Wrong Again!

Crossposted from The Stars Hollow Gazette

So I’ve mentioned letsgetitdone’s recent series on Modern Monetary Theory in reaction to Dylan Matthews’ piece and there are some updates I’d like to draw to your attention.

First, some more reactions have come in-

The WaPo MMT Post Explosion: Kevin Drum’s Take on MMT

letsgetitdone, Corrente

Sat, 02/25/2012 – 1:19am

He … favorably quotes Jared Bernstein’s post, which I recently evaluated, coming out against the idea that deficit reduction is “pure virtue,” and also coming out for the view we need to use Government’s ability “… to run large deficits in times of market failure” to replace lost aggregate demand. But Kevin doesn’t get why Jared says this is MMT’s greatest contribution. Kevin wonders why this is any different from what ” Old Keynesianism. And post-Keynesianism. And New Keynesianism” say, and he asks: “If that’s really MMT’s most important contribution, who needs it?”



It is about our fear of inflation and our assessment of the risk of it. But it’s also about how we prioritize the risk of inflation against the reality of unemployment other than a “frictional” rate due to job transitions of 1 – 2%. Even 4% Unemployment measured by the U6 would still leave about 7.2 million Americans unemployed after a vigorous post-Keynesian expansion.

Those people would pay the price for the rest of us who are more concerned with containing inflation than with employing them. How serious is this price? Martin Watts and Bill Mitchell (one of the earliest and still leading developers of MMT) offer us a very good idea of how high this price is for those selected to pay the price of a 4% U6 target, much less a 4% U3 target which is what I suspect Kevin is referring to.

Kevin Drum refers to the NAIRU, as if he and all economists agree that there must be a trade-off between inflation and unemployment at a to be determined NAIRU level. But, I wonder if he knows that MMT economists view the Non-Accelerating Inflation Rate of Unemployment, as both “a crock” and as closely tied to the neoliberal economic paradigm that MMT opposes, and specifically to its acceptance of the idea that there must be an unemployed “buffer stock” of people who want to work, but must stay unemployed, in order to contain inflation?



MMT is always about policy, mostly fiscal, not monetary, that will enable certain economic, social, cultural, environmental, and political outcomes, and disable other outcomes in each of these categories. It is never about running deficits or surpluses as targets for their own sakes. Whether deficits, or surpluses occur are byproducts of MMT policy impacts, and are largely endogenous to the economy. In themselves they mean nothing. Only the economic policies and outcomes that drive them are important.

The WaPo MMT Post Explosion: Matthew Yglesias’s Reaction to MMT

letsgetitdone, Corrente

Mon, 02/27/2012 – 2:49am

Reading this, I had the definite feeling that the old aphorism about people who fight new paradigms and ridicule/marginalize their adherents, and often opine later that there is nothing new there, is all too true. Matty ought to give everyone a break and admit that the mainstream has been beating the drums of insolvency terrorism since shortly after the Obama Administration began and still is. So, mainstream people have been saying that there can be an insolvency problem in very large numbers, and if they are doing so less now, it’s only because any fool can plainly see that austerity is failing all over the world, as MMT predicted when the austerity craze started, and also because many more people are reading MMT blogs than was the case two years ago, and they are beginning to pick up some of the core insights.



I wonder what the mainstream would have to say about Matty’s implication, that its economists haven’t really been being ignorant and dumb; just elitist, dishonest, and manipulative.

I lived through the inflation of the 70s, and I can attest to its reality, and severity for some people, but relatively mild impact for others. I also think that the causes of that inflation were not simply increases in nominal unit labor costs, but increases in interest costs caused by the Federal Reserve’s policies, the actions of the oil cartel, and particularly the Saudis, the activity of speculators, the constraining regulations on Natural Gas production, and the failure of the Carter Administration to employ price controls and rationing due to its neoliberal biases.



Galbraith was clearly talking about the likelihood of demand-pull inflation inflation occurring in the United States, and was also implying that the Weimar and other WWI aftermath inflations had nothing to do with that policy. Also, in referring to “dodgy government financial practices” in the last sentence, Matty seems to be saying that the Weimar Government was guilty of such practices, but given the size of their Versailles-imposed reparations to be repaid only in goldmarks or foreign exchange, what could the German Government have done to recover from the War, except try the money-printing strategy to try to get the foreign exchange needed? If anybody was guilty of “dodgy financial practices” it was the Versailles peacemakers who, in imposing a Roman peace on Germany, insisted on payment conditions that the Germans could not possibly meet, especially since the French and Belgians seized control of the Ruhr and with it much of Germany’s industrial capacity in 1923.



