Saturday, 10 April 2021

Stephanie Kelton’s flawed ideas on improving the unemployment / inflation trade off.


I’ve supported MMT for about ten years and thus agree with much of SK’s material. However her ideas in the second half of a recent New York Times article on how to minimise the inflationary effect of Biden’s stimulus plan are poor. The title of the article is “Biden Can Go Bigger and Not ‘Pay for It’ the Old Way.”

She starts this section by saying, “These mostly nontax inflation offsets could include industrial policies, like much more aggressively increasing our domestic manufacturing capacity by steering investment back to U.S. shores….”.

Well the first problem there is that Biden’s stimulus plan is very much into infrastructure, while US plants owned in other countries make a huge range of different items. Thus even if the relevant machinery was moved back to the US, it would not for the most part help with meeting demand for infrastructure related items.

Plus in as far as US firms are NOT CONCERNED with infrastructure related stuff, they manufacture in other countries because they regard that as being CHEAPER than manufacturing in the US. Forcing those firms to manufacture in a more expensive way won’t do much to ameliorate inflation, which is what SK aims to do.

Another of her less than brilliant ideas is that “The Biden team could also consider loosening its legal-immigration policies, so that even once America nears full employment there would still be an adequate labor pool to meet the increased demand for workers.”

Well that’s just a repeat of the age old fallacy that imported labour deals with labour shortages: a fallacy the UK fell for when it imported a large amount of labour from the West Indies just after WWII. The flaw in that argument is that (gasps of amazement), immigrants purchase food, housing, electricity and all the consumer items that natives purchase: i.e. immigrants ADD TO demand just as much as they add to aggregate supply.

At least the latter point is certainly as far as labour IN GENERAL goes. In contrast, the inflation / unemployment trade off can certainly be improved by importing SPECIFIC TYPES of skilled labour that are in short supply (and indeed by exporting specific types of labour that are in surplus). But simply importing a more or less random selection of different types of labour is of no help whatever when it comes to dealing with labour shortages.

Indeed, it’s worse than that. Most of the labour currently trying to get into the US is from central and south America is relatively unskilled, and certainly the labour imported to the UK just after WWII was relatively unskilled.

And finally, if her “industrial policies” do in fact bring benefits, shouldn't they be a PERMANENT FEATURE, rather than just some sort of temporary measure to help Biden’s stimulus, which seems to be the objective of said “industrial policies”?

Friday, 9 April 2021

Whoopeee: the IMF is back in schizophrenic mode..!!



For about the last ten years, the IMF, OECD and others have been utterly schizophrenic on the subject of government debts. Like every economic illiterate, they have been worried about the degree to which debts have been rising. On the other hand they don’t want to advocate big tax rises so as to cut debts because that would cause too much austerity.

So what have the IMF etc done? Well they’ve published any number of articles making the near useless claim that countries should implement enough stimulus to keep unemployment down, at the same time as aiming to cut stimulus and raise taxes with a view to cutting the debt. They might as well have told everyone to stand on their heads and stand on their feet at the same time. But never mind: doubtless the pay at the IMF is good, and I’m sure they have generous early retirement arrangements and good pensions for IMF staff, as long as said staff write enough nonsense.

Anyway, seems the IMF is back in full schizophrenic mode, if a recent article in the Telegraph by Ambrose Evans-Pritchard is any guide. The Title of his article is “Ballooning global debts need to be restructured before it is too late.”

Evans-Pritchard’s third para reads: “On the one hand, the IMF hints at austerity. It urges governments to head off the risk of runaway debt spirals before it is too late. On the other, it calls for more stimulus to prevent an economic relapse once the sugar rush from reopening has faded."

So what’s the solution to this allegedly horrendous debt problem? Well the answer in a nutshell is “Step forward MMT”. That is, as MMTers have been trying to explain for years, and as I’ve explained many times on this blog, the government of a country which issues its own currency has complete control over the rate of interest it pays on its debt, but it CANNOT control the SIZE OF the debt at a given rate of interest. That is, if the private sector goes into savings mode and decides it wants to hold more debt at let’s say a 1% rate of interest, government and its central bank will just have to run a deficit and let the private sector have what it wants. If government and central bank don’t do that, then the private sector will try save with a view to acquiring that extra debt, and as Keynes pointed out in his “paradox of thrift” point, saving up money raises unemployment, all else equal.

I.e. the debt will come down if and when the private sector goes into what might be called “spendthrift” mode and decides it wants to hold LESS debt.

Wednesday, 7 April 2021

One Fed chairman and one vice Chairman support Positive Money.


To be more accurate, one former chairman and one former vice chairman support a particular aspect of the idea put by Ben Dyson (founder of Positive Money) namely that the central bank should decide the SIZE OF the deficit, while politicians continue to be responsible for strictly political decisions, including the NATURE OF the deficit, e.g. whether it takes the form of more public spending or more tax cuts.

The chairman is Ben Bernanke. See para starting “A possible arrangement….” in his Fortune article “Here’s How Ben Bernanke’s Helicopter Money Plan Might Work.”

The former vice chairman is Stanley Fischer.  See article by him and co-authors: “Dealing with the next downturn” published by “The European Money and Finance Forum”.

To be even more accurate, Fischer & Co advocate the latter “fiscal / monetary coordination” policy only where interest rates are so low that there is little more that further interest rate cuts can do. In contrast, Dyson advocated that policy on a PERMANENT basis, with interest rates being determined by market forces: i.e. stimulus under a Dyson system would be implemented ONLY via the latter “coordination” system. But still, the Fischer proposal is support of a sort of the Dyson idea.

For more details on the Dyson proposal, see the book “Modernising Money” by Ben Dyson and Andrew Jackson, or for a shorter summary of their proposals, see a submission to the UK’s “Vickers Commission” by Dyson and co-authors (p.10 onwards).


Market forces.

A flaw in the Dyson proposal is that governments nowadays are such HUGE borrowers, that it is arguably a bit meaningless to refer to market forces which allegedly set interest rates unless one also states what government policy on borrowing should be: i.e. government borrowing policy itself influences interest rates.

My answer to that little conundrum is “step forward Modern Monetary Theory with its claim that interest on government debt should ideally be set permanently at zero”. One reason for the permanent or near permanent zero idea (at least as far as I’m concerned) is that any sort of positive return on government debt essentially equals rewarding money hoarders for hoarding money, with a variety of less well-off taxpayers footing the bill for that reward.

Thus if one accepts the permanent zero idea, then Dyson & Co’s idea about market forces becomes irrelevant, and stimulus is implemented just by creating new money and spending it (and/or cutting taxes): which is what Fischer, Bernanke, Dyson and MMT all advocate, though they all have their own variations on that theme.