Man, I hadn't heard that a serious MMT-er had held out African forced labor as an example. This reminds me of Scott Alexander's fairly persuasive argument that a "job guarantee" almost certainly leads into a scenario where you have second-class citizens who are stuck working those guaranteed jobs in order to survive at subsistence, while the first-class citizens continue to work in the normal market.
This is why we should have UBI, not a jobs guarantee. UBI says that you're allowed to live at subsistence while NOT working -- which you might just do indefinitely, but it won't be comfortable, so most likely you'll still be looking for work. The point of UBI is precisely to make sure that nobody faces the choice between tolerating a shitty, coercive employer, and suffering some dire consequences (homelessness, hunger, or even worse, their children experiencing the same).
As an occasional MMT dabbler I might be able to explain some of the stuff around taxation you were wondering about above. I think the usual MMT way of thinking here is that things work like this:
1) government says all ten people in the economy will need to pay $1 in taxes each (for a total of $10).
2) We hire Susan as a firefighter and pay her $10.
3) The other 9 people in the economy need to provide some good or service to Susan in order to get the $1 they owe the government.
4) boom, now you've got a market economy.
I think in reality you'd want to spend more money into the economy than you plan to tax back out, at least until you achieve the right level of liquidity. So the government might hire two people to do firefighting, injecting $20 into the economy, but still only tax $10 out, leaving the extra $10 behind to continue circulating.
My understanding (maybe wrong) of the idea here though is that we think of government spending as creating money, and taxes destroy money. So the government doesn't pay for things with taxes - in an MMT model, taxes are simply collected and burned in big bonfires, and then as a completely separate action, the government prints new money and spends it into existence.
If you like mathematical models (as I do), could you give us a feedback on the “Mathematical Model of Modern Monetary Theory” from Steve Keen ? (See https://www.patreon.com/posts/mathematical-of-40545245) It is a bunch of ODE drawing from accounting equalities so I guess it is difficult to contest it. Of course there are many free parameters in it, (such that the level of interest rate, CB open market policy level, share of output between Capitalists and workers, etc… ) and different parameters lead to different outcomes, but at least we could pinpoint what we are talking about. I recon however it may be not detailed enough for the discussion at hand (for instance, for matters of Job Guarantee, there is a need to split the aggregate of “Workers” between “unemployed workers” and “employed workers”). Thank you for posting your answers with a link to Wolfram or Matlab files so that we can experiment on your models too, that wil help fruitful discussions …
Noah asks: "how does MMT model productivity in the economy? It seems like hiring a bunch of firefighters in the absence of fires would negatively impact productivity and reduce living standards". Only if there were no involuntary unemployment, ie all available labor is employed , and the idle fire fighters could be 'productively' employed somewhere else.
Thus an examination of the concept of "productivity" is necessary. I will claim the person who is conscientiously tending a public park, is more 'productive' than the advertising agency encouraging consumption of consumer junk (confectionery food, gambling , grog) which has a negative productivity in terms of damage to the environment, and public physical and mental health.
"Because MMT doesn't often include formal models, the question of how MMT thinks inflation works is very difficult to answer for yourself. The same is true of a number of other questions, such as how MMT's Job Guarantee would create full employment with price stability."
I know very little about macro or MMT, but from the little I've seen, I don't think they would disagree with e.g. monetarists over whether an identity like MV = PQ can be used to model and predict inflation dynamics. They would just disagree over how to estimate the output gap and, then in their prescriptive voice, they'd disagree about the best policy levers to manage it. I think they would say there's nothing neutral or natural about a non-zero unemployment rate; that a non-zero unemployment rate is a deliberate fiscal policy choice, and that, ceteris paribus, a jobs guarantee is the morally preferable fiscal policy - especially because they believe it is also a better way of managing the output gap (and hence price stability) than through interest rate policy.
My understanding is that the jobs guarantee is supposed to then operate like a buffer stock in MV=PQ dynamics, in the same way monetary policy is supposed to operate as a buffer stock. A jobs guarantee just substitutes one buffer stock which is less directly related to the output gap with another that is more directly related and carries additional pro-social policy benefits.
I haven't seen other good MMT models, but I don't think the one you chose is a good representation. It's not deep or simple enough. I feel like the fundamental analysis could be done simply using the sovereign's balance sheet, the private sector's balance sheet, and the output gap. The challenges there would be estimating the actual output gap and the true equity on the sovereign's balance sheet. This is especially challenging because I don't think the sovereign's balance sheet should be denominated in the currency they issue; it should be denominated in terms of their potential political power, which is a better representation of how much fiscal space they have with the private sector to exact higher taxes before being voted out or supplanted. Of course ultimately, all of our balance sheets are power balance sheets, it's just more convenient to denominate them in currency terms - this is the spot where econ reduces to political theory.
I don't know if there's a clean way to model that. But that shouldn't diminish the fundamental theoretical (not policy) lesson of MMT. As I read the literature, this lesson is that all macro analysis must bottom out in brute political power - most importantly, the power of the sovereign to extract higher taxes and manage a buffer stock of tax credits to implement its policy goals. Their core insight is that any analysis omitting this power variable will inevitably miss the most important credit/debt relationship in the economic world and so fail the most important predictive tasks.
