May 23, 2014

My thoughts about MMT and US Fiscal Policy

Filed under: Uncategorized — admin @ 4:13 pm
The other day I heard Stephanie Kelton “Busting Monetary Myths” on Sam Seder’s Majority Report, and that got me thinking about our approach to fiscal policy. So I thought I’d share my thoughts with you here.
  1. MMT is right that for polities that issue fiat (monopoly) currency, there is no immediate necessity to tax people in order to raise revenues for public projects. In fact the Grace commission’s report pretty much said this was de facto the case, in the 80s.
  2. However, there are long term consequences, and the point that Stephanie Kelton and Warren Mosler make only goes so far in a larger framework. Taxes remove money from the economy but they “hurt” purchasing power of individuals and corporations according to some political rules. On the other hand, government spending “helps” individuals and corporations, and furthers some ends, according to political rules. Printing money without taxation can lead to inflation.
  3. Government spending doesn’t always lead to inflation. If the government makes good bets that result in higher GDP, then the greater money chases a greater amount of goods and services, and there is more wealth and prosperity for everyone in the country. Famous examples are the interstate highway system and the internet, so MMT advocates often point to infrastructure spending as something we can do now, without waiting for tax revenue, and I agree.
  4. However, the public sector running at a deficit eventually leads to sovereign debt, which, if not serviced, becomes harder to pay. And, given the debt ceiling in the US, it’s even worse because it contributes to political brinksmanship and lowers the credit rating of the US. This is a BIG DEAL and as long as the credit limit is in place, deficits are dangerous.
  5. There is a good case to be made for spending on infrastructure that businesses need (internet, etc), basic services that everyone needs to collectively bargain (healthcare, education), and a basic income for everyone (or a negative tax as Milton Friedman would advocate). That last one is because the marginal propensity to spend is higher for people in the long tail (which also happens to be the majority), and this boosts aggregate demand.
  6. But this keynsian/state-capitalist approach is limited by many things, including crony capitalism, corruption, regulatory capture, and simply wrong bets. More often than not, government spending does NOT increase GDP. State capitalism must take aggressive measures to remove corruption, which Singapore has done but US has not (Singapore isn’t an example of laissez faire, but it’s a shining example of state capitalism and “economic freedom” aka business friendliness).
  7. There are diminishing returns from being TOO centrally planned (state socialism) and being TOO business friendly (corporatism). People therefore on either side of the debate are needed to keep the policies swinging form one extreme to the other. Which is why I believe that libertarian ideas (such as the ones promoted by Milton Friedman) are very valuable in public discourse, even if their utopia isn’t going to happen anytime soon, or ever.
  8. Now the bigger picture. If we take MMT *simplified* soundbites to their logical conclusion, we can eliminate all taxes and print money. The government would choose who/what causes to help and not choose at all whose purchasing power to hurt. Sounds great, right? Except if GDP doesn’t keep pace with the currency (and it won’t, cause government bets wrong, boosting aggregate demand has limited returns and even Paul Krugman explicitly acknowledges this) there will be much more rapid inflation. This in itself is a viable way to run a country — not unlike a corporation that keeps issuing and selling more shares to investors and diluting all existing ones, forever, making everyone reinvest into the company every so often if they believe in it. But this will NEVER be done by the USA or any country that already has treasuries others have bought. Because this will devalue all the future cashflows and throw off all futures contracts on exchanges. This is obviously a mental experiment and edge case, but you can see how veering one way or the other policy wise can affect this.
  9. In fact, countries compete on the strength of their currency, among other things. The bigger picture that wasn’t covered involves TRADE DEFICITS. In the US, our wages are among the highest in the world, and our cost of living is quite high. You want to know what slavery is? It is being poor and living next to rich people. You can’t afford the necessities of life unless you work your ass off for ONE of them, and since your need is great, the average cost of your labor is cheap. That is why we have social protections. But social protections cost money. And the rich people drive up the cost of living, making the social protections cost even more.
  10. The result? As world technology and infrastructure got better since the 1950s, much of our stuff is outsourced. Apple, once proudly making its products In The USA(TM) now employs Foxconn and an army of people around the world, who would work longer hours doing more repetitive work for less pay than most Americans. Here I would invoke the Three Sector Theory.
  11. Joseph Stiglitz points out one interesting fact about the Great Depression: the US went from over 20% employed in farm related jobs to 2% today!. This combined with the 3-sector theory explains a lot. The FUNDAMENTALS MATTER. The Great Depression is largely the result of disrupting the first sector with technology – as well as the Dust Bowl. If you read the Grapes of Wrath or other pieces about that time, you’ll see how long it took for people to a) migrate to cities, b) cities to build factories, c) transition the economy to a second-sector economy. The reason that our manufacturing did so well after WW2 is that Japan and Europe were bombed out. By the 70s, Labor Unions in US were very strong, and wanting a piece of all the manufacturing pie. But, corporations reacted by outsourcing labor around the world in the next decades.
  12. And now, with the internet and computers, the situation is simultaneously worse for the American worker (as they are now in a race to the bottom against overseas workers AND computers), and holds a lot of promise. The promise is in things such as education, but not the kind of failed attempts to throw money at existing, brick-and-mortar schools ( but real reform: use the internet to deliver lectures and invert the classroom ( . Our skyrocketing college costs will go down. This is already happening (Coursera, MIT OpenCourseWare, Udemy, Udacity, Khan Academy etc.) but the government could start transitioning from student loans to this.
  13. Countries compete on more than the strength of their currency. They also attract talent. Going back to the GDP, the US turns away a lot of H1B visa applicants who would love to come here and contribute to our STEM fields and pay our taxes. We turn them away and they go work in other countries. Countries also compete to attract lucrative businesses, and the US is way low on the list of net investment.
  14. We can see the effect of paying down your debts in the case of Russia for example. In 2000 it was nearly bankrupt, now it is once again going toe to toe with The West and ramping up to be a world power. Among the things that enabled its government to do this was an economic policy that got debt under control and currently it is 10% of GDP. US debt is 98% of GDP. China is now set to become the biggest economic power in the world. You may not agree with this right away, but there’s good cause to worry that China will start buying less US treasuries and start selling more treasuries to EU banks (and EU economy is bigger than US by GDP). At that point we are stuck with an ever worsening problem, as more banks choose non-dollar reserves, plunging demand and currency loses its purchasing power. All your callers’ comments about petrodollar warfare aren’t going to make much of a difference.
  15. 15. Finally — if you ask me, the best investment of all is in CAPTURING GREENHOUSES GASES. Why? Simply because if this investment pays off, we and our children will be able to NOT DIE from results of general ecosystem collapses, trillions in property won’t be destroyed in coastal cities, etc. Richard Branson is offering $25M for the best ways to capture atmospheric carbon, but more should be invested in this and other pollution reducing industries such as Sweden’s great achievement. The US should be a leader in this, since it’s the biggest polluter in the world. A distant second is investing in COMBATING SUPERBACTERIA, which both CDC and WHO have said is a catastrophe waiting to happen due to the end of antibiotics. Yes, these investments will SAVE people trillions of money and lives, but we are unwilling to make them. Something has to be done.

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