I hesitate to say what MMT might recommend in the two cases of increasing world-wide demand, highlighted by Matty, because I’m not sure that all of us would say the same thing, nor am I one of the economists developing the MMT approach. But, speaking as someone who’s been researching MMT for some time, in the ’70s case, I would have placed domestic price and wage controls on commodities except on foreign sales to oil exporting countries, where prices of exports would have been pegged to increases in the prices of their oil exports. I would have also recommended de-regulating natural gas, and oil rationing to cut demand for the cartel-restricted supply. I would not have implemented higher interest rates as the Fed did. Until the very end, when the economic system was driven into recession, that only “fed” the inflation fire, while creating “stagflation.” I think such measures, consistent with MMT as I understand it, would have “choked off” the ’70s inflation in a much shorter time than the policies followed in the 1970s and the early 1980s.

As for the present increasing demand on the world’s food supply, that’s certainly not being caused by deficit spending by an International currency issuer, since there is none. And the only remotely similar entity to that is the ECB which is gradually choking off economic activity in the Eurozone to save its financial elites. I think commodity inflation must be fought by Governments legislating and enforcing existing laws against speculation, preventing cost-push inflation of the kind we saw in the 70s using the measures outlined, and by allowing commodity markets to adjust to the need for more supply, or producers to create substitutes for commodities in short supply. I also think control of speculation and market forces will probably suffice to relieve the pressure we’ve been seeing in commodities.

If that fails, however, then Governments whose economies can produce abundant supplies will have to place export controls on commodities necessary for their own populations in order to contain domestic inflation. That will not be popular. But we do still live in a nation state system, and the first responsibility of national governments still is to the general welfare of their own populations. Of course, such measures will result in other nations placing their own export controls on abundant commodities, and nations will have to negotiate bilateral agreements to serve their respective populations.



The truth, again, is that the inflation of the ’70s was caused by a complex of inter-related phenomena and the rise in unit labor costs was only one of these. It may have been the one that neoliberals focused on in the ’80s to avoid pinning the blame for what happened on the Cartel, the failures of the Carter Administration and the Fed’s policies, and to claim that the inflation was due to demand-pull factors, but that doesn’t mean that their analysis was correct.

Today, we know that Paul Volcker and Jimmy Carter handled the 1970s inflation incompetently, and we also recognize that the behavior of the Cartel, and the excessive regulations on natural gas made this a cost-push and not a demand-pull inflation, and that the Fed policy of targeting the unit cost of labor as a trigger for raising interest rates for the next 30 years or so was part of its low inflation at the cost of high unemployment policy that it illegally engaged in, in violation of the Humphrey-Hawkins Act.



(M)y thinking about what went wrong in the ’70s, and also MMT thinking about it are both very different from his. As a result, I think corresponding explanations of why it won’t happen again are likely to be very different also. Again, I don’t think what we have to acknowledge is that increases in unit labor costs caused the ’70s inflation.

In fact, I think that is a very partial, and therefore false narrative of what happened then. And I’m afraid I also think that Matty ought to take his own advice and acknowledge the roles of 1) the Cartel, 2) the Federal Reserve, and 3) the Carter Administration as all being much more important in the severity of that cost-push inflation then the rise in unit labor costs was.



If the ’70s are not to happen again, it will not be enough to rely on the more globalized economy of 2012, with its cross-border competition among workers, creating a race to the bottom in wages, and untoward returns to capital.

The Federal Government will have to be much more aggressive in implementing a response, recognizing that an inflation like that in the 70s would be cost-push and not demand-pull. And that to manage it, policies that choke off government deficit spending, and tighten credit, will be much more costly than policies involving trade retaliation, price controls, rationing, substitution of commodities subject to cost-push, and above all continuous and very substantial investments in government programs developing alternative energy sources.

There is also a 4 part response to 2 pieces by Dean Baker-

but I think I’ll save those for another post.

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