Rogue Economist Rants

Some suggestions to improve MMT and the JG proposal

2012-01-27T17:55:53-08:00

Cullen Roche, along with TC and Beowulf, have a new initiative, to flesh out a quasi-MMT economic paradigm, and will likely start website dedicated to it. This paradigm seeks to incorporate all, if not most, MMT insights on monetary and banking operations into its thinking while doing away with the controversial JG component of MMT. They call this new MMT offshoot Monetary Realism, or MR. This sounds like a promising initiative, one that could only be good for both those who want to preserve market-based adjustments in the functioning of the macroeconomy, while seeking to spread the insights of sectoral balances approach in both private and public decision-making and policy-making; and for the main proponents of MMT. After all, If MMT proponents are correct, that better understanding and functioning according to the real world monetary reality will eventually lead us to accept the JG, then this is also helpful to MMT.

Cullen starts off some of their basic principles, at least as to how it would distinguish itself with mainstream MMT:

1. We side with Godley on the current account issue.
2. We view the state theory and the “taxes drive money” idea as incomplete.
3. We will focus more on productivity as a compliment to consumption as opposed to mainly looking at ways to increase aggregate demand.
4. We reject the JG as a central component of understanding the modern monetary system.

MR will focus on monetary and banking realities and operations, and focus less on the macroeconomy, to be clean in its analysis. For the mainstream MMT, meanwhile, I suggest it approach economic analysis with a clearer view of how specific policy proposals would affect grassroots-based businesses. It needs to start looking at the economy as comprised not just of large private sector institutions, but also of many small mom-and-pop size businesses. Consideration for small businesses and their concerns is something that is currently still weak in the current evolution of MMT(as I see it). For example how does government tweak its tax policy and deficit spending in a way that does not kill off a significant part of what makes a dynamic economy. To wit:

1. If inflation starts heating up, mainstream MMT with a 100% JG proposes to manage it by increasing taxes and decreasing spending. The goal would be to decrease private employment and bring a segment of workers back to the public JG. What types of taxes would be increased? Taxes of whom? For doing what activities? Will the higher tax burden be rolled out the same across the board, or segmented and differentiated, depending on size of business? I ask because, while increased taxes could affect large businesses the way MMT economists intend - by decreasing their employee rolls, it will entirely kill off the smallest businesses whose profits are now below the higher income threshold caused by higher taxes, and whose sales may now fall below break-even with the decreased government spending.

2. Will this tax be rolled out by sector, by geographic location, by nature of business activity? Would it take into consideration a business' place in the value chain? Or how many JG-skill level employees it has?

3. How would this economy-wide aggregate demand management account for small business who occasionally need to borrow funds? This type of system will likely discourage banks from extending any medium or long term loans to the smallest businesses who could easily be killed by a ramping up of JG and increase of taxes. Does MMT propose to take the banks' place, or do these smallest businesses become casualties in the name of greater employment and price stability?

4. Also, those businesses most highly affected by those occasions when government increases the JG sector would likely lose all their revolving credit lines precisely when government announces a ramping up of the JG. Is this a natural aim of the JG program, or is there a proposed mechanism whereby those businesses with existing obligations towards employees, suppliers, and customers will be provided a bridge loan by the government, at least to enable them to attend to their open client accounts until they can cleanly liquidate their business and everybody can go back to join the JG?

5. How does JG address greater than normal inventory and capital equipment liquidation every time a ramping of JG and private sector taxes kills off the businesses now below the marginal profitability? Will the government buy these excess, or will it let the market clean up the mess?

6. How does the JG account for the current long and interconnected supply chain processes among businesses? Ex. if the smallest car components makers are to close to accommodate the JG ramp up, does the government intend to turn those business operations into JG positions owned by the government so as to keep the supply lines from disrupting the entire auto industry? How about with large food conglomerates that source a lot of their raw inputs from small growers, who in turn source their own inputs from further small businesses? Do these processes become government-owned JG businesses during times of inflation? And paying the lower JG wage level?

7. How does this JG-led system account for JG people who wish to save up capital, so they can leave the JG to start their own business? So let's say a prospective entrepreneur saves up enough for startup capital, but when he tries to hire people, he can't hire them unless he promises to pay them more than he himself used to earn from the JG? Would the JG have incentive programs to encourage entrepreneurship, to make up for the higher startup costs effected by a permanent JG? Further, if a JG can give workers employable skills, what makes these same workers to still willingly leave that skill-enhancing JG job for a job in the private sector at all? Does the JG coerce these workers to leave the JG?

