Constructive Remarks on a Promising Beginning

The Modern Monetary Realists have put up a new website to help disseminate a correct understanding of monetary operations to a wider audience. Regardless of any differences they may have with Modern Monetary Theorists, their main goal of educating the public is a worthy one. I do think, though, that their handling of a few points in an introductory post need some tweaking. I offer this in the spirit of helping to move the discussion forward. For brevity, my focus will be on points of difference, but this should not obscure the fact that there is much more in both Modern Monetary Realism and Modern Monetary Theory with which I agree than disagree. I will simply refer to the two groups as Realists and Theorists. I am not strictly in either group, but consider myself closest to the perspective of the Theorists.

 
Value of the Currency

The Realists state their key differences with the Theorists in their introductory post. Four points are highlighted. Their disagreement with the chartalist explanation of state money is touched on in point 2.

Viewed in terms of the Theorists’ definition of currency value, the Realists appear to mix up productivity or living standards on the one hand with value and viability of the currency on the other. It is true, as the Realists correctly stress, that real resources, including labor, are prior to taxation, and there would be no point taxing if the non-government did not already possess some resources. Even so, members of the non-government always possess at least some resources, even if only their own capacity to perform labor. The value of the currency, as defined by the Theorists, is the amount of labor time it takes to acquire a unit of the currency. Or, looked at from the reverse angle, it is the amount of labor time that can be commanded with a unit of the currency. Clearly, the level of productivity has no bearing on the amount of labor time that is commanded by a unit of the currency.

Certainly, productivity affects how much real stuff is produced with that commanded labor time – and is a key economic issue – but it is a concern that is separate from how much of the currency it takes for the government to transfer some labor services to the public domain, or, for that matter, how much of the currency it takes for private-sector employers to employ a certain amount of labor.

Pointing out, as the Realists correctly do, that there is a prior issue of government legitimacy backed by the people does not alter this point. If productivity languishes and real living standards decline, there is a likelihood that one set of politicians will be replaced by another set without there being a change in the currency in use. If the rot continues, despite changes in government administration, the legitimacy of the system itself might come into question. Even then any systemic change could conceivably occur (though not necessarily) without a change in the currency.

But the legitimacy of the state and viability of the currency are not necessarily affected by productivity. In principle, it would be possible for the value of the currency – which is a monetary measure – to remain, say, a dollar per minute of average labor time while productivity plummeted year after year. The government and private-sector employers would still be able to command one minute of average labor with every dollar outlaid, but the output made possible by this would be in decline. This would be a bad situation, but the problem would be the declining productivity, not the value of the currency.

Equally, productivity could increase strongly year after year while the legitimacy of the government, currency or system itself came into question. Mass unemployment, extreme inequality, civil unrest, incessant war or any number of other political factors could undermine the legitimacy of a government or system itself. Yet, in principle, a dollar might continue to command one minute of average labor time. As long as this were the case, the currency would remain operative as a means of commanding labor time.

In other words, it is not that productivity is unimportant. It is just that it is a separate consideration from value of the currency. Productivity relates to alterations in potential real living standards. Value of the currency is a monetary concept that relates to the difficulty in obtaining it. (For more on the above considerations, see the last two sections of this post.)

Now, it may be that the Realists would prefer to define the value of the currency differently than the Theorists. They may have a definition in mind other than the amount of labor time required to obtain it. This possibility may be implicit in past remarks they have made concerning their notion, yet to be elaborated, of Full Productivity. If this is the case, I think it would be beneficial, in moving the discussion forward, for the Realists to spell out their alternative definition of currency value and their reasons for it. Or, if this is not yet possible, it would be helpful at least to make explicit the alternative definition of currency value that they have in mind. This would help to clarify the points of disagreement.

 
The Supply Side

The Realists are concerned that the Theorists ignore supply-side issues relating to productive potential (point 4 of the introductory post). This may partially misconstrue the nature of the Theorists’ macroeconomic theory, which emphasizes output, employment and price stability while at the same time remaining compatible with other heterodox (e.g. Post Keynesian) explanations of technical progress, productivity and microeconomic issues.

