After stating his general approval for Dylan Matthews's, MMT post on Ezra Klein's blog, and his agreement with MMT on the issue of solvency, a big point that MMT's been trying to get across to the mainstream for years, Jared brought forth a number of points of disagreement, which I'll reply to based on my interpretation of the MMT perspective.
Tax Cuts Hard to Unwind? Not If You Legislate Properly!
”. . . awfully hard to unwind (this is a political flaw to MMT, btw…they seem to believe they can reverse the potential inflationary impacts of printing money by raising taxes on a dime).”
Hey Jared, not fair!
MMT can tell politicians what good Macroeconomic policy is. If the politicians won't enact the necessary legislation, then why is this an MMT problem? MMT tells us that when we're getting close to full employment, deficit spending ought to decrease, but not through explicit targeting. That will happen under MMT policies through the effects of the MMT-strengthened automatic stabilizers in the safety net; since when we get close to full employment, Government spending on safety net items will fall precipitously, and income and other tax revenues will increase substantially even under current tax structures.
Also, the MMT Job Guarantee (JG) proposal provides full employment within 6 months of initiation of the program, but is structured in such a way that as the economy recovers and the private sector gains ground JG expenditures automatically decrease because the private sector will higher back the JG workers by paying higher compensation than offered by the JG.
In addition, the legislation implementing MMT's full payroll tax cut program can be structured so that payroll tax cuts are automatically indexed to the U3 or U6 unemployment rate. For example, full FICA credits would be in place until U6 unemployment reaches 8% then there would be gradual re-imposition of FICA until U6 unemployment of 3% is reached. Also, income tax legislation could be regulated the same way with tax increases on the wealthy indexed to increases in the monthly rate of inflation. Since both these measures would be built into MMT-based stimulus legislation and viewed as a permanent reform. Congress would not have to re-open the indexed tax increases to further legislation, and the President would be in a position to veto any changes to this automatic stabilizer.
Default vs. Hyperinflation? A False Choice for the US?
Even though nations with their own fiat currencies can't default, default is preferable to hyper-inflation.
This is a view of Greg Mankiw's that Jared mentions as a point of criticism of MMT without registering his own disagreement. The wording above is a paraphrase of Mankiw.
This conjecture suggests that there’s a relationship in fact between repaying debts incurred in one’s own fiat currency and hyperinflation. Of course, there’s no evidence that such a relationship exists where the nation involved is a fiat currency sovereign.
The historical evidence suggests that if fiat money is “printed” to secure foreign exchange needed to repay debts incurred in a foreign currency, then default may be preferable to hyperinflation. But the US doesn't and won't face this situation. So, why should anyone believe that this false choice posed by Mankiw and Jared is a real one?
Debt Should Grow More Slowly Than GDP? Why?
“When the economy is improving in earnest, we need our debt to grow more slowly than our GDP.”
As long as the debt is in one’s fiat currency, and one is sovereign in that currency
, then why is it a problem if Government debt grows faster than GDP? If we agree that there is no solvency problem then either creditors will still buy newly issued bonds at low interest rates or they won’t. If they don’t, then the Government, with the cooperation of Congress, can always stop issuing debt instruments and create reserves instead to mark up private sector accounts. Here’s a scenario
explaining how the US Government can do that.
The idea is based on Beowulf’s proposal, though I hasten to add that he doesn’t favor this particular proposal, nor do most of the MMT economists, though I believe that their disagreement is based on political judgments rather than on MMT-based economic analysis. The possible inflationary effects of Proof Platinum Coin Seigniorage (PPCS) are discussed and dismissed by Scott Fullwiler. PPCS is a legal alternative under present law, even when it involves filling the public purse to the extent I propose here.
Btw, Jared's mentioning this “need” is a signal that he doesn't understand MMT, since MMT economists don't believe there's any relationship between an increasing debt-to-GDP ratio and fiscal sustainability.
