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Yglesias and MMT

April 21, 2011

I was wondering when Matt Y would get to MMT.  He is a smart guy, plus has shown an increasing concern for economics over the last few years.

He gets to it today, and fortunately takes his lead from Steve Randy Waldman over at Interfluidity.   Until you get a few things about MMT, there is reallllllly no point in even thinking about the rest of it.

For me, the solvency/debasement distinction is by far the hugest idea to understand. We simply cannot go broke, full stop.  Once you get we cannot go broke, it becomes clear we only have to worry about inflation, and we can observe inflation.  Then you can really start to think about the economy.  The debate is then “Inflation vs. Growth” and all about that dynamic.

Of course there is much more to the full MMT, and frankly I don’t agree with some of it.  But just getting that we cannot go broke is huge.   Until you get this distinction, there is no reason to bother with the rest. So much of rest of MMT relies on fully understanding this distinction.

FYI: I am taking on the Government Budget Constraint, and will bury it once and for all soon.  So the issue of “seignorage” will no longer be the pressing concern of people like Paul Krugman, Brad Delong, and Nick Rowe.  There will be a new very soft constraint, but this constraint matches what we see in the real world more accurately than that of an inevitable hyper-inflationary spiral due to deficit spending outpacing growth by a few percent.

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  1. Detroit Dan
    April 21, 2011 at 5:51 pm

    Good. I can’t wait for your post on this.

    I’m scared to even look at what Yglesias wrote, although he could do much worse than starting with Steve Randy Waldman’s review. Nick Rowe’s contribution there bored me to death, and Krugman seem hopelessly out of touch when he tries to discuss MMT. And Brad Delong’s thoughts on the subject were another waste of time.

  2. April 21, 2011 at 6:48 pm

    SRW is good but I’m still waiting to find out if anything new or a valid critique came out of his lengthy discussion.

    You have to give Krugman credit for trying to understand the system.

    DeLong just dismisses it so therefore his views should be dismissed. Blogs and social media are about engagement and he fails on that score.

    As for Rowe, I don’t understand his trouble understanding MMT, he only grasped the extreme basics of MMT after modelling it and as JKH points out he is reverse engineering something that is implicitly and fundamentally a rejection of that engineering framework.

    • Detroit Dan
      April 21, 2011 at 7:22 pm


      How’s the MMT Wiki going? I don’t feel qualified to post as an expert there, but would like use the Wiki as a resource and to participate in discussions. I’ll stop by later.

      I agree with your comments here…

      • April 21, 2011 at 10:57 pm

        Slowly, I think myself and an MMT detractor Vincent Cate are the only ones that have added to http://mmtwiki.org/wiki/

        From what I’ve read though Tom Hickey has compiled a mountain of work to just whack in there when he has the time.

    • TC
      April 21, 2011 at 7:27 pm

      Re: Nick Rowe. I know. The horizontal vs. vertical line is the equivalent of shouting “You are using the wrong model!!” – but JKH had to point it out! A bit strange to me.

    • TC
      April 21, 2011 at 7:35 pm

      I cannot dismiss DeLong – he has done yeomans work in fighting the good fight against bad people – but I’d like to at this point. Note that these guys are going to lose the war. The logic is too compelling.

      SRW has some good critiques. I agree with his lack excitement over the ELR – I do not consider it to be even remotely politically possible. I think he still doesn’t get that insolvency is truly and completely impossible. I am going after the current version of the no Ponzi – and it will fall because it is non-sensical. There will be another, much relaxed no Ponzi assumption to replace it, but the play in the new no Ponzi will be far higher.

      • Detroit Dan
        April 21, 2011 at 7:55 pm

        I think you’re on the right track. I like the ELR, but must admit it is untested as far as I know.

      • April 21, 2011 at 11:05 pm

        I confess to dealing with personality rather than his body of work. However, his contempt for genuine engagement should be met with contempt as well. Otherwise this raises his work above those he refuses to engage with. Both should be assessed on their merits, not just one alone.

        I agree that the logic will win out, it is the only coherent economic school of thought. I’ve gone through the other 3 with just a layman’s knowledge and until I discovered PK-MMT, Keynes was the closest imho.

        As for the ELR/JG, it does have some considerable political hurdles which is why I presume Mosler presents it in a different light. However, we must acknowledge the political hurdles are the only constraint to an ELR/JG becoming operational. I believe Winterspeak feels much the same.