There is widespread agreement across all schools of thought that there is ultimately a supply-side constraint on the economy. A key debate in macroeconomics is over whether there can be a long-run demand constraint that usually comes into play prior to the supply-side constraint being hit.

The neoclassical macroeconomic orthodoxy supposes that in the long run only the supply-side constraint is binding. This view depends implicitly on the supposed existence of an automatic tendency to full employment induced through the price mechanism. This (usually only implicit) assumption cannot be justified by appeal to neoclassical theory, since well known results in general equilibrium theory make clear that no such automatic tendency can be shown to exist other than in a single commodity world or similarly extreme simple case. If orthodox macroeconomists recognize this issue at all, they usually appeal to a supposed empirical relevance of the supposed full-employment tendency. But this claim is exceedingly weak, resting on the redefinition of full employment to correspond either to “natural rate” unemployment or the NAIRU. Even then, it cannot be claimed that the economy automatically tends to an invariant (supply determined) natural rate or NAIRU, since the rate of unemployment supposedly corresponding to these measures are redefined in response to persistent alterations in actual unemployment that themselves reflect past levels of demand.

The Theorists, of course, along with Post Keynesians, reject the supposed automatic tendency to full employment, or indeed a supposed automatic tendency to any particular level of output and employment. Output, for them, is demand determined, including in the long run. Normally, other than by fluke, the economy will hit demand constraints well inside the supply constraint.

The Theorists certainly do not deny the importance of productivity and technical innovation, although these aspects are the focus of other complementary areas of heterodox economics. But even here, demand factors are important, and not independent of the supply-side factors. Strong demand, high employment and rising wages create a strong impetus for technical innovation as a means for firms to slash costs and economize on labor. Fiscal demand management that maintains levels of output near capacity are complementary and conducive to technical progress.

The orthodox preference for a sole reliance on so-called microeconomic reform or labor-market deregulation loses any appeal it might have if output is demand determined and persistently far below potential. Any efficiency gains that might or might not obtain in particular cases are minor compared to the forgone output caused by the economy operating well below capacity. I say “might or might not obtain” because there is no convincing theoretical basis for supposing such policies have systematic effects on the overall performance of the aggregate economy.

Even if in particular cases a microeconomic policy can be shown to be beneficial, the benefits will not be compromised either by appropriate generalized deficit expenditure or the introduction of a Job Guarantee. Such policies do not prevent relative price movements or save unviable private firms from bankruptcy. The policies simply help to ensure that potentially viable production does in fact take place while at the same time creating a strong impetus for technical innovation.

Any disagreement I might have with the Realists on this point should not be overstated. I feel certain that they are well aware of likely interdependencies between demand and technical innovation and that their influences are broadly Post Keynesian rather than neoclassical. My main purpose in this section has been to point out that the Theorists do not discount the importance of technical progress. It is just that their emphasis, in macroeconomic theory, on demand determined output and employment does not contradict these insights but to the contrary is highly compatible with them.

 
Coercion

There still appears to be a feeling among the Realists that the Theorists view coercion as in some way justifying government intervention in the economy. This is not the Theorists’ argument. There is coercion in the tax obligation, but there is no suggestion that this is what justifies government intervention. Rather, the argument is that the coercion explains how the government is able to transfer some resources from the private to public domain. It explains, rather than justifies, the way in which the tax obligation enables the government to command some resources.

There is certainly no suggestion that the coercion in the tax obligation implies authoritarianism rather than democracy backed by the people. For example, Wray wrote in 2003 (hat tip to Scott Fullwiler):

For our purposes, sovereignty can be defined as the ability to impose tax liabilities, although in the past the ability to impose fees, fines, tithes, and interest was more important than imposition of tax liabilities. Clearly, these payments are not voluntary at the individual level, although in democratic nations tax liabilities are at least in theory imposed by consensus. It should be emphasized that this ability to impose liabilities on the population does not presuppose an autocratic or fascistic State. Even the most democratic of states impose taxes, indeed, it is somewhat paradoxical that the social democratic states (Scandinavian nations, for example) tend to impose relatively larger tax liabilities than do more oligarchically controlled states (the US or Japan).