Deficits Must Respond Dynamically To Growth? They Will If They're the Right Deficits
“That doesn’t imply zero budget deficits, but it does imply that deficits must respond dynamically to growth, growing in busts, coming down as a share of the economy in booms.”
The MMT point related to this is that if Government fiscal policy is fiscally responsible
so that deficit spending is designed to support private sector savings, import desires, and employment in a way that adds value to the economy, then because deficits are endogenous
, they will reach a level that is appropriate to an economy with full employment and price stability.
So, theSectoral Financial Balances model is Domestic Private Balance + Domestic Government Balance + Foreign Sector Balance = 0, and the Government Balance will respond dynamically to those private sector desires if Government doesn't target it with policy, but just allows it to float in accordance with savings and import desires and also provides properly designed automatic stabilizer policies and programs that create real value in the economy.
For example, if savings desires are at +6% of GDP and the Foreign Sector Balance is at +4% of GDP, then the model says that fiscal policies and programs should produce full employment at a Domestic Government Balance of -10% of GDP, so long as we do a good job designing the stabilizer programs. As long as savings and the Foreign Sector Balance remain constant, then the result will be the same, and a Government deficit of 10% will be sustainable in perpetuity for a currency issuer, so long as savings remain at the 6% level and imports continue to exceed exports by 4%.
Of course, this assumes that we are talking about a currency sovereign Government that can pay whatever debts in its own currency it chooses to create. Or if it chooses, decides to pay off all public debts as they come due and continues to “deficit spend” without incurring any new debt. Change can occur, in that the 10% deficit can go either up or down in response to changes in private sector savings or the foreign balance. But, according to MMT, it shouldn’t arise from simplistic efforts by Government to spend less and tax more to target the deficit for its own sake, because all that will do is to decrease private savings and imports too, reducing both nominal and real private sector wealth.
Instead, the private sector must decide to import less and/or save less on its own, if the Government deficit is to decrease. But why would anyone want to do that when private sector savings contribute to nominal private wealth, and imports from countries willing to accumulate nominal wealth in US Dollars, are real benefits to US consumers? The only reason why people might decide to decrease imports is because other nations stop wanting to sell things to the US in return for USD credits in their Federal Reserve accounts. In that case, we'd have to start making the goods and services we want ourselves, or develop appropriate substitutes for foreign sector products and services.
MMT Not Effective in Deficit Reduction Mode; or Congress Ineffective In Its Legislation?
“I can see MMT working effectively in deficit-increasing mode; less so in deficit-reduction mode.”
Well first, I think Jared's comment here, implies a view that MMT automatic stabilization policies won't be legislated by an ineffective Congress. But, of course, MMT economists would say that if their policies are passed, then they will work, and will be just as effective in deficit reduction mode as in deficit increasing mode.
MMT economists would also say that even if they're not, then the correct thing to do would be to refine the automatic stabilization safety net, so that it will work without continuous or frequent Congressional intervention to destroy excess private sector Net Financial Assets (NFA) when that's needed to contain demand-pull inflation. Of course, that kind of success depends much more on Congress than it does on MMT. MMT can propose effective policies to Congress. But, if it's unwilling to pass them, then that's on Congress. It's not due to MMT's lack of effectiveness “in deficit reduction mode.”
Having said the above, I also don’t think that MMT policies will get a chance to work until legislators and the President change their economic thinking and are ready to try them. As things stand now, Congress will never legislate the MMT program, unless it's desperate for alternative fiscal and economic policies that might work to create full employment. If at that point, MMT policies are presented and formulated with the hedges necessary to ensure that they’ll work in both modes, then the chances are very good that they will. On the other hand, if legislators insist on passing bills that ensure price instability as full employment approaches, then, of course, inflation will result from their insistence on poor policy.
