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Musings Report 2019-17 4-27-19 A Quick Critique of MMT, Modern Monetary Theory
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A Quick Critique of MMT, Modern Monetary Theory
This month's topic was submitted by Randolph S., and it's a topic that's attracting tremendous media coverage.
"I would appreciate an even handed objective discussion of MMT. Many establishment economists are critical to some degree. I heard it explained as funding infrastructure, etc. the same way the US funded WW2."
MMT is a timely topic and one I've been pondering, along with many other people. Let me start by saying my understanding may well be imperfect, but I'm trying to approach the subject without ideological bias.
The basic idea of MMT (as I understand it) is that the economy is not running at 100% capacity--there are capital, equipment, people and resources which could be put to work to better society, and the chief impediment to making full use of our capacity is a lack of funding for projects that would benefit society.
In other words, the only thing standing in the way of broad-based, socially beneficial economic progress is a lack of money (funding).
In the view of MMT advocates, a blindingly obvious source of funding is already available: the federal government can issue however much new currency it wants, and so the government could fund large-scale socially useful projects if the political will to do so was present.
We have to pause at this point and distinguish between borrowing money to fund projects, which is the current model, and issuing (printing) new currency.
In the current model, the federal government sells Treasury bonds and uses the proceeds to fund government spending. The Treasury pays interest on the bonds, and this mechanism--interest due on borrowed money--creates a "governor" on spending: as borrowing rises, so do interest payments, and as interest payments rise, they crimp other government spending.
The other mechanism in the current model is the central bank (Federal Reserve) can create money out of thin air and buy Treasury bonds. This is a form of monetary stimulus, i.e. a way to inject new money into the financial system.
When the central bank creates money out of thin air to buy newly issued Treasury bonds, this is called "monetizing the debt": in effect, the central bank creates money out of thin air and transfers it to the government by buying Treasury bonds.
The basic idea of MMT (as I understand it) is to bypass both paying interest on newly issued money and the artifice of central bank monetization of new Treasury debt: instead, the Treasury issues new currency directly.
This removes the "governor" of interest payments, freeing the Treasury to issue cost-free money in virtually unlimited quantities.
Various historical studies have concluded that hyper-inflation never occurs when governments must pay interest on their debt; the danger with rising interest and debt is default, not hyper-inflation.
Hyper-inflation arises when the supply of goods and services--the output of the economy remains roughly the same while the supply of currency skyrockets. As money increases but the sum of goods and services available for purchase remains flat, the value of money declines accordingly.
Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with "free" new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being thrown from power.
This temptation explains the regular occurrence of hyper-inflation, just as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases, there's a currency/ governance/ financial crisis that upends the status quo.
This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some "governor" to limit the issuance of new currency to align with the expansion of goods and services, i.e. a sustainable expansion of money supply, then governments tend to issue new currency far in excess of what the real economy can absorb without generating inflation
I think the core difficulty here is that the democratic political process is intrinsically skewed to short-term, politically expedient dynamics: politicians focus by necessity on winning re-election, and they will naturally approve new issuance of currency and new spending to placate the demands of constituents, lobbyists and campaign donors.
I honestly don't see any intrinsic or practical limit on political expediency. Politicians have to be able to say, "I know your need is legitimate, but the money's simply not there." Without some real-world limit on the issuance of new money, money will be issued in surplus because the issuance isn't an economic process, it's a political process.
I'm afraid this is a fatal flaw in MMT. Relying on politicians to impose limits on their own desire to win re-election is to deny human nature.
My second concern is the entire notion of "slack" in the economy--untapped capacity. Have you noticed the "help wanted" signs in every Home Depot and many other retail outlets and restaurants? We read about millions of people who aren't working, but if they wanted to work, or had to work, why are there so many unfilled positions? The answers are complex: the wage being offered isn't sufficient incentive, the unemployed don't have the requisite skills, etc.
In other words, in some important ways, the economy appears to be very close to full capacity. New programs such as The New Green Deal will basically be poaching experienced workers from existing projects,driving up wages (good for workers) which can generate a wage-price spiral (bad for consumers and systemic costs).
This is my third concern: as someone with 45 years of construction experience, I am keenly aware that the vast majority of the infrastructure and New Green Deal spending many people see as essential and /or socially beneficial requires highly skilled labor. Rebuilding bridges, electrical grids, etc. all require highly specialized labor. Installing solar arrays and windmills is more routine, but it still requires trained workers with physical stamina.
The process of training a large new workforce is expensive, and doesn't necessarily generate new goods and services. In other words, it's inherently inflationary as it puts new money into the economy but doesn't increase the production of new goods and services--at least until the newly trained workforce starts generating goods and services.
My fourth concern is related: ultimately, "wealth" is new goods and services generated by increasing productivity, via more investment in tools, skills, etc.
Much of the spending people want--repairing bridges, supplanting natural gas electrical generation with solar or wind, and so on--are not necessarily increasing productivity: the repaired bridge carries the same number of vehicles as it did before.
In other words, efficiency and productivity are core dynamics, yet the MMT process is fundamentally political, and politics has little interest in efficiency or productivity. It is, as noted above, fundamentally expedient, with a default setting to put off tough decisions and rising costs into the future.
In the private sector, return on capital and the productivity of labor and processes are the core dynamics. These rationalize decisions to prioritize efficient use of capital, labor and resources. Absent this rationalization, resources can be squandered for politically expedient reasons. In other words, capital, resources and labor can be mal-invested or wasted, which brings up the opportunity cost: all the squandered capital, labor and resources are no longer available for truly productive use.