My own view is that taxation is coercive, but less so than the likely alternatives (e.g. sole reliance on brute force), short of society progressing to a level in which all cooperation can be purely voluntary.

 
The TC Rule

Michael Sankowski has put up an early post on what he calls the TC Rule. I think it is premature to subject the TC Rule to close criticism until its rationale and underpinnings have been elaborated in more depth. It is a proposed fiscal rule, partly informed by empirical regularities that in principle could be modified over time to reflect the latest evidence. The theoretical underpinnings seem unclear at this stage. The suggestion is to target a particular deficit to GDP ratio based on the degree to which actual rates of unemployment and inflation exceed their targets, accounting for population growth. The unemployment and inflation rates are political choices. Sankowski suggests a rate of 4 percent as appropriate for both targets.

It seems to be the view that policies informed by a correct understanding of monetary operations would enable a target rate of unemployment that is below the current orthodox estimates of the NAIRU.

From my perspective, if 4 percent unemployment is to be deemed acceptable, an unconditional basic income would be morally required. If not, I don’t see how this approach is much of an improvement on the preferred stance of the current orthodoxy. It gives up a little price stability for some reduction in unemployment, which in itself I have little problem with, but in doing so is likely to be inferior on both counts (unemployment and inflation) to the Job Guarantee proposal of the Theorists. The Realists touch on their objection to the Job Guarantee in point 3 of the introductory post.

 
Debate Over the Balance of Payments Constraint

In my view, the Realists (and others such as Ramanan) are providing a positive service in raising the external sector as an area for discussion (point 1 in the introductory post). Although at this stage I am not convinced that the criticisms are anything more than a framing issue, in which different economists are electing to compartmentalize various political challenges and realities in different ways, neither have I managed to convince myself that the critics do not have valid disagreements that go beyond mere framing. A long discussion has been taking place in a recent thread, which I am still in the process of reading through closely. I would be interested in seeing a response from the Theorists to the critique of Ramanan and the Realists, or be pointed to any responses that might already exist.

For quite some time now, Ramanan in particular has been criticizing the Theorists’ perspective on the external sector. From an outsider’s perspective – and, when it comes to Modern Monetary Theory, an autodidact’s perspective – it does not seem to me that his arguments, now supported in some sense also by the Realists, have been clearly and properly addressed. It appears, instead, that critics have been, in effect, banished from the larger MMT blogs not by force of argument but simply an appeal to authority. I am open to the possibility that the Theorists have a convincing answer to the criticism, or even that it already exists somewhere (if so, I’d appreciate the relevant links), but I am not left with that impression at the moment. Judging by the comments of other non-academic commentators on the various blogs, I get the impression my uncertainty on this point is not unusual.

 
Concluding Remark

I hope the Realists will take this post in the spirit in which it is intended. I am reticent to criticize either the Theorists or the Realists when we all have so much in common. But I think debate is the most effective way to push the conversation forward. Realists should certainly push back with whatever counter-criticism they deem is warranted.

Lastly, I wish the Realists all the best in disseminating the understanding of monetary operations shared by both Theorists and Realists. The more this understanding takes hold, the better life can be for all of us.

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129 thoughts on “Constructive Remarks on a Promising Beginning

  1. I think some weakness in the MMT JG position comes in when we use the term “buffer of unemployed”.

    Implementing a buffer (of anything) implies some sort of system authority is taking a positive action to establish a buffer and directing that it be filled with the chosen & valued buffer “stock” when certain conditions are triggered. Doing nothing is not a positive action.