Hmmm. great piece as always. I'm not sure this is MMT'S best foot forward. Stephanie Kelton does a much better job at explaining the theory in her book, the Deficit Myth. But I've always found something suspicious about MMT's core assumptions. In simple terms, MMT looks at the government and thinks well, the government can't need money cos it can print whatever amount it likes. So, why do taxes exist? Maybe, taxes exist because the government needs goods and services. And so, you arrive at this funny conclusion where the objective of work is to pay tax and the objective of tax is to stimulate work.
But taxes began to fund wars at a time when the government couldn't just print money: you can't print gold or silver or materiel. And then they continued because they become instruments of fiscal policy, and because let's face it, governments got addicted to collecting taxes.
There's another problem. Anyone who possesses a sufficient acquaintance with post colonial African history knows the entire concept of a tax-driven concept holds no weight.
Europe came to Africa for slaves and in the late nineteenth century returned for natural resources. There is no need to evoke tax driven currencies. Forced work and indentured labour, sometimes in horrific conditions as with the sad case of Belgium and the DRC among others, did the job perfectly.
You don't need the incentive of a tax based currency when there's the incentive of brute Force.
I'm being lazy and commenting on the intro, not the main post, but: if "MMT people generally claim that the only possible negative result of excessive government spending is inflation", and inflation ticks up after the government spends more money, why would that discredit MMT people rather than be support for their view?
(This isn't me claiming that "excessive government spending" does explain the inflation uptick. As I've written before — check out my Substack! — I think it's more oil prices. I'm just trying to evaluate arguments on their own merits here.)
Lately the most attention I've seen being given to MMT is by Bloomberg. I'm not sure why they think it's interesting. Perhaps you could ask. My impression is that Bloomberg editors don't really have any idea what MMT is and seem to vaguely associate it with the mainstream ideas behind inflation-targeting. Perhaps that's because inflation-targeting wasn't sold as "you can spend as much as you want until inflation starts rising" whereas MMT is sold that way.
Also there's as much confusion over how QE works in the progresso-sphere as there is in the Trumpo-sphere. I heard many calls from progressives during the pandemic for the issuance of a $1 trillion coin from progressives who were apparently unaware that there was absolutely no need for it since the Fed was plenty willing to back the massive pandemic fiscal stimulus with massive QE. Pandemic fiscal deficits backed by Fed pandemic QE has been equivalent to more than four such coins.
Man, I hadn't heard that a serious MMT-er had held out African forced labor as an example. This reminds me of Scott Alexander's fairly persuasive argument that a "job guarantee" almost certainly leads into a scenario where you have second-class citizens who are stuck working those guaranteed jobs in order to survive at subsistence, while the first-class citizens continue to work in the normal market.
This is why we should have UBI, not a jobs guarantee. UBI says that you're allowed to live at subsistence while NOT working -- which you might just do indefinitely, but it won't be comfortable, so most likely you'll still be looking for work. The point of UBI is precisely to make sure that nobody faces the choice between tolerating a shitty, coercive employer, and suffering some dire consequences (homelessness, hunger, or even worse, their children experiencing the same).
As an occasional MMT dabbler I might be able to explain some of the stuff around taxation you were wondering about above. I think the usual MMT way of thinking here is that things work like this:
1) government says all ten people in the economy will need to pay $1 in taxes each (for a total of $10).
2) We hire Susan as a firefighter and pay her $10.
3) The other 9 people in the economy need to provide some good or service to Susan in order to get the $1 they owe the government.
4) boom, now you've got a market economy.
I think in reality you'd want to spend more money into the economy than you plan to tax back out, at least until you achieve the right level of liquidity. So the government might hire two people to do firefighting, injecting $20 into the economy, but still only tax $10 out, leaving the extra $10 behind to continue circulating.
My understanding (maybe wrong) of the idea here though is that we think of government spending as creating money, and taxes destroy money. So the government doesn't pay for things with taxes - in an MMT model, taxes are simply collected and burned in big bonfires, and then as a completely separate action, the government prints new money and spends it into existence.
If you like mathematical models (as I do), could you give us a feedback on the “Mathematical Model of Modern Monetary Theory” from Steve Keen ? (See https://www.patreon.com/posts/mathematical-of-40545245) It is a bunch of ODE drawing from accounting equalities so I guess it is difficult to contest it. Of course there are many free parameters in it, (such that the level of interest rate, CB open market policy level, share of output between Capitalists and workers, etc… ) and different parameters lead to different outcomes, but at least we could pinpoint what we are talking about. I recon however it may be not detailed enough for the discussion at hand (for instance, for matters of Job Guarantee, there is a need to split the aggregate of “Workers” between “unemployed workers” and “employed workers”). Thank you for posting your answers with a link to Wolfram or Matlab files so that we can experiment on your models too, that wil help fruitful discussions …
Noah asks: "how does MMT model productivity in the economy? It seems like hiring a bunch of firefighters in the absence of fires would negatively impact productivity and reduce living standards". Only if there were no involuntary unemployment, ie all available labor is employed , and the idle fire fighters could be 'productively' employed somewhere else.
