Thursday, 21 November 2013

Larry Summers should study MMT.

Whoopee. Larry Summers made an allegedly important speech at the IMF on November 8th, and the economics profession is all excited about it.
As MMTer Bill Mitchell has pointed out over and over, the IMF is clueless . And just one illustration of this cluelessness is that it seems to be impossible to get hold of the text of Summers’s speech. Doubtless it’s out there somewhere, but after 10 minutes of Googling, I can’t find it, so I’m relying on reports about, and snippets from the speech produced by others.
Summers’s basic point seems to be that interest rates are at record lows, which makes conventional monetary policy near impotent. Plus we’ve had large doses of fiscal policy (though not as much as the advocates of fiscal policy would like) and that doesn’t seem to have had much effect. So we’re in for Japan style stagnation. Well that’s all nonsense.
The best way to explain what is going on, and what the cure is, is to revisit Warren Mosler’s hypothetical and very simple economy which consisted of a family: the parents charged their children rent, and issued “business cards” and paid the children for doing household chores. The children paid their rent using the business cards. (Warren is of course a leading MMTer.)
Now if you think professional economists are too sophisticated to need lessons in how simple “family” economies work, then think again. A significant number of so called professional economists (scarcely believable this) don’t seem to have worked out something that Robert Mugabwe has worked out, namely that governments can print money, or print “fiat” as it’s often called on this MMT site. I.e. governments can do what the parents in Warren’s hypothetical family manage to do (with zero training in economics, probably).
And if you want an illustration of the inspiration in insight that some leading economists claim to have got from considering very simple economies, see here.
Anyway, as Warren correctly pointed out in connection with his mini economy, the children (aka private sector) will be willing to hold a finite stock of business cards (monetary base) surplus to their immediate requirements, e.g. as a precaution against a rainy day.
And as he also rightly pointed out, the parents (aka the government / central bank machine) can always get what might be called a “free ride”: that is print surplus cards and pay for more than the normal amount household chores. Though there is a slight problem there, namely that the children will have to be induced to hold more cards than they really want. But that can be done, as Warren pointed out by the parents paying the children interest.
However, there is no good reason to suppose the number of cards that the children want to hold at a particular rate of interest will remain constant for all time. Indeed, we currently have what Martin Wolf (in reference to Summers’s speech) called a “glut of savings”. That is, the private sector is currently willing to hold larger than normal amounts of monetary base, even at very low rates of interest.
And of course if people simply cling to their cards / money rather than spend it, the aggregate demand declines.
Now the solution will be blindingly obvious to children. But Summers and most of the rest of the economics profession apparently cannot see it: it’s simply to continue issuing cards / monetary base till the private sector’s desire for private sector net financial assets (PSNFA) to use MMT phraseology is satisfied.
But of course the big problem there is POLITICAL. That is, having the government / central bank machine print and spend $Xbn of fiat means $Xbn of deficit, and the economic illiterates in Congress, in the Harvard department of economics and elsewhere have a largely irrational phobia about deficits.
However, the latter phobia is not 100% irrational. That is, it’s always possible that the private sector uses its expanded stock of monetary base or fiat in a few years to go wild, and excess inflation might ensue. Well the answer to that is that it’s not actually necessary to keep PSNFA at EXACTLY the level desired by the private sector: all we need do in order to raise demand is to print fiat and have government up its spending, plus we need to feed fiat into household pockets. The mere fact of extra government spending raises employment. And when households see their incomes rise, they’ll increase their spending, even though their PSNFA is not yet at the level they’d like.

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