Archive for the ‘Modern Monetary Theory’ Category

Public Banking and Boom Bust Boom

L. Randall Wray | March 24, 2015

While in Spain for the launch of my Modern Money Primer in Spanish, I gave a long interview for Public Television. Parts of that interview are interspersed in this segment on public banking. My interview is in English (with Spanish subtitles), while the rest is in Spanish. Other portions of my interview will be broadcast later.

The Boom Bust Boom movie on Minsky will be released next month. Watch for it. I do not know how widely it will be distributed, but it is well worth seeing. Here’s a nice piece from The Guardian:

To Move Beyond Boom and Bust, We Need a New Theory of Capitalism

By Paul Mason, The Guardian UK

23 March 15

his is the year that economics might, if we are lucky, turn a corner. There’s a deluge of calls for change in the way it is taught in universities. There’s a global conference at the Organisation for Economic Co-operation and Development in Paris, where the giants of radical economics – including Greek finance minister Yanis Varoufakis – will get their biggest ever mainstream platform. And there’s a film where a star of Monty Python talks to a puppet of Hyman Minsky.

Terry Jones’s documentary film Boom Bust Boom hits the cinemas this month. Using puppetry and talking heads (including mine), Jones is trying to popularise the work of Minsky, a US economist who died in 1996 but whose name has become for ever associated with the Lehman Brothers crash. Terrified analysts labelled it the “Minsky moment”.

Minsky’s genius was to show that financially complex capitalism is inherently unstable. Under conditions of stability, firms, banks and households will, over time, move from a position where their income pays off their debt, to one where it can only meet the interest payments on it. Finally, as instability rises, and central banks respond by expanding the supply of money, people end up borrowing just to pay back interest. The price of shares, homes and commodities rockets. Bust becomes inevitable.

This logical and coherent prediction was laughed at until it came true. Mainstream economics had convinced itself that capitalism tends towards equilibrium; and that any shocks must be external. It did so by reducing economic thought to the construction of abstract models, which perfectly describe the system 95% of the time, but break down during critical events.

In the aftermath of the crisis – which threatens some countries with a phase of stagnation lasting decades – Minsky’s insight has been acknowledged. But his supporters face a problem. The mainstream has a model; the radicals do not. The mainstream theory is “good enough” to run a business, a finance ministry or a central bank – as long as you are prepared, in practice, to ignore that theory when faced with crises.

Read the rest here.


Spain’s Proposal for a Job Guarantee

L. Randall Wray | March 5, 2015

Yesterday I participated in a press conference and gave the first of a series of lectures in Madrid on MMT and the Job Guarantee. At the press conference, Alberto Garzón announced his party’s plan to create a million jobs in a targeted JG: “IU plantea un plan de 9.600 millones para crear un millón de empleos en un año

Alberto and his brother, Eduardo, are well-versed in MMT. He emphasized that the barrier to full employment is not technical but political. If the political will exists, full employment can be achieved and sustained. MMT shows the way to understanding the policy options that are available to sovereign government.

The newspaper article summarized some of the points I made, arguing that we should no longer see the finances of a government as similar to those of a household:

Por su parte, Randall Wray, que ha estado presente en la presentación de la propuesta, ha rechazado las teorías que equiparan el funcionamiento del Estado con el de una familia, ya que el primero puede emitir su propia moneda y no puede quedarse sin dinero, por lo que sus opciones de gasto e inversión son diferentes y la austeridad no es la única salida posible.

Esto hace plausible el trabajo garantizado, que ya se aplicó de alguna manera en los años 30 del siglo XX en Estados Unidos con el ‘New Deal’ de Franklin D. Roosevelt, pero también en Argentina y, más recientemente, en la India, que incluso ha “incluido en su Constitución el derecho al trabajo”, que la Declaración Universal de los Derechos Humanos de la ONU también recoge.

La diferencia con este tipo de propuestas aplicadas hasta la fecha en otros países –”Casi todos los que tienen un paro inferior al 2%”, según el profesor estadounidense– es que la ambición de IU es que sea “universal y permanente”, y que no se desactive una vez superada la crisis.

Many other links to yesterday’s events are here.

A universal and permanent Job Gurantee will make full employment a reality.