    Currently the political policy of the authorities is to do nothing when an individual is facing loss/lack of employment, not ‘establish a buffer stock of unemployed’, this logically doesn’t make sense to describe a policy of apathy and disregard in this positive way.

    So use of this term, which is suggesting that “doing nothing” is “doing something”, leaves the MMT position of use of the JG as a “buffer” to establish Maximum Employment and Stable Prices WEAK and perhaps wide open for misinterpretation and/or a designation of being optional.

    It’s not a “buffer of unemployed” (it logically can’t be) it’s just “unemployed”.

    Resp,

  2. I support a job guarantee or employer of last resort policy, but I am also skeptical of the buffer stock reasoning in some of the MMT theorizing in support of the job guarantee. The idea of a buffer stock for some product, as I understand it, is that the government or some other dominant player buys up stock when the price is falling down below the desired floor price, to keep the price at the floor, and then sells off stock when the price threatens to shoot past the desired ceiling, in order to drive the price down. I suspect this is unworkable in the labor market via a genuine job guarantee for two reasons:

    1. Politically, it would be very hard to

  3. continued:

    1. Politically, it might be very hard to release people from the JG pool of government employees so as to bring the price of labor down. People aren’t soybeans. They vote.

    2. The government JG employees will have to be kept at low wages to be able to generate sufficient downward pressure on wages during the anti-inflationary “release” stage.

    That’s why I tried to defend a full employment economy on other social, moral and economic principles in my recent post at New Economic Perspectives.

  4. Matt, in effect choosing to disemploy people to control inflation, which is what NAIRU and Taylor rules do, involves creating a buffer stock of unemployed in econo-speak.

  5. Joe, if your theory assumes a wave election of likeminded congressman, then there’s nothing to debate politically since we’re assured to be (as Kang would say) “always, whirling, whirling, whirling towards freedom!”

    Tom, there’s no supermajority requirement for budget reconciliation bills, that’s how Clinton passed his tax hikes and Bush passed his tax cuts. In both 1993 and 2003, the Senate was split evenly and the vice president broke the tie.

  6. Matt,

    Actually, the NAIRU model is all about, explicitly, making sure there are enough people unemployed to ensure inflation doesn’t rise above the target. There are all sorts of statements from policymakers particularly at the Fed to the effect that they use a NAIRU model.

    For instance, the statement from 11/16/99:

    “Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy’s growth potential. As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue. ”

    That’s basically saying that the buffer of unemployed is getting too small for price stability, so policymakers will act to ensure that doesn’t happen. That is, the point is that it is the buffer stock of unemployed that is necessary for price stability in the Fed’s view.

    I would suggest you are confusing micro policy with macro policy when you write “Currently the political policy of the authorities is to do nothing when an individual is facing loss/lack of employment, not ‘establish a buffer stock of unemployed’, this logically doesn’t make sense to describe a policy of apathy and disregard in this positive way.” Your position relates to micro policy, whereas the buffer stock relates to macro policy, and, as above, the concept of a buffer stock of unemployed is clearly at work in the minds of policymakers when there is concern about inflation.

  7. Joe, thanks for explaining some of the limitations of the Political Compass test. Your strong interdisciplinary background comes through in your writings. Trixie, in one of her interesting comments, also noted a weakness in the test.

    Political Compass coming in to the discussion was my doing. Cullen simply did the test because I had brought it up, by way of clarification, which I appreciated.

    Great discussion, everyone.

  8. beowulf said:

    We can get to 4% unemployment and 3% inflation (also in Humphrey-Hawkins) with fiscal and/or monetary policy– we last did this 12 years ago (and to 4.5% 5 years ago). .
    But to get it lower than that…. I don’t think you can’t push unemployment south of 4% without jumping on inflation with both feet, in particular, cost-push inflation.

