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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