I’ll report more on MMT in Spain tomorrow.


Bitcoin and the Rules of Finance

Michael Stephens | March 3, 2015

Levy Research Associate Éric Tymoigne contributed to a debate in the Wall Street Journal over the viability of bitcoin and other cryptocurrencies. Here’s Éric:

Bitcoins are an odd sort of commodity. They are not financial instruments. The value fluctuates widely, in line with changing views regarding the overall usefulness of the bitcoin payment system and the speculative manias surrounding such views. There is no financial logic behind bitcoins’ face value. In other words, if you like to gamble, this is a perfect asset. If you are looking for an alternative monetary instrument, look elsewhere.

The bitcoin system has two components: the means of payment themselves, and an online ledger, called the block chain, which is a record of all bitcoins that have been created and who holds them. The ledger is the main innovation. It provides an open, decentralized, fast, cheap and supposedly secure means of completing transactions.

But as an alleged alternative currency, bitcoin is unacceptable. Its volatility and lack of liquidity pose risks far beyond most traditional currencies.

Read the WSJ debate and the rest of Tymoigne’s contribution here: “Do Cryptocurrencies Such as Bitcoin Have a Future?

See also Tymoigne’s earlier posts at New Economic Perspectives:

The Fair Price of a Bitcoin is Zero

Bitcoin System: Some Additional Problems


MMT in Madrid: An Update

L. Randall Wray | March 2, 2015

Another event has been added. Hope to meet Spanish followers of MMT in Madrid this week.


Here are some details:


Press release below the fold:

continue reading…


The Spanish Launch of Modern Money Theory

L. Randall Wray | February 25, 2015

Update 2/28: more details here.

Sorry, I’ve been very busy in recent weeks, finishing up a book on Minsky and revising my Modern Money Primer for a second edition (more on both of those projects later).

Meanwhile, Lola Books is gearing up to release the Primer in Spanish next week. I’ll be in Madrid for the launch and for a series of meetings. I’ll give two presentations that are open to the public. Details are below. Hope to see our Spanish friends there!

March 5, 2015
I’ll make a presentation at the Izquierda Unida economic program. This event will officially introduce MMT into Spanish politics.
Location: Sede Central de CC.OO.
Address: c/ Fernández de la Hoz 12, planta baja; Madrid
Time :19 h. See the event flyer below.

March 7, 2015
Presentation of the Primer at the ‘Association pour la Taxation des Transactions financière et l’Aide aux Citoyens’ (Association for the Taxation of Financial Transactions and Aid to Citizens)
Location: Fuhem
Address: c/ Duque de Sexto 40; Madrid
Time: 11 h.

Wray_Event Flyer_Spain


The Modern Money Primer: Spanish Language Edition

L. Randall Wray | February 6, 2015

For our Spanish-speaking followers, my Modern Money Primer has just been released in Spanish and is available:

Modern Money Primer_Spanish Book

Here’s the description of the book:

El esfuerzo intelectual que se realizó en el campo de la física tras la aparición de la teoría de la relatividad o del modelo copernicano, no se llevó a cabo en la economía tras la aparición del dinero fíat. Teoría Monetaria Moderna es la plasmación de dicho esfuerzo intelectual. En este libro se expone claramente qué es el dinero en realidad y lo que es más importante se exponen las políticas económicas que deberían llevarse a cabo para llevar a la práctica un programa político coherente con dicha realidad. L. Randall Wray es doctor en economía y profesor en la Universidad de Missouri-Kansas City, así como director de investigaciones del Center for Full Employment and Price Stability. Además, pertenece al Levy Economics Institute of Bard College de Nueva York.

I’ll be in Madrid for the book launch. See you there. More details to follow.


Odds and Sods: Some Good Reads for a Cold Winter Friday

L. Randall Wray | January 15, 2015

If you, too, are living in one of the sub-zero climes right now, you might want some stimulating reading:

1) Here’s one of the best and fairest summaries of MMT that I’ve seen, by Joe Guinan.

As Joe says:

“Few matters of economic importance are as woefully misunderstood as modern money. It can seem a fiendishly complicated subject, even to economists. Schumpeter confessed to never having understood money to his own satisfaction, while Keynes claimed to know of only three people who really grasped it: ‘A Professor at another university; one of my students; and a rather junior clerk at the Bank of England’.”