8. How will MMT address the possibility that JG entrenches big companies even more? If small businesses were to start up, the guaranteed JG wage could be used as a negotiating ploy by workers, and could lead to escalating wages, and the more people a startup needs, the higher its labour clearing price. Less startups would probably result. The Walmarts of the world, in the meantime, would probably start trying to justify that they are a JG supporting company that creates a lot of jobs for the JG, so the government better start paying their line workers.

9. The JG as proposed likely will encourage the mass expectation among workers that though they might work for JG now, tomorrow they'll work for private business, but maybe next month, economic changes will cause the government make them go back to the JG. How does the JG still encourage long-term planning among both workers and small business owners?

For as long as the program as proposed goes against people’s EXISTING risk-return mindset, and discourages free initiative, it's not ready to be at the forefront for reform.

Increasing NGDP to increase income

2012-01-24T08:54:58-08:00

Scott Sumner today writes:

Of course wages are not flexible, but if NGDP was raised sharply then aggregate nominal wages would not rise as fast, allowing more jobs for Murdock making pick-up trucks, and more income to buy those pick-up trucks. This is what “Say’s Law” is really trying to “say.” If we can produce more stuff, society will be rich enough to buy that extra stuff. No matter how much we produce, there is always some price level where we are rich enough to buy all the stuff.

I have questions about this assertion:

You're advocating ↑NGDP, and you believe this ↑income to buy trucks. But how does ↑income without ↑wages?

If ↑NGDP, thus ↑cost of living, why won't people demand ↑wages?

If ↑NGDP , how does this actually lead to ↑income? Does ↑NGDP entail government sending checks to everyone? QE, does not cut it as a mechanism that ↑income, as it just exchanges income earning assets with non-income earning cash.

If you believe in neutrality of money, why would you believe that - if you ↑NGDP, which ↑costs, and thus ↑wages - it leads to ↑sellers and ↑income? Income for whom? And sellers do not automatically become buyers of same nominal amount.

And if money were indeed neutral, what is the point of ↑NGDP? Money neutrality just means everything will ↑pari passu. (Of course, we know that money is not neutral, ↑NGDP via QE actually ↑price of financial assets, making savers strive to save more.)

Why do we believe that S=I ?

2012-01-18T16:50:03-08:00

The latest endless, debate, among, mainstream, economists is on S=I. This equation is so controversial right now, it's already comedic. Anyway, why do we have this equation anyway, S=I?

Savings in an economy can comprise of actual investments, and unspent income. Any unspent income does not contribute towards the GDP, so it can't be part of C+I+G+X-M. Any unspent income will actually lead to lower GDP in the next time period.

If I means income spent on capital investment, and savings includes unspent income, why will S=I? Savings a.k.a unspent income doesn't lead to more capital investment because, even if deposited in banks, it doesn't lead to more lending for investment. After all, banks don't need deposits prior to lending. It's lending that creates deposits. Also, savers don't normally save to put to investments later on. Many just want to have a cash buffer for consumption, if they foresee not having enough coming from income in the coming time periods.

So why keep S=I? Investment may include inventory, which may have remained unsold by businesses during the current time period. But unsold inventory usually isn't a result of businesses wanting to spend more of their income on more unsold inventory. They're usually a consequence of buyers deciding not to buy. So an increase in household savings does not necessarily mean an increase in business savings. It may actually mean a decrease in savings by businesses because businesses may now have to liquidate those unsold inventory at a huge loss, and not necessarily by selling to households at discounted prices. i.e., increased savings for households. Some unsold inventory may simply go to waste, the scrap heap, meaning, decreased savings for business (they'd used previous income to purchase the inventory) and decreased business income for the current time period.

So why keep S=I? It assumes the economy is in equilibrium, where all savings goes towards investment, which it never is and never does. Nowadays, I can constitute not just of S, but increasingly, of B (Borrowing). This B doesn't come from S because again, banks don't need deposits prior to lending. It's lending that creates deposits.

Any unspent income, not put into actual capital investment, for all intents and purposes, has now exited the economy (unless it's used to pay off their B, which doesn't really contribute to GDP, but can be considered as decreasing banks' I).