03 January 2015

A Further Response on the Weakness in Modern Monetary Theory and Modern Economics

“A concept is a brick. It can be used to build a courthouse of reason. Or it can be thrown through the window.”

Gilles Deleuze

A reader 'Joyce' sent an email to me today, and rather than just provide a complete answer to her I thought I would take the opportunity to expand on this to further explain what I said about Modern Monetary Theory yesterday.  
There were more responses from those from the fiscally conservative economic right, who support MMT as a rationale for eliminating the income tax.   The progressive voices speaking out for MMT as a cure for austerity ought to think long and hard about this. 
They would propose using MMT printing rather than progressive direct taxation.  This is a more regressive taxation of currency depreciation, or monetary inflation, that would adversely impact those without resort to holding inflation senstive assets as a store of wealth.   I might write something more about this later, 
Joyce's observations are in italics, with my reactions to them just below.
"I am just learning about MMT myself but I see that you are conflating the value of the currency with the use of the currency (no matter what its valuation is). MMT just describes the way money works in a sovereign country with its own currency. MMT makes no claims for the goodness of the politicians that are elected to the government that spends money into the economy."
The method of how a currency is created and used is intimately involved with its valuation.  As a medium of exchange and a store of value, the method in which money is created, distributed, and valued impacts every transaction that occurs within an economy, and in trans-economic (international if you will) commerce.

To say that assuming that printing money at will by the government without limit can have no effect on value flies in the face of historical experience.   MMT seems to be based on this assumption and a few others that do not hold up well to practical examination.
"The government has to spend money into the economy in order for the public and private sectors to "save" or use that money. The people accept the currency that is spent into the economy because they use it to pay their debts, such as income tax, to
government. I suppose the valuation can change but it remains true that the sovereign government can afford to pay for anything that it needs or wants to as long as it is in their own currency and is available."
The government manages the currency.  It provides it to the economy under certain sets of economic rules.  'Government spending' is one of them.   There are others.  These are not particularly germane to my major objection to MMT, but they do serve to divert the discussion from it so I will let that go for now.

But it is not true that 'the sovereign can afford to pay for anything that it needs or wants as long as it is in their own currency and is available.'   There must be an agreement on value for an exchange to occur between entities.  This is easier to see if you assume that one of the parties is another sovereign government.

What troubles me about some of the unspoken assumptions in MMT is that individuals within an economy are not 'sovereign' or free actors.   What comes out in discussions with MMT believers is that government rules by force, that individuals are compelled to accept the currency, presumably at some valuation well above worthlessness. 

This is why I say that there is nothing particularly 'modern' about Modern Monetary Theory.  It is the same old canard where the state sets the values, and dictates them to the people by force, whether it be official exchange rates, currency controls, or other draconian measure THAT  hold whether the governing authority is abusive or not.  If politicians were angels, it would not be such a worry that their power is largely unchecked by market forces in the MMT theory.
"Basically, the market is the people purchasing commodities or commercial dealings of companies and individuals; therefore, the market is the people."
The market is not only the people, but the set of rules under which they act.  The notion that there are no rules, spoken or unspoken, is romantic nonsense.   A 'society' is a group of people with a common set of rules and conventions.  The default condition of a failed society is that 'might makes right.'
MMT is a theory and can only be dangerous if it creates a dangerous environment. How can a theory create a dangerous environment? It is a belief system. MMT tries to describe how money works not how bad politicians and appointees use it for their own purposes."

If only this were true, if only these things were immutably decided for us.  Well they are, but that is another theory.   Theories and assumptions about values are the key to civilization if you think about it more deeply.  And they have a tendency to create a dangerous environment where there are not checks and balances on power because, quite frankly, people are not angels.
"There are, of course, limits on the use of money which rest on whether or not the resources are available and on whether or not there are arbitrary limitations such as the periodic caps placed on the deficit by politicians."
This I think is an oblique reason why some very smart people might find MMT to be attractive.  We are in a very contentious period of political history.  The current financial and political system is acting unevenly, unjustly if you will, and seeks to impose austerity on the unfortunate while subsidizing the wealthy and powerful with tax breaks and bailouts.

Well intentioned people see MMT as a wonderful methods of avoiding this conflict by asserting that money can flow without practical limit or consequence.   It reminds me of the common talk about the 'Trillion Dollar Platinum Coin' that was proposed by some Very Serious People as a response to the budget and debt ceiling impasse.

Like so many attractive expediencies, it had some very serious unintended consequences attached.  It would have signaled to the other sovereigns of the world, rightly or wrongly, that the US was willing to create money without regard to value in order to solve its own political difficulties.  It would have sent a chill through our trading partners (and creditors whom MMT desire to reduce to helpless subservience like our own citizens apparently) about the reliability of the full faith and confidence which is the basis of a modern fiat currency.  

