Tuesday, 23 August 2011

Stiglitz doesn’t get Modern Monetary Theory.



Joseph Stiglitz wrote an uninspiring guide to reducing the deficit at the end of last year. Here is guide to the main ideas in the paper.

He gives seven main ideas, starting on page 1.


Brainwave No 1.

The first idea is to go for “Public investments that increase tax revenues by more than enough to pay back the principle plus interest reduce long-run deficits.”

One flaw in that idea is that worthwhile public investments (and private investments) should be being made ANYWAY – regardless of whether we are in a recession or not.

The second problem is that if the investment “increases tax revenues by more than enough to pay back the principle plus interest…” then the investment will withdraw cash from the private sector. In a balance sheet recession that’s plain daft. Or in MMT parlance, the last thing that needs to be done in a recession is to reduce private sector net financial assets.

Thirdly, public sector investments often require specialised labour, e.g. highway or bridge construction. A dramatic increase in public sector investment in a recession could be plain impossible or difficult for lack of the relevant skilled labour. But even if it is possible, to dramatically expand one sector of the economy, only to contract it again come the recovery simply distorts the labour market: hardly desirable. The distortion has to be unwound come the recovery.

Stiglitz then enlarges on this public sector investment idea under item A in his page 2. Here he claims that public sector investments during a recession a good idea because interest rates are currently low.

Well hang on. WHY are interest rates low? It’s because the government / central bank machine has DELIBERATELY lowered them! And those low interest rates have been lowered by printing money and buying government debt.

So Stiglitz is saying government should borrow the stuff (i.e. money) which government itself has produced. Well now, why go to all the trouble of dishing out money to the private sector only to borrow it back again????

It would be much simpler just to print money and spend it (in a recession), which is what MMT advocates!!!

His next reason under item A for public investment is that given high unemployment, the multiplier from such investment will be high. True. But the same goes for any sort of spending, so this is not specifically a point in favour of investment!

MMT beats Stiglitz yet again: MMTers tend to favour payroll tax reductions in a recession. Having expanded the economy via such payroll tax reductions, a portion of the expanded economy will doubtless end up in the form of extra public sector investment. But that’s by the by.


Brainwave No 2.

Stiglitz’s second brainwave is that “It is better to tax bad things (like pollution) than good things (like work).” Revelation of the century! There was me wondering why we tax alcohol. Now I know.


Brainwave No 3.


His 3rd idea is that “Economic sustainability requires environmental sustainability. The polluter pay principle—making polluters pay for the costs they impose on others—is good both for efficiency and for equity.”

Quite right, but what’s that got to do with deficits or recessions? Absolutely nothing. Again, the above principle applies recession or no recession.


Brainwave No 4.

This is that “Eliminating corporate welfare is good both for efficiency and for equity.” True, but for the umpteenth time, this has nothing specifically to do with recessions or deficits.


Brainwave No 5

This is “Given the increases in inequality and poverty and given the inequitable nature of the 2001 and 2003 tax cuts, the incidence of any tax increases should be progressive, and there should be no increases in the tax burden on the poorest Americans.”

At last: an idea with a small amount of logic! The inequality point is irrelevant in that optimising the level of inequality is a valid aim recession or no recession. But the idea does have a small amount of logic in that the poor have a higher propensity to spend income increases than the rich. Thus transfers of money from rich to poor would be stimulatory. But as far as I can see Stiglitz has not grasped the latter “stimulatory” point: at least I can’t find it in his paper.


Getting technical.

But even the above stimulatory effect of transferring money from rich to poor is a feeble saving grace for this paper. Reason is that it is a classic example of the “bang per buck” argument – the idea that there is some merit in getting as much employment as possible from each dollar spent.

The latter apparent merit is not actually a merit at all because the process of government creating dollars and spending them is virtually costless in real terms. The only important question is: what are the REAL effects of the different options available? The number of dollars that need to be created and spent to effect each option is irrelevant.

As Abba Lerner put it (p.39) "government fiscal policy, its spending and taxing, its borrowing and repayments of loans, its issue of new money and its withdrawal of money, shall all undertaken with an eye only to the results of these actions….” (the italicisation of the word “results” is in the original).

Stiglitz’s paper thus consists of a series of random ideas, most of which are no good. But when it comes to the one idea that is half valid, the author does not seem to realise why it is half valid.

I’ve had enough. I’m can’t be bothered reading beyond Brainwave No 5.



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