Reminds me of the time Robert Heilbroner called me up after reading my draft 1998 book, Understanding Modern Money, apologizing because he could not write a blurb for the jacket. Money is, he said, the scariest topic there is, and your book is going to scare the hell out of everybody. And by Jove he was right.

Anyway, Joe goes on to argue that MMT seems to have the theory, description of real world operations, and policy right, but needs some better political economy. I agree. Geoff Ingham has done some pretty spectacular work on that, but we need more.

2) As you probably know, something like 90 percent of Americans do not have passports. Presumably, few have been to any rich, developed country. I’m including the USA in that, since we long ago gave up any pretense at striving toward such.

Well, maybe a few have been to Canada, which almost qualifies.

As a result, Americans live in their own little hermetically sealed bubble. They have no idea how the others live. They probably believe that all of Europe—say—also has to contend with incomprehensible health insurance bills (and declaring bankruptcy because they cannot pay them), outrageously expensive colleges (and bankrupting student debt), crumbling infrastructure (and JFK airport, which would embarrass any developing nation), and heavily armed and unbalanced neighbors (that would scare the bejeebers out of most of Africa’s child armies).

Well, Ann Jones tells us what the rest of the developed world thinks of Americans. I’ve lived in Italy for extended periods, and I can confirm that this is no exaggeration. Yep, they think we are crazy loons.

3) However, the real threat to our national prestige comes not from Europe (which, thanks to the euro, will rapidly bring most of Europe down to our level!) but from China. They are eating us for lunch.

To be sure, this article is woefully confused on finance. It worries that the Chinese governments are undertaking infrastructure projects that will not generate enough revenue to pay for themselves! “’People should be concerned because very few of these big projects generate cash,’ said Victor Shih, a China specialist who teaches political economy at the University of California, San Diego.” Oh, yes, China will run out of RMB. Scarcity of keystrokes.

There are, however, two problems faced by China that have to be resolved. The article picks up on one of them (by far the most difficult): “Many experts say such projects also exact a heavy toll on local communities and the environment, as builders displace people, clear forests, reroute rivers and erect dams.” Agreed.

The other is that the national government does not supply enough funds to local governments, which need the development projects to generate their revenues. That leads to excessive development without regard to communities and the environment. You can see my co-authored solution to that problem here.

The NYT story about taking the tops off mountains is true; I saw it in another beautiful little city in a narrow river canyon—not quite the Grand Canyon, but a rival to the Grand Canyon of the Gunnison. No room to expand. Solution? Level the surrounding mountains. Why? Because the developers pay good prices for the land (which goes to the local government), borrow lots of money to build, and then default on the loans. But don’t worry, the creditors get bailed out. Only the community and the environment suffer.

I do not want to make too much of that because the solution is rather simple. Tricky Dick Nixon actually implemented it, calling it “revenue sharing.” That is a misnomer because all you need is national government keystrokes into local government budgets.

4) The top one-thousandth of Americans now owns a fifth of everything. Isn’t that sweet?

See this article by Scott Bixby. Now, if you think they will be happy with that, you do not understand the way the truly filthy rich think. They want it all.


Replacing the Budget Constraint with an Inflation Constraint

Michael Stephens | January 13, 2015

by Scott Fullwiler

Tim Worstall has a post decrying the dangers of MMT ever being used in the real world—even as he recognizes or at least suggests that it might be the correct description of how the monetary system works—and is particularly concerned about Stephanie Kelton’s new appointment as Chief Economist on the Senate Budget Committee. (Note: Randy Wray also posted a critique of Mr. Worstall’s post.)