It is a dangerous game, because once one loses that confidence, it can lead to collateral damage rather quickly, and provide a difficult situation that inflicts much damage and pain on many.
"MMT is not about justice and fairness. As far as I know, MMT does not have an 'efficient market hypothesis.'"
 All rules, particularly financial rules, are about justice and fairness.  Justice and fairness are not abstractions that sit on a shelf to be pulled out now and then.  Justice and fairness are a priori values encapsulated in the laws of the land,  and reasonably well stated in the Declaration of Independence and the Constitution.    Men and women have given their lives for justice and fairness, which are inherent qualities of liberty. 

We allow our choices to be limited by being members of a society.  But in return we demand certain services and considerations for it. 

A system that has not regard to justice and fairness is a tyranny, or quickly becomes one.

Now, I want to put a different meaning on what you said, that I think strikes a little closer to what you intended to say. 

I think you mean to say that MMT merely describes what is, some natural occurrence, like physics or any other pure science.   And this is one of the great fallacies that some promote about economics in general, that it is a pure science merely describing natural phenomena like the movement of the tides or the planets.

Economics is a social science.  It is all about interpreting realities and especially theoretical realities or systems through a prism of assumptions and values.   It is unavoidable for any macroeconomic system NOT to embody certain assumptions and values, whether they are spoken or just assumed.

And the whole point of my example about 'efficient market hypothesis' was that it 'worked' if one assumed certain qualities about people acting in groups that are not only incorrect, but radically so in the case of a persistent minority of the sociopathically inclined.

MMT does not have its own efficient market hypothesis.  It is like the efficient market hypothesis in that it assumes an otherworldly goodness in politicians and government bureaucrats in using the assumed to be unlimited power to create and spend money only wisely and for the greater good.  Try that idea out on any historian or political scientist and see how far it gets you.
And as a side note, politicians refused to regulate the shadow banking system that includes trillions of dollars of debt by banks and near banks, debts which can never be paid back should we have another recession.

I surmise that some of that QE money from the Fed was used by companies to create more wealth for themselves and I'm sure that some of it ended up in the shadow banking system where trillions of dollars of derivatives still thrive.  
This is precisely my point   The political class has been corrupted by Big Money.  I write about this all the time.   The bailouts were a clear abuse of power, especially in their collateral damage to innocents.

I do not think that MMT is a solution to  the problem of 'debts that can never be paid back should we have another recession.'   But I do think that this is the motivation for some who know deep down that MMT is founded on rubbish, but is the lesser of two evils in finding a way out of a bad situation.

My God, with our political class as corrupt as it is, would one wish to give them the power to create and spend money at will, under the assumption that they can never do it too much?

I will not muddy the waters here by getting into other solutions, but to willingly accept a belief system not founded in practical reality as a mean of escaping a dilemma does not encourage the rational person who has not given themselves over to the belief as a means of economic salvation.  

Reform is the most viable solution longer term.  We did it before and we must do it again.  Reform is a continual struggle against the worst tendencies of people.  

As Lord Acton said, "The danger is not that a particular class is unfit to govern.  Every class is unfit to govern. The law of liberty tends to abolish the reign of race over race, of faith over faith, of class over class."

In other words, no one is above the law, and their power is to be constrained by the restraints of the liberty of others, and therefore required to act justly and openly, under a system of checks and balances on their power.

One of the recurring myths throughout history is that a group of 'better men' are naturally equipped to rule.   There is much in modern economics that assumes that very dangerous idea, of superior people of natural rationality and virtue being naturally able to rule wisely and benignly without corruption.  And they may do so with secrecy, and independent of checks and balances, the better to serve the dispensation of their gnostic knowledge that is conflated by other mere mortals who simply cannot understand it.

And this is one of the major drawbacks with the methods of the central banks and the in particular Federal Reserve today.  Economics is no science, but a branch social science that at best casts some light on public policy, but with absolutely no claim to pure scientific objectivity or the ability to dictate outcomes independent of choices based on higher values.

History is the story of the never ending struggle between tyranny and liberty, the individual and the state, right and might, anarchy and society, with most of the action occurring in the vast area between.  
No system can guarantee freedom of the individual, or the rule of law over lawlessness.  But some may provide the means and the methods of giving individual rights a more even footing with organized power, and organized society with the means to hold individual power in restraint.
I have come to believe that the most critical step for our sustainable recovery is not more laws, the gold standard, a new system of currency like modern monetary theory, or one political party or another.

The key to our return to a sound economy is to be found in meaningful reform. And so far we have merely struck uselessly at a few largely symbolic branches, and failed to address the problem with a serious commitment to our values. The heart of the problem is the power of the financial sector over the greater part of society, through the corrupting power of Big Money over the political process.