[The following is the text of Senior Scholar Randall Wray’s presentation, delivered October 28, 2011, at the annual conference of the Research Network Macroeconomics and Macroeconomic Policies (IMK) in Berlin. This year’s conference was titled “From crisis to growth? The challenge of imbalances, debt, and limited resources.”]
It is commonplace to link Neoclassical economics to 18th or 19th century physics with its notion of equilibrium, of a pendulum once disturbed eventually coming to rest. Likewise, an economy subjected to an exogenous shock seeks equilibrium through the stabilizing market forces unleashed by the invisible hand. The metaphor can be applied to virtually every sphere of economics: from micro markets for fish that are traded spot, to macro markets for something called labor, and on to complex financial markets in synthetic CDOs. Guided by invisible hands, supplies balance demands and all markets clear.
Armed with metaphors from physics, the economist has no problem at all extending the analysis across international borders to traded commodities, to what are euphemistically called capital flows, and on to currencies, themselves. Certainly there is a price, somewhere, someplace, somehow, that will balance supply and demand—for the stuff we can drop on our feet to break a toe, and on to the mental and physical efforts of our brethren, and finally to notional derivatives that occupy neither time nor space. It all must balance, and if it does not, invisible but powerful forces will accomplish the inevitable.
The orthodox economist is sure that if we just get the government out of the way, the market will do the dirty work. Balance. The market will restore it and all will be right with the world. The heterodox economist? Well, she is less sure. The market might not work. It needs a bit of coaxing. Imbalances can persist. Market forces can be rather impotent. The visible hand of government can hasten the move to balance.continue reading…
[The following is the text of my keynote presentation delivered October 20th at “The Capitalist Mode of Power: Past, Present, Future,” a conference that took place at York University in Toronto.]
Back in 1997 I was finishing up my book titled Understanding Modern Money and I sent the manuscript to Robert Heilbroner to see if he’d write a blurb for the jacket. He called me immediately to tell me he could not do it. As nicely as he could he said (in the most soothing voice), “Your book is about money—the most terrifying topic there is. And this book is going to scare the hell out of everybody.”
Here we are a decade and a half later and I’m still scaring them. Why? Because nobody wants the truth about money. They want comforting fictions, fantasies, bedtime stories. As Jack Nicholson put it: “They can’t handle the truth.”
To be sure, on the left the story is about the evil Fed and bankers and conspiracies against the poor; on the right it is the evil Fed and Congress and conspiracies against the rich. The one thing they seem to be coalescing around is the need for a return to sound money—and I note that Ron Paul and Denis Kucinich are inching toward consensus on that—although they don’t necessarily agree on what is sound.
What I want to do today is to argue that both the left and the right as well as economists and policymakers across the political spectrum fail to recognize that money is a public monopoly. continue reading…
Particular budget outcomes should never be a policy target. What the government should be targeting is real goals, by which I mean a sustainable growth rate buoyed by full employment. Why do we want governments? We want them because they can do things that improve our welfare that we can’t do individually. In that context, it becomes clear that public policy should be devoted wholly to making sure that there are enough jobs, that poverty is eliminated, that the public health and public education systems are first class, that people who are less well off are able to become better off, etc. From a macroeconomic point of view, the spending and tax decisions of government should be such that total spending in the economy is sufficient to produce the level of real output at which firms will employ the available labor force. This is the goal, and the particular budget outcomes must serve this goal.
None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is not insolvency but inflation…. Deficits can be too large, just as they can be too small, and the aim of government is to make sure that they’re just right to employ all available productive capacity.
The bowling alley cannot run out of points, and the US government cannot run out of keystrokes. Research Associate Stephanie Kelton slaps down the folk wisdom that there is nothing the government can do about unemployment because it’s “broke.” “We don’t understand our own monetary system.”
Martin Wolf, in the Financial Times last week, “thinks the unthinkable” and inches toward what sounds distinctly like a Modern Money Theory approach: “Alternatively, the government could fund itself from the central bank, directly. Better still, the government could increase its deficits, perhaps by slashing taxes, and taking needed funds from the central bank. Under any of these alternatives, the central bank would be behaving like any other bank, creating money in the act of lending.”
Wolf goes on to argue that such a policy needn’t be inflationary, insisting on the absence of a necessary and immediate linkage between central bank money and the overall money supply: “…the policy would be inflationary only if it led to chronic excess demand. So long as the central bank retains the right to call a halt, that need be no serious danger.”
