Tuesday, 29 October 2019
Boring inconclusive waffle from Nouriel Roubini on MMT.
In a recent article by Roubini entitled “The Allure and Limits of Monetized Fiscal Deficits” he claims MMT has overestimated the number of problems that monetizing fiscal deficits can solve.
Unfortunately he is totally unclear on exactly what problems monetization can solve and which ones it can’t solve: he ends by saying “a semi-permanent monetization of fiscal deficits in the event of another downturn may or may not be the appropriate policy response. It all depends on the nature of the shock.” Unfortunately he does not spell out exactly which “shocks” can be cured by monetization and which can’t.
However, he does say, “But what if the next recession is triggered by a permanent negative supply shock that produces stagflation (slower growth and rising inflation)? That, after all, is the risk posed by a decoupling of US-China trade, Brexit, or persistent upward pressure on oil prices.”
Well now, a big change to US-China trade patterns or Brexit certainly involves changes to relevant economies: e.g. some US firms would make stuff previously imported from China, which would require investment in capital equipment needed to make relevant stuff, plus employees would have to be trained to use that equipment, and that all takes time.
In that scenario, simply trying to maintain the current near record low unemployment levels by monetizing deficits (or raising demand any other way come to that) would probably not work. But to repeat, creating the latter capital equipment and imparting new skills to employees would not take for ever. That is, after a year or two, there’d be absolutely no reason not to get back to the current near record low unemployment levels.
In contrast, getting back to earlier levels of GDP per head would not be possible assuming free trade between China and the US (or between the UK and mainland Europe) has a GDP raising effect (and my guess is that it does).
As for the “stagflation” that Roubini mentions in this connection, there is (to repeat, sort of) absolutely no reason for stagflation in the sense of a permanently higher combination of both inflation and unemployment. But (also to repeat, sort of) THERE IS a reason for stagflation in the sense of “a permanently lower level of GDP than would otherwise have obtained”.
Another point which Roubini completely misses is that the fact of monetizing the deficit DOES NOT tell you anything about the OVERALL stimulatory effect of a set of monetary and fiscal policies, and for the simple reason that there are several other factors influencing that overall stimulatory effect. It’s a bit like asking how far the accelerator has to be depressed in a car for it to go at a given speed: silly question because there are numerous other factors influencing the speed of the car, like how many passengers it’s carrying, whether it’s going uphill or downhill, whether the car is heading into the wind, or has a tail wind, and so on.
Conclusion. If the above paragraphs of mine are not 100% clear, they are at least ten times clearer than Roubini’s waffle. And finally, I'm indebted to Mike Norman's MMT site for drawing attention to the above Roubini article..