    There are examples of low unemployment and low inflation. Not that countries are directly comparable. But it is possible – even without a JG! And, in the Swiss case, even with low domestic growth. Japan’s numbers are probably similar.

    http://www.tradingeconomics.com/switzerland/unemployment-rate

    http://global-rates.com/economic-indicators/inflation/consumer-prices/cpi/switzerland.aspx

  9. PeterC,

    A very balanced set of observations.

    I was waiting until the discussion subsided a bit before bringing in my two cents worth.

    Commenting on the coercion thing. I haven’t read all posts and it’s possible this has already been said, but I have the feeling that the aversion to the state coercive power in taxation is due to a misunderstanding.

    I am sure not all Realists share this, but at least some of them appear to imagine that this power is tantamount or at least leaves the door open to a SWAT team breaking into their bedrooms at 2:30am, shouting and pointing automatic weapons and LED torches at you; I would like to assure them that it is not.

    It’s more akin to the coercion applied to enforce that drivers stop at the red light, do not exceed their speed limits, or drive on the right or left side of the road.

  10. Tom and Scott thanks.

    Here is a Wiki on this:
    http://en.wikipedia.org/wiki/Buffer_stock_scheme

    This wiki identifies 2 schemes, a single price scheme (which I think would be similar to the MMT JG) and a dual price scheme.

    It seems to me though that the NAIRU people are not using either scheme.

    “When the price drops close to the floor price (after a new rich vein of silver is found, for example), the scheme operator (usually government) will start buying up the stock, ensuring that the price does not fall further.”

    The NAIRU people are not buying up anything. They are not a “scheme operator”, they do nothing. They allow the price to collapse (think real wages).

    So it perhaps is ceding a point to the NAIRU people before the debate even starts and granting them unmerited favor to say that they are “maintaining a buffer stock of unemployed”, they aren’t doing anything.

    This NAIRU is a textbook ignorant moron Libertarian policy, ie “more freedom (sic)”; ie “we’re too stupid to understand the operation of these systems so we recommend for ourselves and everyone else we do nothing”.

    I would think that the NAIRU documentation does not include references to Buffer Stock Schemes . We may be giving them too much credit right from the start. Indeed this wiki says:

    http://en.wikipedia.org/wiki/NAIRU

    “Others, such as Abba Lerner (1951, 1967) and Hyman Minsky (1965) have argued that a similar effect can be achieved without the human costs of unemployment via a job guarantee, where rather than being unemployed, those who cannot find work in the private sector should be employed by the government. This theory replaces the NAIRU with the NAIBER (non-accelerating-inflation-buffer employment ratio).”

    So if this is to believed, it looks like the NAIRU people dont have a buffer of anything. The buffer concept came after NAIRU and is outside of NAIRU.

    Resp,

  11. magpie: I am sure not all Realists share this, but at least some of them appear to imagine that this power is tantamount or at least leaves the door open to a SWAT team breaking into their bedrooms at 2:30am, shouting and pointing automatic weapons and LED torches at you; I would like to assure them that it is not.

    Not sure that this completely the case. Ask any of the individual sovereignty people when they attempted to assert it by not filing taxes. Yes, they do come after you with guns drawn at a certain point. Obviously, that is not a threat to most people, but it is a very strong coercive threat that is exerted now and again if only to prove the point. The government can do this and this is the bottom line on tax obligations wrt state money.

    What the state theory says as interpreted by MMT economics is that the coercive power of the state to compel citizens to meet their obligations to the state as a matter of law is a necessary condition for avoiding hyperinflation, because there will also be a need to obtain the currency to pay taxes. IIRC, Warren has stated this several times recently.

    The state theory of money is based on the need of the state to create a market in which it has extraordinary purchasing power to move private resources to state use, so that the state does not have to obtain the medium of exchange elsewhere, i.e., become a currency user instead of the issuer, which has bankrupted many rulers.

    The question is about necessary and sufficient conditions. The state theory of money holds that the coercive power of the state to require non-government to obtain the money issued by the state in order to meet obligations to the state is necessary for state money. A lot of people will just refuse to allow the state to transfer resources to itself for essentially worthless tokens. There are a lot of people in the US that refuse to do so in various ways, even resorting to barter. But the US taxes barter too as if it were a monetary transaction. There is no way to live in the US having to obtain state money to pay taxes.