Thus an examination of the concept of "productivity" is necessary. I will claim the person who is conscientiously tending a public park, is more 'productive' than the advertising agency encouraging consumption of consumer junk (confectionery food, gambling , grog) which has a negative productivity in terms of damage to the environment, and public physical and mental health.
"Because MMT doesn't often include formal models, the question of how MMT thinks inflation works is very difficult to answer for yourself. The same is true of a number of other questions, such as how MMT's Job Guarantee would create full employment with price stability."
I know very little about macro or MMT, but from the little I've seen, I don't think they would disagree with e.g. monetarists over whether an identity like MV = PQ can be used to model and predict inflation dynamics. They would just disagree over how to estimate the output gap and, then in their prescriptive voice, they'd disagree about the best policy levers to manage it. I think they would say there's nothing neutral or natural about a non-zero unemployment rate; that a non-zero unemployment rate is a deliberate fiscal policy choice, and that, ceteris paribus, a jobs guarantee is the morally preferable fiscal policy - especially because they believe it is also a better way of managing the output gap (and hence price stability) than through interest rate policy.
My understanding is that the jobs guarantee is supposed to then operate like a buffer stock in MV=PQ dynamics, in the same way monetary policy is supposed to operate as a buffer stock. A jobs guarantee just substitutes one buffer stock which is less directly related to the output gap with another that is more directly related and carries additional pro-social policy benefits.
I haven't seen other good MMT models, but I don't think the one you chose is a good representation. It's not deep or simple enough. I feel like the fundamental analysis could be done simply using the sovereign's balance sheet, the private sector's balance sheet, and the output gap. The challenges there would be estimating the actual output gap and the true equity on the sovereign's balance sheet. This is especially challenging because I don't think the sovereign's balance sheet should be denominated in the currency they issue; it should be denominated in terms of their potential political power, which is a better representation of how much fiscal space they have with the private sector to exact higher taxes before being voted out or supplanted. Of course ultimately, all of our balance sheets are power balance sheets, it's just more convenient to denominate them in currency terms - this is the spot where econ reduces to political theory.
I don't know if there's a clean way to model that. But that shouldn't diminish the fundamental theoretical (not policy) lesson of MMT. As I read the literature, this lesson is that all macro analysis must bottom out in brute political power - most importantly, the power of the sovereign to extract higher taxes and manage a buffer stock of tax credits to implement its policy goals. Their core insight is that any analysis omitting this power variable will inevitably miss the most important credit/debt relationship in the economic world and so fail the most important predictive tasks.
Hmmm. great piece as always. I'm not sure this is MMT'S best foot forward. Stephanie Kelton does a much better job at explaining the theory in her book, the Deficit Myth. But I've always found something suspicious about MMT's core assumptions. In simple terms, MMT looks at the government and thinks well, the government can't need money cos it can print whatever amount it likes. So, why do taxes exist? Maybe, taxes exist because the government needs goods and services. And so, you arrive at this funny conclusion where the objective of work is to pay tax and the objective of tax is to stimulate work.
But taxes began to fund wars at a time when the government couldn't just print money: you can't print gold or silver or materiel. And then they continued because they become instruments of fiscal policy, and because let's face it, governments got addicted to collecting taxes.
There's another problem. Anyone who possesses a sufficient acquaintance with post colonial African history knows the entire concept of a tax-driven concept holds no weight.
Europe came to Africa for slaves and in the late nineteenth century returned for natural resources. There is no need to evoke tax driven currencies. Forced work and indentured labour, sometimes in horrific conditions as with the sad case of Belgium and the DRC among others, did the job perfectly.
You don't need the incentive of a tax based currency when there's the incentive of brute Force.
I'm being lazy and commenting on the intro, not the main post, but: if "MMT people generally claim that the only possible negative result of excessive government spending is inflation", and inflation ticks up after the government spends more money, why would that discredit MMT people rather than be support for their view?
(This isn't me claiming that "excessive government spending" does explain the inflation uptick. As I've written before — check out my Substack! — I think it's more oil prices. I'm just trying to evaluate arguments on their own merits here.)
Lately the most attention I've seen being given to MMT is by Bloomberg. I'm not sure why they think it's interesting. Perhaps you could ask. My impression is that Bloomberg editors don't really have any idea what MMT is and seem to vaguely associate it with the mainstream ideas behind inflation-targeting. Perhaps that's because inflation-targeting wasn't sold as "you can spend as much as you want until inflation starts rising" whereas MMT is sold that way.
Also there's as much confusion over how QE works in the progresso-sphere as there is in the Trumpo-sphere. I heard many calls from progressives during the pandemic for the issuance of a $1 trillion coin from progressives who were apparently unaware that there was absolutely no need for it since the Fed was plenty willing to back the massive pandemic fiscal stimulus with massive QE. Pandemic fiscal deficits backed by Fed pandemic QE has been equivalent to more than four such coins.