  3. Detroit Dan
    April 21, 2011 at 7:30 pm

    Where did JKH react to Nick Rowe’s posts? I’d like to read that..

  4. Peter D
    April 21, 2011 at 11:32 pm

    I just don’t get how come we cannot explain MMT to super smart people like Nick Rowe! This just defies common sense. It’s like a teacher whose whole class is failing – this is a strong evidence that something is wrong with the teacher, not the students.
    Repeating “you still don’t get it” starts getting tiring and kind of senile at some point. Come on, MMT is really not that hard, we’re not trying to explain string theory in 10 minutes or something. If a bunch of dilettantes like myself think that we’re getting it, then how on earth could Nick Rowes of the world not get it!?
    So, either (a) our communication totally sucks, or (b) super smart people like Nick Rowe are too married to their paradigm that they cannot let go of it and are stuck; or (c) we ourselves don’t really understand this stuff and thus fail to see where objections to MMT are coming from. Is there another explanation?

    • beowulf
      April 21, 2011 at 11:50 pm

      Peter, that’s the way of the world. People who’ve devote their careers to a particular system of beliefs (and perhaps even won a Nobel Prize for their efforts) are the very last people on Earth who can approach a challenge to those beliefs with an open, unbiased mind.

      • Peter D
        April 22, 2011 at 12:35 am

        So, a guy like myself who started thinking about economy since something like October last year, by virtue of reading some Mosler and Wray (I admit hardly being able to make it thru Billy’s posts) now understands economy better than super smart people who spent years thinking about this stuff? It might be true but it’s a height of arrogance on the one hand and almost unprecedented in history on the other. I mean, Copernicus happened in a qualitatively different scientific environment. If MMT gets traction and gets accepted by the mainstream it is going to be sensational. More sensational than Quantum Mechanics revolution in physics in some respects, I think.

        • TC
          April 22, 2011 at 6:34 am

          Hi Peter,

          I have to confess I’ve thought the same thing a few times. I don’t have a PHD either, I do have some interesting designations that are very financial related. I’d say I have the equivalent of a masters in finance.

          My experience with economists is that they have a tenuous grasp of finance. Most of the models do not have money and credit within them. Barter seems fetishized, even though barter economies do not seem to have existed in the last 1000 years. Those models that do have money seem to be more like thought experiments.

          Nick Rowe is very smart. But he created a model of MMT in ISLM land that had a vertical line and a horizontal line, and someone had to point out that MMT fundamentally rejects ISLM! If you – a guy with some math skills – saw a graph with a vertical line it it, your first thought would be “there is something very wrong with this model” and go through

          1. Are the measurements correct?
          2. Am I measuring the correct thing?
          3. What could cause this line to shift left and right – and why am I not measuring that instead?

          at a bare minimum. A chart or graph with a vertical or horizontal line would scream to you there is something very wrong with the model. Nick considered it to be an accurate representation of MMT. PK made a point about PHDs who don’t have a grasp of the real world – and he has made the point several times that the Chicago school does not seem to understand the implications of their own models. To me, Nick’s error is exactly this type of error – they really do not grok MMT.

        • TC
          April 22, 2011 at 6:41 am

          Re: Copernicus

          For 50 years or so after copernicus, the earth centric models were more practical guides to where the planets would be – there was centuries of quality work done with earth centric models. Just because these models have flawed assumptions doesn’t mean they won’t have practical use. MMT could be “right”, but not as useful for many years.

        • Oliver
          April 27, 2011 at 8:42 am

          I’m not sure whether it is wise to equate understanding of an approximation of reality such as MMT or Monetarism or what-not with an understanding of reality itself (the relevant reality being the economy in this case). Nick Rowe may need to translate MMT in to his own paradigm to get a better grasp of it initially, but that does not mean his understanding of economic reality is ‘worse’ than someone’s who started out ‘in paradigm’.

        • TC
          April 27, 2011 at 8:50 am

          I totally agree. I think Nick Rowe is very good. I call it the “Essential Canadian Initiative” in my mind. I like how he thinks. I actually consider his ability to take nearly new ideas and put them into old models a huge plus. When he gets it, he will tell Delong. When delong gets it, he will tell Krugman. When Krugman gets it, he will tell the world.

          Plus, these guys are studs. They are very, very good at thinking. Having them on our side will be a massive gain in detailing the understanding for the Mandarins.