    It is debatable whether this is a sufficient condition, however. In ancient times, state money was not generally used in day to day transaction. State money was specifically a tax credit and those with tax obligations had to obtain this tax credit for period payment. In this way the state could move resources to itself for the price it set as monopolist. So in this situation the condition was necessary and sufficient.

    Is it sufficient in a modern complex monetary economy? We can debate that. I would say that without attending to other relevant conditions, then domestic inflation and external devaluation are the risks to the value of state money.

  12. Matt, I believe that the Fed quote Scott provided shows that the Fed was aware that it was using unemployment as a buffer stock. Of course, no one defending NAIRU is not going to talk that way. Their party line is that unemployment rises because people prefer leisure. It’s transparently self-serving nonsense. Orwellian double-speak.

  13. Tom, my understanding is that tax enforceability is sufficient for state money though possibly not necessary (though in reality probably necessary as well). That is, if the tax obligation is enforceable, that is sufficient to ensure resources can be transferred to the public domain. It might or might not bring with it wide usage of the state money by the non-government, but that is not critical for the viability of the state money, which at minimum only requires sufficient usage to transfer resources to the public domain, and this is ensured by successful enforcement of the tax liability.

    It is conceivable that under special conditions coercion might not be necessary. Certainly for small communities of individuals, under the right conditions, monies can achieve transfer of resources without coercion.

  14. That is interesting, peterc. My impression was that it was necessary. Force implies necessity. Comply or lose your freedom and/or property. Many (if not most) people pay taxes only because they are afraid of the consequences. Even then there is a lot of tax cheating. Absent the threat of coercion, I doubt state-imposed money would be viable. So I would say it is a sine qua non.

    The reason I said that sufficiency is open for debate is that in a modern complex economy other factors seem to be involved in acceptance of state money as the exclusive unit of account in a complex economy. What I mean is that I don’t think that the issue that Cullen brings up can just be dismissed. He is certainly not unique to him. I have seen quite a few people bring up this line of reasoning. On that score, it needs to be met. There is huge resistance to theory of state money based chiefly on force.

  15. peterc, the problem with making coercive force only a sufficient condition is that other sufficient conditions are possible, so that it would be possible to have state money without coercive taxation. That is the argument of opponents of Chartalism. That is why I believe that the Chartalists argument rests in coercive force being a necessary condition.

    A necessary condition might not be sufficient, so that other factors would have to be present in addition to coercive threat as a necessary condition. In a modern complex economy that might be arguable. If one wished to rebut this, it would be necessary to show that coercive force is necessary and sufficient in any case.

  16. I think people make too much of the issue of coercion, its everywhere in all walks of life and in all functions.

    Without it at all, in the lay use of the word, there would be anarchy and chaos.

    It’s only idealist libertarians, perhaps right-libertarians to make a distinction that think such a thing and thus I don’t think much of them.

    Left-libertarians I’m still working out.

  17. People in the US will think: x

    Fallacy of composition perhaps?

    I’m not saying it is but according to wikipedia this fallacy is closely related to one called hasty generalisation. (personally I doubt this hasty generalisation one exists as an official fallacy) but that is what we’re doing here.

    A decade or so in Australia we had a Prime Minister that educated us on economics (he was incorrect on lots) but is there no such sort of leader in the US?

    I think some MR have not read widely enough on the buffer stock literature as I see no confusion between the various statements, just differing levels of how to get an employed buffer stock. 99% of that is via Bill Mitchell what I’ve read and that includes practically every PDF he has posted over the last 2.5 years, more recently I have read NEP and their PDFs and I see no conflict. Unlike Scott, I don’t even see Bill’s clarification of buffer stock or not as taking words bad – I see it all as entirely consistent.