I tend to think Ellen Brown's proposals for public banks is more practical than MMT, as it creates a more disciplined and less problematic incentive structure.
In Brown's proposal, public banks raise private capital to invest in socially beneficial projects. This requires some discipline: each project must pencil out to return a modest profit/yield to investors. Each project has to be have a cost structure that has is affordable and a yield / output that pays for itself via social utility and increased productivity.
Without such discipline, the resources of the nation are squandered on "bridges to nowhere" and other politically motivated/driven projects which add little or no productivity gains and very limited socially beneficial value.
Without incentives to invest in socially beneficial projects, private capital is mal-invested in chasing assets such as stocks and real estate--a bubble-inflating dynamic that always ends in ruin.
I think the key question here is: how do we harness our intrinsically scarce capital, labor and resources to increase productivity and socially/ecologically beneficial investments in a sustainable way?
MMT's diagnosis is that a lack of currency is the primary problem. The MMT solution assumes the new currency can be efficiently invested within the existing political system without disrupting the increasingly precarious existing financial system.
While I understand the appeal of MMT, it seems to me that both the financial system and the political system are broken in ways that MMT, no matter how it's managed, cannot fix.
The problem is we're misallocating capital, resources and labor on a vast scale. That's the problem, and adding more currency and capacity/"growth" doesn't fix this problem, it actually makes it worse.
I look around at the trillions of dollars in recently issued currency floating around the world looking for a yield, the trillions poured into asset bubbles that only benefit the few at the top, the billions of gallons of fuel wasted in traffic jams and other consequences of "endless growth on a finite planet", the gargantuan waste of capital, resources and labor squandered in maintaining a "growth at any cost" Landfill Economy of mindless consumption, regardless of consequences, and I conclude MMT is basically a Band-Aid for a profoundly broken, wasteful, unsustainable system.
MMT leaves the existing status quo essentially untouched and adds a new layer of newly issued currency and spending, and a new layer of "growth" and consumption, consumption that no matter how socially beneficial is still an additional burden on the planet.
As Randolph noted, MMT hearkens back to the immense spending on global war (WW2) that boosted the U.S. out of the Depression. It's instructive to go back and look at the conditions that enabled that massive increase in spending.
1. The U.S. was the Saudi Arabia of energy at that time, and it could afford to waste its oil wealth on a fantastically costly and energy-intensive global war.
2. The enormous sums that were spent were borrowed from the public via War Bonds which paid interest, adding to household income and savings.
3. The entire economy was shifted almost overnight to war production, leaving very little consumer spending. As a result, households saved their earnings and did not borrow for consumer spending. These savings funded the postwar boom.
4. The war production was extremely labor intensive, requiring the hiring of tens of millions of workers, including millions of women and minorities who had been effectively blocked from employment before the war.
5. The vast majority of the war production was a complete loss to the civilian economy. Most of the weaponry, ships, tanks and aircraft ended up on the bottom of the sea or rusting away after the war, as it was already obsolete. Other than some Jeeps and DC-3s, very little of the thousands of aircraft, tanks, ships etc. ended up in the civilian economy. In effect, almost the entire production of the war was a complete waste, the equivalent of Keynes' "digging holes and filling them."
None of these conditions apply now. The planet has billions more human residents, and wasting irreplaceable resources on a giant job-creation project is neither wise nor possible.
In effect, MMT is just another attempt to preserve a dysfunctional status quo by adding another layer of newly issued currency and "growth." More "growth," even the sort envisioned as "Green," is simply adding to a destructive system. What's needed is a radical reduction in consumption and a diversion from a consumerist Landfill Economy to one driven by incentives other than "more of everything" in the name of "growth."
As longtime readers know, I see radical DeGrowth and decentralization and the institutionalization of a more sustainable and healthier (i.e. less perverse and destructive) set of incentives as the only set of solutions that can fix what's broken in the current socio-economic model.
Highlights of the Blog This Past Week
This Is the End of the Cycle 4/27/19
Push Them Hard Enough and the Productive Class Will Opt Out of Servitude 4/26/19
The Feedback Loop of Doom: When Mobile Creatives and Capital Abandon Unaffordable, Dysfunctional Cities 4/25/19
If "Getting Ahead" Depends on Asset Bubbles, It's Not "Getting Ahead," It's Gambling 4/24/19
From Left Field
The U.S. Is the Unhappiest It’s Ever Been--but isn't this the longest "recovery" in our history?
Edgelands: Birthing a New Lore
Young Adult Employment Is The Canary In Coalmine
World Trade Volumes Are Plunging at the Fastest Pace in a Decade
Is America Turning Into a Nation of Dunces? Judge Judy is on the Supreme Court, etc....
The Myths of Enlightenment
How Le Corbusier’s American Dream Became a Nightmare--cities designed for cars don't work for people....
Exposing The Three Flawed Narratives Driving Today's Late-Cycle Euphoria--well worth a read....
Registration of Food Facilities: What You Need to Know About the FDA Regulation: Small Entity Compliance Guide
A Guide to Elizabeth Warren’s (Many) 2020 Policy Proposals-- grab-bag politics...
Harvard study: Heat slows down the brain by 13%
How California’s faltering high-speed rail project was ‘captured’ by costly consultants--and consultants are always costly....
Amazon’s system for tracking its warehouse workers can automatically fire them-- The Machine noticed your bathroom breaks were too numerous and too long....
"Work isn't to make money; you work to justify life." Marc Chagall
Thanks for reading--
charles |
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