Mr. Worstall’s main issue is one we’ve heard hundreds of times before—because MMT explains that currency-issuing governments operating under flexible exchange rates and without debt in a foreign currency do not actually have budget constraints, this opens the door to all sorts of problems if put into practice. We can’t trust our government with this information, in other words—it must be required to match spending with revenues over some period (whether each year, over the business cycle, etc.) or at least plan over some period of time to not allow the debt ratio to rise beyond a modest level.**

Mr. Worstall notes the frequently heard MMT argument that the point of taxes is to regulate the economy—and takes particular issue with the view that taxes can be increased/decreased in real time. Note, though, that this is simply a metaphorical or simplified explanation—it blends the Chartalist argument that “taxes drive money” with the functional finance view of using the outcomes of the government budget position as the criterion by which to judge it (rather than the state of the budget position itself). It is not intended as a literal point—no MMTer has ever made a specific proposal for raising/lowering income tax rates in real time to manage the economy. (Though Ray Fair does offer a sales tax proposal and shows that it would be stabilizing here—I simulated it along with the Job Guarantee and another transfer payment rule here.)

As argued bazillions of times, the real point MMT is making is that the government’s budget constraint is the wrong constraint—the correct constraint is whether or not a particular budget position will raise inflation beyond an official target rate (say, 2%, which seems to be the choice of most central bankers).

Let me explain to Mr. Worstall and others how this could work rather easily—just as the CBO and OMB now evaluate government budget proposals regarding their effects on the budget stance, the CBO and OMB could instead shift focus on evaluating these proposals against the inflation target (I argued the same thing here, printable version here). Much like how policy makers supposedly take estimates of effects on the budget position rather seriously in making budget conditions, they could replace these with projections of inflationary effects. An inflation constraint provides more fiscal space than a budget constraint, but in no way does it provide unlimited fiscal space (again, as we’ve always argued).

We could add quite a bit of detail here if we want, but I’ll just say a few more things. First, it’s quite clear that economists don’t have much expertise modeling how to use the government’s budget stance to manage the macroeconomy via a functional finance rule—but this is largely because they have come to view monetary policy as the main macroeconomic policy tool, not because it’s not possible.

Note, though, that functional finance isn’t less specific than, say, the Taylor Rule—Taylor’s Rule says to adjust the interest rate to manage the macroeconomy; functional finance says to manage the budget position to do this. Consider the never ending debate among policy makers at the Fed, Fed watchers, and economists on what the Fed should do next, when it should do it, how it should communicate what it’s going to do, and so on. If Taylor’s Rule were really that useful, we wouldn’t need most of this debate and there wouldn’t be so much disagreement among the various parties.

Second, concerns that government policymaking is necessarily less “efficient” than monetary policy are unpersuasive to me (even aside from my view that monetary policy traditionally understood as manipulations of the overnight rate isn’t a good idea). What if some of the thousands of economists currently working on understanding monetary policy started to try and understand how to build automatic stabilizers? They might help us understand which taxes (or tweaks to them, like indexing marginal tax rates to the inflation target rather than inflation) or spending priorities (or tweaks, like indexing spending to the target rate) are most consistent with functional finance—we don’t need to adjust tax rates in real time as much as build in a significant amount of stabilization automatically (i.e., more than we already have). MMT has its own proposal—the Job Guarantee—which we have argued in dozens if not hundreds of publications possesses macroeconomically significant stabilization properties if well designed.

For sure, times like the last several years may call for more than just automatic stabilizers (or it may instead call for better financial regulation to avoid a speculative bubble and then a deep recession in the first place). However, while I am under no illusions that we could ever get totally rid of some of the messy politics of fiscally-driven stabilization, it’s not as if monetary policy even when set by a small group of “experts” (like the FOMC) has been apolitical (and, as noted above, it’s been highly contentious among even the true believers in monetary policy which strategy is/was the appropriate one).

In sum, let’s stop pretending that replacing a budget constraint with an inflation constraint is so hard. It involves a change in perspective, nothing more and nothing less. It doesn’t give license to policy makers to do whatever they want. It does mean CBO will finally be doing something useful with its deficit projections—namely, building models to understand how deficits will affect the macroeconomy (while its current practice is to assume an economy at full employment and warn of impending financial ruin as a result of deficits). Stephanie’s appointment gives reason to hope at least a little that this change might actually one day be possible, for the benefit of all of us (including Mr. Worstall).

**The latter is actually what neoclassical economics argues—contrary to popular understanding, there are no economic theories that require the government to ever balance its budget. What they argue is that the government must eventually keep its debt ratio at a modest level, which does allow modest deficits on average forever. What this does require is primary surpluses (i.e., budget position before accounting for debt service) to offset primary deficits if the interest on the national debt is above the economy’s growth rate. In fact, though, this condition hasn’t been met on average in the post WWII period; only the 1979-2000 period saw average interest on the national debt rise above the economy’s growth rate.