  18. Tom, thanks for your responses.

    My understanding is that the MMR group agree taxes are important (perhaps necessary?) but insufficient. I’m pretty sure chartalism is saying tax enforceability is sufficient but not necessary (i.e. that other factors could be sufficient), but I’ll happily stand corrected on that if an MMTer or yourself can set me straight.

    This is how I see it. Whether or not people think there are great things to be had by trading in the government’s money, that is immaterial to the question of whether the government can create sufficient demand for its currency to transfer resources as desired from the private to public domain. If there is a lump-sum tax, and it is successfully enforced, that will be sufficient. End of story.

    That does not mean the currency will be widely used, though in many cases it probably will. Maybe the disagreement is only because the MMR group are thinking in terms of widespread use and MMT is thinking in terms of, at minimum, sufficient use to transfer resources to the public domain. It would not ultimately matter if people transacted in other monies the rest of the time. The reason governments try to keep people doing so is because they have introduced consumption and income taxes, but if people used other monies for private transactions, the matter could be resolved by the government imposing lump-sum taxes.

    MMTers agree that once a currency is up and running, driven by lump-sum taxation, many other factors will come into play to encourage its widespread use.

    In terms of the (domestic) value of the currency, the MMT position is that it is determined by the scarcity of the government’s money relative to the enforced tax obligation. In a sense, successfully enforced lump-sum taxes determine the minimum scope of the currency (the minimum use). The government’s money will be used at least to that extent. If the government’s money were not used beyond that, the point of interest for other transactions would be the value of whatever money was being used. This would not impact on the (domestic) value of the government’s money. There would be fluctuations in the exchange rates between these different monies, but that has no bearing on the (domestic) value of the government’s money, which is what is relevant for dealings in the government’s money.

  19. > ” That does not mean the currency will be widely used…”

    Peter, this is very helpful! Makes lots of sense. Thanks!

  20. peterc, the way I understand the state theory argument as MMT economists put it, taxation is necessary and sufficient to give state money value. It is the sine qua non and the causal factor. Other factors come into play in determining how the state us used and what its purchasing power is.

    I also believe that the state money involved is the unit of account rather than the medium of exchange. For example, in the US use of barter or alternative currencies has to be converted into the unit of account for tax reporting. One cannot avoid taxation in terms of state money by avoiding its use as a medium of exchange, because it is the unit of account that is the criterion the government uses.

  21. “Other factors come into play in determining how the state us used and what its purchasing power is” should be “Other factors come into play in determining how the state money is used and what its purchasing power is.”

  22. Neil: I have yet to see Ramanan or anybody else demonstrate anything that is operational or systemic regarding the alleged constraints.

    I am very late to the party and have read only thus far but imho there is a very clear argument which, unfortunately, exposes the underlying and implicit politics of MMT. And as long as there is politics there will always be “agree to disagree”. This is imho the clear weakness of academic MMTers whose task is to educate, explain and then explain harder and even harder rather than resort to misrepresentations and existing literature. Anyways to the argument…

    International trade is effectively a barter system complicated with modern credit relationships. Accumulating trade imbalances represent inter-generational transfers of wealth and resources facilitated by these credit relationships. While we, our generation, can argue that we chose to sacrifice by exporting today for the benefit of our children tomorrow, there is no outright economic justification to the political position of permanent imports. This is pure political selfishness regardless of whether it is possible or sustainable operationally or systemically. Because it is NOT by definition sustainable once you include politics into the definition of sustainability. And this fact alone, regardless of whether coming from right or left, top or down, for any academic scientist in any science shall be as shameful as an outright lie. Because in reality it turns out to be a sweet politically driven lie more often than not exceptions notwithstanding. Just pump up some spending ahead of elections. And time still has to show us whether we have exceptions or not. I am less than sure that unemployed Americans think that they are an exception.

  23. ” there is no outright economic justification to the political position of permanent imports”

    There is.

    The political justification is that the other side is buying up your currency and hoarding it to reduce the amount of domestic activity that can occur. Which gives more space in your import market for their exports.