To learn more about MMT and its policy implications, this short working paper by Randall Wray is a good place to start. Wray is also putting together an MMT primer over at New Economic Perspectives.
Beyond the particulars of Modern Money Theory, would it be too naive to expect that the latest crises, convulsions, and lingering stagnation would prompt more economists and economic thinkers to move beyond “normal science” and begin, in a more general sense, thinking the unthinkable?
Here is an excerpt from the most important article you will read this year, by George Lakoff:
Here’s how public intimidation by framing works.
The mechanism of intimidation is framing, not just the use of words or slogans, but rather the changing of what voters take as right as a matter of principle. Framing is much more than mere language or messaging. A frame is a conceptual structure used to think with. Frames come in hierarchies. At the top of the hierarchies are moral frames. All politics is moral. Politicians support policies because they are right, not wrong. The problem is that there is more than one conception of what is moral. Moreover, voters tend to vote their morality, since it is what defines their identity. Poor conservatives vote against their material interests, but for their moral identity.
All language activates frames in the brain. Conservative language activates conservative frames, which activate conservative moral worldviews in the brains of those who hear the language. The more those frames are activated, the stronger the conservative moral views get in people’s brains.
In last week’s post, I responded to Paul Krugman’s critique of Modern Money Theory (MMT), which argues that a sovereign government that issues its own floating exchange rate currency cannot face an affordability constraint—which means it cannot be forced into involuntary default on its own currency debt. His criticisms really boiled down to a misunderstanding over operational details—how banks work, how the Federal Government really spends, and the role played by the Fed in making all these operations work smoothly. I won’t rehash any of that here.
But what we were left with is the argument that if a government operates along MMT lines, then we are on the path to ruinous hyperinflation. Of course Austrians have long argued that all fiat money regimes are subject to these dangers—even ones that don’t follow MMT’s recommendations. MMTers are commonly accused of promoting policy that would recreate the experiences of Zimbabwe or Weimar Republic hyperinflations. These were supposedly caused by governments that resorted to “money printing” to finance burgeoning deficits—increasing the money supply at such a rapid pace that inflation accelerated to truly monumental rates.
It is very easy to titillate audiences with graphs such as the following, which displays rapid depreciation of the Weimar Republic’s paper money in terms of gold:
Or with a picture of a Zimbabwe note—which shares the all-time record for number of zeroes:
No one wants to defend high inflation, much less hyperinflation. In his classic 1956 paper Phillip Cagan defined hyperinflation as an inflation rate of 50% or more per month. Clearly the zeroes would add up quickly, and economic life would be significantly disrupted. To read the rest, click here…
L. Randall Wray has responded in the Huffington Post to Paul Krugman’s latest criticism of Modern Money Theory. In addition to taking issue with the usefulness of Krugman’s historical example (France after WWI), Wray discusses the evolution of MMT and the manner in which it has benefited from the rise of social media.
Senior Scholar James Galbraith’s recent article in The New Republic (“Stop Panicking About Our Long-Term Deficit Problem. We Don’t Have One”) has sparked some reactions from Paul Krugman and Arnold Kling (JG responds briefly to the latter in comments).
Galbraith, jumping off from his Levy Institute policy note, argues that there is a certain marked evasiveness in attempts to describe the dangers of the long-term deficit:
Exactly what that threat is remains elusive. Foggy rhetoric about “burdens” that will “fall on our children and grandchildren” sets the tone of discussion. The concept of “sustainability” is often invoked, rarely defined, never criticized; things are deemed unsustainable by political consensus, backed by a chorus of repetition from the IMF, headline-seeking academics, think-tankers, and, of course, the ratings agencies.
He takes issue in particular (in passing in TNR and in detail in the policy note) with the Congressional Budget Office’s estimates of the trajectory of long-term debt; estimates that depend upon assuming rising interest rates. Galbraith argues that this assumption is hard to square with CBO’s concurrent assumptions of moderate growth and low unemployment and inflation. At a bare minimum, his point here is: whatever story you might tell about the long-term deficit and debt, CBO’s particular version (which has inspired a great deal of the public commentary about future budget peril) appears to contain some internal tension.
At least in the case of Krugman, it should be noted that this disagreement about the long-term deficit is occurring against the background of broad agreement about the negligibility of short-term deficits—and, one might add, agreement over the immediate need to make those short-term deficits bigger.
(This continues an earlier debate between Krugman and Galbraith).
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