          I just think that they are operating out of a system that limits their understanding. Its like the old Platonic model of the cosmos. It can be effective if you spend decades working out the details. But operating out of Copernican allows a simpler model. It is easier to imagine. This frees up your thinking time – allowing other insights that we possible under the old model, but unlikely due to the difficulty of visualization or imagination. Thinking about the comets belt past pluto is very difficult in the earth centric model, but with Copernicus, it’s a bang your head obvious thought.

      • beowulf
        April 22, 2011 at 9:34 am

        You must be confident in all things even if you’re occasionally wrong. :o)
        The arrogant point part would be if you or I thought that we had ourselves outthought these scholars. It was Mosler and Wray who did that, we just read their work and thought, “this does a better job explaining reality than these other theories”.

        So you came to economics last fall unbiased and with an open mind… there’s a reason our justice system trusts “12 men good and true” to decide defendants’ innocence, even though police officers have spent years thinking about this stuff. :o)

        Oh yeah, and I’ve learned more about economics from David Colander’s historical papers than anything else. In this paper he talks about the difference kinds of Keynesians and on page 2 and 11, he defines (and then redefines) “functional finance”.

        • TC
          April 22, 2011 at 9:46 am

          Exactly – strong opinions held weakly is the way to go. I’ve been wrong about so many things. I was a huge, huge budget deficit guy in until 2006. I am a trader so being wrong a lot is part and parcel of the job.

          Right now MMT seems a good choice. The descriptive part is actually scientific, because it is can be falsified. We could actually be wrong about the operations of the government fiscal authority.

  5. Peter D
    April 21, 2011 at 11:35 pm

    How is that for functional finance in 10 seconds:
    Govt deficit should be accommodating the non-govt sector’s desire to save currency + the growth of the economy. Any part of the govt spending that is not saved or does not result in growth (and thus does not pay for itself) has to be taxed away or inflation will occur.
    Is this correct? Would a mainstream economist object to this?

  6. beowulf
    April 21, 2011 at 11:47 pm

    “Any part of the govt spending that is not saved or does not result in growth (and thus does not pay for itself) has to be taxed away or inflation will occur.”

    Perhaps restate the last bit that as, “Any part of the govt spending that is not wealth creating has to be taxed away or inflation will occur.”
    Would that resonant with fiscal conservatives or… or would it simply trigger the talking point,’the govt can’t create wealth’?

    • Peter D
      April 22, 2011 at 12:43 am

      Thanks! “Wealth creating” seems too mushy to me – what does that exactly mean? OTOH, saved money is by definition not inflationary in the current period and growth is also understood to absorb spending (except in Austrian minds, I guess)
      I think I need to add that if saving propensities change so abruptly that a regular fiscal adjustment is impossible, then price controls and rationing JK Galbraith style are in order.

      • April 22, 2011 at 2:42 am

        What about this?

        Govt deficit should be accommodating the non-govt sector’s desire to save currency + the growth of the economy. Any part of the govt spending that is not saved or does not result in desired goods and services (and thus does not pay for itself) has to be taxed away or inflation will occur.

      • beowulf
        April 22, 2011 at 7:31 am

        what does that exactly mean?
        Republicans use “wealth creators” as an synonym for the rich, so the term must test well with focus groups. )

        I’d amend to, “Price controls and rationing Bill Vickrey and Marty Feldstein style, respectively”. :o)

        “a market in rights to raise prices, with those wishing to raise prices being permitted to do so only by purchasing the right from others willing to lower theirs to a corresponding degree”

        “A far better approach would be a system of tradeable gasoline rights… Individuals with more TGRs than they need could sell the excess, while those who want to use more gallons than their allocation would have to buy extra TGRs. The gasoline companies could act as clearing houses…

  7. April 22, 2011 at 2:38 am

    That’s the largest problem with MMT convincing Austrians since they believe any increase in the monetary base is inflationary. That said Ed Harrison gets it, Rob Parenteau gets it, they have Austrian backgrounds. I think Marshall Auerback might too.

    So for Austrians, deprogramming their notion of inflation is the key point. Keynesians have to get over the loanable funds/gold model. Not sure of the Chicago belief, could never separate it from the Austrian.

    The Nick Rowes of the world need to explain their thinking to us in lay terms, it is not up to us dilettantes to explain MMT to them in economic terms. If MMT or Nick Rowe’s view of the world cannot be explained in largely lay terms then the veil of economic ignorance will remain on all the populace.