(cross-posted from New Economic Perspectives)


Oh Me Oh My! MMT Is About!

L. Randall Wray | January 12, 2015

Here’s an unintentionally hilarious piece by Tim Worstall at Forbes. Watch out, he warns, MMT has come to Washington! Our nation’s capital! No doubt ruin and wastage will follow.

Why? Well. Nothing wrong with the theory of Modern Money Theory, he admits.

“It’s not actually that I disagree very much with the economics that is being laid out in MMT: indeed, I’m terribly tempted to agree that they’re actually correct in much of what they say.”

He admits that MMT is right on budgets:

“It’s most certainly not obvious that MMT proponents are all barking mad or anything. Jamie Galbraith (who I’ve had one or two very limited interactions with) is certainly a reasonable guy. And his insistence that a budget surplus, despite the ribbing he gets about it, is in fact economically contractionary doesn’t seem to have anything wrong with it. Budget deficits are fiscally expansive, a surplus is fiscally contractionary, if there’s any one statement at the heart of Keynesianism that’s it.”

And it is right on money:

“And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like.”

And really nothing wrong with the policy, either. No, it is all politics.

What he’s afraid of is that if politicians understood that they cannot run out of money, they’d spend like they cannot run out of money. And off we’d go to Weimar and Zimbabwe land.

It is the same line that Paul Samuelson took, when he argued that the job of an economist is to lie. Or, better, to preach the old time religion and superstition. Put real fear into the politicians and the voters they represent.

Government is just like a household, you know. Careful, Gov, you’ll run out of money. You’ll have to go hat-in-hand to Bond Vigilantes when you run out. Uncle Sam will have to go to the Salvation Army for a cup of soup.

It is the same old fear mongering by someone who does not trust the democratic process and does not understand budgeting.

The way we ensure that policymakers don’t run up the spending to create hyperinflation is by subjecting them to the budgeting process, and then holding the administrative branch to approved budgets. It isn’t religion, superstition, or fear mongering that forestalls accelerating inflation. It is accountability.

And where-O-where do our blogging pundits get the idea that all politicians always and everywhere are pushing for hyperinflation? I see exactly the opposite.

(cross-posted from EconoMonitor)


Options for an Independent Scotland

Michael Stephens | September 18, 2014

People in Scotland are heading to the polls today to decide the question of secession. One of the major policy questions for an independent Scotland is whether the country should attempt to keep the pound. As many have now begun to appreciate — with a little help from the eurozone spectacle — this would likely be a big mistake.

In “Euroland’s Original Sin,” Dimitri Papadimitriou and L. Randall Wray explained why a separation between fiscal and monetary sovereignty — when countries do not issue their own currency yet retain responsibility for fiscal policy — is the root of the problem in the eurozone. Any country with this setup will face budgetary constraints to which currency-issuing nations are not subject; the kind of constraints that can generate a sovereign debt crisis if, for instance, the country’s fiscal authority is forced to handle the fallout from a large banking crisis. This is a drum that many people affiliated with the Levy Institute have been banging for some time (well before the eurozone fell into its current mess).

Recently, both Paul Krugman and Martin Wolf  have written columns in which they make similar arguments in the context of Scottish independence (and the SNP’s ostensible plan to retain the pound). Philip Pilkington wrote a policy brief a few months ago in which he also argued, with the aid of an analysis of Scotland’s financial balances, that retaining the pound would leave the country open to a eurozone-periphery-style crisis. Pilkington’s story focuses on Scotland’s reliance on oil and gas revenues and the particular instability that could be generated, for a currency-using (vs. issuing) Scotland, by oil price fluctuations.

Although Pilkington suggests it might make sense to retain the pound in the short run (during which time he advocates the use of “tax-backed bonds” to limit instability, a proposal Pilkington originally developed with Warren Mosler [see here and here] for the eurozone), he argues that Scotland ultimately needs to move toward issuing its own freely-floating currency. The question is how to move from the first to the second phase with a minimum of disruption. The policy brief thus lays out a “dual currency” transition plan for Scotland: continue reading…