alone; or to think that even if we did get full employment it would be full employment of the right kind: the kind that is building a good and just society rather than an immoral consumerist, exploitative hellhole."
Bravo! I'd buy you a bottle of Le Grand Bouqueteau after reading that very perceptive sentence.
Even here among ourselves we overlook the fundamental nature of the problem. Since the end of reserve constraints on banking (1971), private debt had outpaced Govt deficits in money creation at an increasing rate (up until 2008):
80 to 1990 = ~$5T to $14T = $.9T per year (GDP Growth N=100% ~3000 to 6000 & R= 33% 6000 to 8000)
1990 to 2000 = ~$14T to $28T = $1.4T per year (GDP Growth N=67% ~6000 to 10K and R= 44% 8000 to 11.5K)
Of this, only a net of $879B came from deficits. Thats less than 1% of the total money growth, compared with 75% below.
2000 to 2010 = ~$28T to $53T = $2.5T per year (GDP Growth N=33% 10K to 15K and R = 17% 11.5K to 13.5K)
and so far in this decade:
2010 to 2013 = ~$53T to $58T = $1.67T per year.
And of this almost all of its come from deficits ($3.6T or $1.2T per year, 75% of total)
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
http://research.stlouisfed.org/fred2/series/TCMDO
http://im-an-economist.blogspot.com/2011/11/ngdp-targeting-licence-for-inflation.html
(Ignore the insanity in the article, the site is simply the source for the GDP graph)
If the amount of money created on average per year grows slower than the $2.5T per year of the last decade due to an epochal shift in debt demand, where will the rate of growth in the money supply come from? Once deficits get back into the $500B a year range (if thats even possible without a recession right now), will the private sector be able to leverage up to 400% or 500% to GDP? 2008 peaked at 300%.
http://static.seekingalpha.com/uploads/2012/1/9/1066626-132608573651625-marchahead_origin.png
Econ Law #1 in my book: A growing economy with a growing population must have a growing supply of money.
Once that fundamental logic is accepted, we can talk rationally about how much new money is optimal and the best distribution of its origin.
Auburn,
The relevant comparison is government spending (gross) to net private debt. Taxes hit both. Paul Meli pointed this out here a while back...
http://economicsrantsnmusings.blogspot.com/2013/06/does-credit-drive-economy-part-ii.html
Excellent Dan, thanks for reminding me, I forgot about his excellent series of posts on the subject. His methodology is obviously much deeper than mine and most likely more accurate (although objectively I don't know enough of the details to even judge).
I was simply using some broad numbers to make the logical point that Paul makes. Its Law #1 for a reason.
Dan,
OK: Mosler’s law does specifically deal with financial crises. But I’m 95% certain Warren would be happy to broaden that out to recessions of ALL SORTS. I’ll contact him and suggest that change to his “law”.
Next, what exactly are these “systemic and structural” problems that make it impossible for “full employment to be guaranteed through monetary tools alone”? The only one you cite is “a shortage of viable projects to invest in”. But if there is such a shortage, then great: that means we can simply consume more without having of forgo consumption so as to make investments. In fact plant capacity utilisation is at a historically low level at the moment, thus it’s quite possible that a big increase in consumption IS INDEED possible with relatively little investment.
As to “building a good and just society rather than an immoral consumerist, exploitative hellhole” I’m all in favor of raising taxes so as to cut down on consumer spending and spend more on stuff like publicly funded education, if that’s what the electorate votes for. That way we employ more teachers and fewer car workers etc. But if that’s not what the electorate votes for, then so be it: full employment (making more cars, etc) is still achievable.
In an open economy there is no guarantee that effects of monetary policy will be exclusively or primarily domestic under free trade and free capital flow. Embedded labor and materials are imported, while saving and investment are exported. The cb can set the nominal interest rate but not the real rate of interest or the exchange rate. Not only is the assumption of loanable funds wrong but it would be made largely irrelevant in open economies anyway.
On the other hand, fiscal policy can be tightly targeted domestically.
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