    • TC
      April 22, 2011 at 8:16 am

      I agree fully with this. I am a smart guy, but I find economics of the Tyler Cowen variety almost impossible to understand. I find I have to read his posts 5 times to understand what he is saying. Nick Rowe is better, he is simply a much clearer writer.

      But when I read these guys on the economics, I nearly always find myself thinking “that assumption is preposterous.” Esp when Nick writes, because he makes it really clear.

      I am a big “moderated market guy” because I come from the futures world. I’ve seen the amazing successes of markets with moderate amounts of regulation – they thrive. Completely free markets, not so much. The coordination problems are huge for free markets too – the constant negotiation of contact details is a killer of commerce.

    • Peter D
      April 22, 2011 at 3:38 pm

      The Nick Rowes of the world need to explain their thinking to us in lay terms
      This is true and I actually said something related on Nick’s blog.
      And it also reminds me that when Einstein, who never made peace with Quantum Mechanics, wanted to refute it, he did not try to operate from outside the QM paradigm. Instead, he with Podolsky and Rosen came up with a gedunkenexperiment using the QM paradigm that they thought showed an impossible result, such as information traveling faster than the speed of light (in fact, instantaneously). It turned out, of course, that instead of a bug they discovered a feature (Quantum Entanglement), and this became known as EPR paradox (for Einstein-Podolsky-Rosen.) So, instead of coming out as fools, they got honored 🙂

  8. Peter D
    April 22, 2011 at 9:12 am

    So, guys, you’re saying it is option (b) above (“super smart people like Nick Rowe are too married to their paradigm that they cannot let go of it and are stuck”). Good, this is what I also hope to be the case! I’d add that there must be a measure of resentment on the part of the mainstreamers when a “bunch of dilettantes” comes and challenges them (especially with such obvious ideas that money has to be spent before it can be taxed or borrowed!)

    • TC
      April 22, 2011 at 9:51 am

      I do think that is the case. it is difficult to just accept something new and see how it really works without using decades of skills and thoughts as a guide.

      This is pure hilarity because it is a head slapper:

      “especially with such obvious ideas that money has to be spent before it can be taxed or borrowed”

      It is a “Doh!” moment. How did that first person pay the first U.S. Dollar in taxes? Where did he get that U.S. Dollar? How did the U.S. government borrow that first U.S. Dollar?

  9. Detroit Dan
    April 22, 2011 at 1:45 pm

    beowulf :
    Oh yeah, and I’ve learned more about economics from David Colander’s historical papers than anything else. In this paper he talks about the difference kinds of Keynesians and on page 2 and 11, he defines (and then redefines) “functional finance”.

    That was an interesting paper. Thanks. His MAP proposal at the end seems a bit bizarre. What do make of that?

  10. beowulf
    April 22, 2011 at 6:47 pm

    Well it was later refined by, Lerner’s friend and Colander’s graduate adviser, William Vickrey (who stuck it The Man by living long enough to win the Nobel Prize in 1996, he died two days later. Nobels are never otherwise awarded to the deceased). Vickrey looked to gross margins and not price (makes sense, hedonic adjustments make pricing tricky).

    “One possible third control measure would be a system of marketable rights to value added, (or “gross markups”) issued to firms enjoying limited liability, proportioned to the prime factors employed, such as labor and capital, with an aggregate face value corresponding to the overall market value of the output at a programmed overall price level.”(Fallacy 6)

    • Detroit Dan
      April 23, 2011 at 11:33 am

      Thanks again.

      “Vickrey’s economic philosophy was influenced by John Maynard Keynes and sharply critical of Chicago school of economics and the political focus on balanced budgets and inflation in times of high unemployment.”

      I’m having trouble imagining the implementation of such a marketable rights scheme. But that’s enough for now. Interesting history…

    • Detroit Dan
      April 23, 2011 at 11:43 am

      Last comment was before I read Vickrey’s paper on the fallacies. It seems to be right on the MMT money…

      • beowulf
        April 23, 2011 at 2:39 pm

        You’re welcome. Bill Vickrey was brilliant economist– his congestion pricing work was 50 years ahead of its time– and was also a born doer of good (“That was Bill, thinking of others in the time of his greatest triumph… What a saint!”).