But, even if that happens, it won't be credible to say that this was a failure of MMT as an economic theory, since there’s little doubt that if legislation passes without the necessary automatic fiscal stabilizers to produce both full employment and price stability, then economists like Jamie Galbraith, Randy Wray, Warren Mosler, Bill Mitchell, Stephanie Kelton, Pavlina Tcherneva, Marshall Auerback, and Mat Forstater, would loudly predict the likely failure of such legislation, while pointing out that this failure will be due to legislation that MMT says will fail, because it doesn't have the necessary automatic revenue increasing stabilizers to create price stability.
Fiscal Sustainability and the Health Care Issue or Mis-allocation of Net Financial Assets to the Health Care Industry at the Cost of Weakening Our Democracy?
“There is no path to a sustainable long-term fiscal outlook that doesn’t reduce health spending, a problem not restricted to the public sector, btw—if anything, it’s worse in the private sector, where costs are rising even faster. Printing money doesn’t help you here—you need to reform the delivery system to take advantage of pooling and to emphasize cost effectiveness, i.e., the quality of treatment over the quantity.”
The effect of “printing money” to pay for increasing health care costs in this situation would be to create more and more nominal financial wealth for the health insurance and health care provider sectors of the economy, making them wealthier and wealthier relative to the other sectors, and giving them more political power. However, I don’t think “printing money” to maintain the present level of Government social safety net, or provide Medicare for All, poses any fiscal sustainability problem for the public sector, at least not for the reasons of solvency and hyperinflation normally brought forward.
Rather, the fiscal sustainability problem presented by the increase in health care costs is for the middle class and the private sector economy as a whole, not for a fiat currency sovereign Government. And there is another, political, sustainability problem for Democracy in the United States, since with each new Government “gift” of more net financial assets to that sector, the more powerful it becomes relative to other sectors. That is the greatest real problem with the health insurance/care sector, not Government fiscal sustainability.
In any event, the solution to our health insurance/health care problem isn’t rocket science. We know from looking at health care arrangements around the world that we can get better outcomes at a cost of no more than 12% of GDP. What we need to do is to pass a bill like HR 676 Medicare for All, taking the insurance companies out of the health care business, limiting the provider cost increases to the general rate of inflation, and applying modern quality management methodologies to the health care industry.
This has nothing to with MMT, except insofar as it tells us that we will experience neither governmental solvency nor inflation problems from taking that kind of action, as long as we wrap it into our general MMT program of automatic stabilizers. The rest is political and relies on our ability to break the thralldom of our Representatives and Senators to the oligarchy, and force them to begin again to represent the heavy majority of the people in our democracy.
Does Jared Bernstein Really Understand MMT, Yet?
It's clear that he thinks he does and that he asserts that he accepts the central proposition that there is no solvency problem. However, all the criticisms he mentions suggest that he really hasn't thought through what it means to say that the US Government is a sovereign fiat currency issuer and has no solvency problem.
So, If the Government has no monetary limits then how can rising health care costs present a fiscal sustainability problem for it? If there are no limits, then why must deficits or the debt-to-GDP ratio ever decline? If there are no limits, then why must we use debt instruments at all? If there are no limits for a currency sovereign, then why should default ever involve a choice between it and hyperinflation?
Finally, I also think that Jared doesn't fully understand that MMT is not just an approach to economic policy and analysis, but primarily embodies certain Macroeconomic propositions and propositions about how modern money works, and what policies could be followed to achieve public purpose. If he did, then why would he keep making objections to MMT policy proposals based on his ideas about how Congress will act in reply to them?
In the end, it's not MMT's responsibility to propose policies that Congress will legislate. It is, instead, up to MMT to propose policies that will achieve full employment with price stability and other favorable social, cultural and political impacts for our democracy.
From that point on, it is up to political advocates to make these policies popular enough to get Congress and the President to pass them. And any failings in passing these policies are not failings of MMT economics, but faiings of the oligarchy which will not pass the policies it recommends.
(Cross-posted from Correntewire.com