    Therefore accommodating that central bank hoarding via increased flows in the domestic circuit is a highly effective counter-measure to central bank mercantilism.

    Drain the other country of real resources and give them empty promises in return until they realise they gain no advantage from doing that.

    There is no intergenerational transfer because there is no guarantee that the foreign nation will be able to obtain real resources from you in the future. That is entirely down to whether you decide to let them have any or not.

  24. Neil: There is no intergenerational transfer because there is no guarantee that the foreign nation will be able to obtain real resources from you in the future

    Sorry, but you have to reconcile your liberal views on full employment and human rights with your … do not know how to call it … arguments that “they” should shut up and eat their own dirt.

    Your view of the world is too mechanical and dry even for an academic who are you not. Your models of behaviour assume away such factors as military wars and economic embargoes. We are not even talking some random country which starts with Z. Lets run a thought experiment and take USA and assume that tomorrow the government of USA will void all its financial obligations owned by China or foreigners overall which you seem to suggest. What do you think will happen? Do you think that USA will experience an abrupt decrease of living standards due to collapsing imports? IF yes then it IS already an inter-generational transfer which has *already* happened.

    But there is more to it. Do you think that other countries tolerate this? do you think they will line up for an embargo on USA also leading to a collapse of its export industries? What do you think will happen to the businesses and *assets* of Facebook, Microsoft, Google, Apple, Bank of America etc abroad? Does it constitute a transfer in your mind? Do you think a general economic chaos that such a decision of the US government can lead to will affect purely domestic american businesses.

    So is it really possible to void such a guarantee at a whim of politicians or you just live in a world of fancy theories? Is there really a free fiscal space of an otherwise sovereign country which has accumulated substantial claims of foreigners?

    Neil, you can not take such answers as “maybe”. Unless you can clearly and irrevocably say that there is no risk *at*all*, i.e. there is no even a theoretical scenario where anything outlined above can be conceived of, then you are talking inter-generational transfers. Because any risk requires capital. And capital is scarce.

    You have to reconcile your prescriptions in various economic fields. Either you are a liberal who cares about people and equality or you are not. But make it straight please. People are people everywhere. Even in China people have dreams and they want to work. Even assembling stupid iphones, which you want to consider as your benefit and their cost, in work-slave conditions at Foxconn. And they are competitive, i.e. more productive.

    I am not saying that you should favour foreigners more than your own citizens. But you should be consistent in your views, especially towards your own people. If you decide to import and run a negative trade balance which you enjoy, you should also have an exit plan which makes sure that kids of those who enjoy imports today are guaranteed from any possible loss (due to imports) they can suffer tomorrow. With no risk *at*all*.

  25. “Lets run a thought experiment and take USA and assume that tomorrow the government of USA will void all its financial obligations”

    Who said anything about voiding them?

    “I am not saying that you should favour foreigners more than your own citizens.”

    Good I’m glad to hear it. Then you won’t have a problem with what I’ve just said – other than to take it to the extremes that you have done.

    In case you haven’t realised that line of argument is called the ‘excluded middle’ and is a logical fallacy.

  26. Neil, you seem to miss the argument that as long as there is even a possibility of inter-generational transfer among your own population then you are in the political domain. And your economic views in this political domain are questionable especially against your views in the economic domain of employment. Do you say that you will enjoy imports as much as possible today and force … sorry … guarantee employment for everybody tomorrow to pay back through the quality of life for what you have consumed today?

    The fact that such transfer can happen between today and tomorrow, i.e. has any probability different from zero, is enough to say that your position is economically unfounded and politically biased. And this political bias does not dance with your liberal views unless explicitly stated. So next time you mention that you are waiting for somebody to demonstrate etc without any additional qualifications I will just read it as an explicit political position of opportunistic economic free-riding at the expense of future generations. And you have full right for such position.

    But does this whole topic sound to you like an ecological and environmental problem?

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