        Vickrey’s thoughtfulness had an impact in the development of MMT. Warren Mosler recently wrote:
        Shortly after writing Soft Currency Economics I met the late Bill Vickery at a meeting of what I recall was called ‘Social Policy’ in NYC and was directed to who were called the Post Keynesian’s, where I discovered their internet based discussion group. There I met Bill Mitchell and Randy Wray, who have subsequently become the main academic proponents of what is now called MMT.

        • Detroit Dan
          April 25, 2011 at 6:40 am

          Thanks. So Vickrey consorted with “Georgists”? Any thoughts on the Georgists? I’ve never been able to get their perspective…

        • TC
          April 25, 2011 at 7:05 am

          I haven’t read any George either. Never enough time to to everything!

      • beowulf
        April 26, 2011 at 12:52 pm

        Probably the best Georgist economist writing today is Vickrey’s old friend, Mason Gaffney (author of the above article).

        His article, The Hidden Taxable Capacity of Land: Enough and to Spare” is an excellent summary of the Georgist case.

        Since real estate is typically taxed by state and local govts, its not usually an issue at the federal level but Gaffney does explain how to tax land value via the federal income tax (1. add imputed rental value of land to the federal tax base, 2. exempt everything else). That may be a little over the top, but I like how he thinks. :o)

        The most famous Georgist is, of course, Winston Churchill:
        “Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced.”

        • Detroit Dan
          April 26, 2011 at 8:22 pm

          Thanks. It’s a challenging concept, and seems rather old fashioned. With extensions for pollution and other externalities, it might make sense…

        • TC
          April 27, 2011 at 8:21 am

          I tend to be against any proposing any major changes to the tax code. Not that it isn’t flawed, but rather getting them to fly is horribly difficult.

          That said, I’ve seen more talk about changing the tax code – who and what gets taxed – than I have in a long time. The odds of shifting some of the current burden of payroll taxes to energy taxes gets a bit higher everyday. With this major change “in the air” it is good to talk about all sorts of ideas. We could call it an “inflation tax”. We’re taxing inflation at the source to make it less attractive.

    • TC
      April 24, 2011 at 9:27 pm

      The system of marketable rights is a non-starter. Good idea in theory, impossible to implement in practice. It is a great idea from the standpoint of moderating inflation, but I cannot even begin to imagine how this system could be policed.

      I know the how instruments are electronically traded inside and out – from the network required, to the matching engines, to the contract specifications. Simply designing the contract specifications would be nearly impossible because the inputs are so vague. Insuring compliance would be massively expensive for the state and intrusive to the consumer. Honest compliance for the LLC would be vastly time consuming and irritating beyond reason. And all trading has transaction costs, however small.

      It isn’t that it wouldn’t “work”, it is that the implementation costs (of all varieties) would swamp the benefits of stable prices. And unless I am not in on the joke, doesn’t this sound a huge amount like money already?

      Reminds me of Robert Schillers “trills” in some ways. Schiller has some good ideas, but does not seem to get that starting up markets is difficult.

      • Detroit Dan
        April 25, 2011 at 6:37 am

        Thanks. That seems right to me…

      • beowulf
        April 26, 2011 at 8:19 am

        I agree with Detroit Dan, thanks for your input TC (and let me apologize in advance for throwing in so many links). As it happens, Vickrey’s cap and trade market has a “carbon tax” equivalent. In the 1970s Post Keynesian economist Stanley Weintraub advocated a tax-based incomes policy (TIP).

        Weintraub targeted wages, but a TIP tax could also target (as Vickrey’s proposal suggests) value added.

        It could be set up by replacing corporate income tax with a voluntary gross margins tax (and exempting small businesses wouldn’t reduce effectiveness all that much). The allowable gross profits (“value added”) markup would the relevant NAISC sector’s average gross markup (AGM), the tax would only be levied on excess gross profits. Its voluntary because corporations could avoid the tax by cutting prices to stay within benchmark to sell more volume at a lower markup (So it’d cut inflation even as it increased aggregate supply). Tsy could target NAISC sectors with overly large AGM (cough, pharmaceuticals) with a AGM – x% benchmark as an anti-monopoly tax.

        • TC
          April 26, 2011 at 8:17 pm

          Sure – this sounds way better than trading credits. I don’t have a ton of time right now to engage this more.

        • Detroit Dan
          April 26, 2011 at 8:26 pm

          Ease of enforcement is critical to the effectiveness of any tax, it would seem to me…

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