Friday, April 22, 2011

Comments on Interfluidity

Steve Waldman's been trying to get his head around MMT. Here are his criticisms of it. My response is below.

While the flow of net private sector financial assets does strike me as an important and powerful tool for macroeconomic policy, it is not a uniquely effective tool. Changes in the relative price of financial assets (the object of conventional monetary policy) and in the distribution of financial assets can also powerfully affect behavior, and there are costs and benefits associated with each lever. What is the justification for focusing almost exclusively on managing the level of “net financial assets”?
This is the weakest of Steve's points, and reflect the fact he's in a PhD program and a Progressive. What evidence is there that changes in the relative price of financial assets is much influenced by the Fed, regardless of what it's "objectives" are? And, even if these relative prices are influenced by the Fed, what evidence is there that they are a potent macroeconomic tool. Does Japan not exist? Aren't we in the Year 2011? Does reality never get a chance at bat in the ivory tower?

I'll disregard the distribution question for obvious reasons.
It is unassailable true that a government cannot be forced into insolvency for want of capacity to pay in its own currency. But a government might find itself politically or institutionally unable to meet an obligation despite access to the printing press, and there might be a sharp run on government obligations even without the focal point of formal insolvency that usually occasions private sector runs. It strikes me as an open question the degree to which protection from formal insolvency protects government obligations from disruptive races to redeem. Point #7 below strikes me as stronger protection.
A government can always choose not to make an obligation, and indeed, Russia made this very choice in 1998. What protects a government from disruptive races to redeem is its ability to tax.
MMT-ers are right, I think, to argue that, for fiat-money issuers who borrow in their own currency, conventional government solvency criteria are false. They are right to argue that such governments have a great deal more latitude to issue money and debt than conventional theories suggest. But that shouldn’t be taken as license to defend carelessness in the distribution of new claims, or to treat expansions of money or debt as entirely cost-free. To be fair, this is a bit of a straw man.
To be accurate, this is entirely a straw man. Again, Japan? Reality? Tinkerbell? The difference between a dependent and independent variable?
So, I’ll to acknowledge TC’s objection as important and potentially valid, but defend my positing of an MMT “solvency” constraint, at least with scare quotes in place. I don’t think it’s reasonable for MMT-ers or anybody else to write off the possibility of sharp and unexpected changes in the value of a fiat currency. The possibility is dangerous enough that it should focus the mind in a precautionary way. If MMT policy advice is to be taken seriously, it must offer a some assurance of safety against that scenario. The absence of formal default hazard provides some assurance, but without Point #7 as a backstop, not enough.
It's called sensibly designed fiscal policy with good automatic stabalizers. Oh yeah, and an academic class who knows an asset from a liability, a stock from a flow, and a bit from an atom. A lot to ask, for certain.
On the one hand, I consider this point is one of MMT’s deepest insights, and its secret weapon. So long as a government’s taxing power is strong, so long as it is capable of persuading individuals to surrender highly valued real goods and services for the ability to escape liabilities imposed by fiat, exercise of that taxing power creates a floor beneath which the value of a currency, in real goods and services, cannot fall.

However, relying too overtly on taxation to give value to a currency strikes me as dangerous and potentially counterproductive. A government’s taxing power is limited and socially costly. Governments must maintain a patina of legitimacy so that people pay taxes “voluntarily” or else they must intrusively or even brutally force compliance. In a decent society, it’s perfectly possible that governments will find it politically impossible to tax at the level consistent with price stability goals.
Here, Steve's Progressive instincts cloud the remainder of his mind. The US is certainly a decent society. But I don't pay my taxes voluntarily and neither does anyone I know. If taxes were voluntary, I wouldn't pay them. Maybe Steve can share how much extra tax he gave in 2011 (since it's 4/22, the 1040 should still be fresh in his mind)?

A Government that cannot tax is no longer a government. When a government dissolves, then its fiat currency dissolves as well. This is called "hyperinflation" and it has nothing to do with a government's "solvency" and everything to do with its existence.
I think this is true, a deep and powerful way to think about public finance. Note that a government’s “political capacity to levy and and enforce payment of taxes” depends first and foremost on the quality of the real economy it superintends. The value that a government is capable of taxing if necessary to sustain the value of its obligations increases with the value produced overall.
Again, Steve's Progressive instincts cloud what remains of his judgement. A government's capacity to impose taxes has nothing to do with the quality of the real economy it oversees and everything to do with its sovereign power. The King of some remote village will be able to collect goats in tribute so long as he is the True King. etc. A soverign who oversees a more productive economy will certainly get a richer vig, but what does that have to do with anything?
The internet is a fractious place. Many MMT-ers are civil and patient, and devote enormous energy to carefully and respectfully explaining their views. There’s no way to police other peoples’ manners. Still, even by the standards of the blogosphere, MMT-ers have a reputation as an unusually prickly bunch. That might not be helpful in terms of gaining broader acceptance of the ideas.
What crap. It's like the Pope saying to Gallileo, "if you were only nicer about this whole earth revolving around the sun the Church would listen to you more". MMT is rejected because it is heretical.


Blogger Detroit Dan said...

Bravo! I've been thinking about Galileo and Copernicus too, in relation to MMT...

9:17 PM  
Blogger Jazzbumpa said...

A government's capacity to impose taxes has nothing to do with the quality of the real economy it oversees

This is nonsense. Please tell me this was just a momentary lapse.

Taxation always and everywhere accomplishes some sort of wealth distribution. The government does more than just engage in warfare and maintenance of the nation's physical plant. It buys stuff, it lets contracts, it employs people, it provides medial care, food stamps and, best of all, Social Security payments to old fogies like me. The latter two are particularly effective ways of getting money to flow into the economy. I certainly spend every penny of my SS check.

This is spending, and it has EVERYTHING to do with the quality of the economy.

BTW, Galileo was a progressive. The Pope -- not so much.


3:37 PM  
Blogger jeff65 said...


Taxation and govt spending aren't the same thing.

3:56 PM  
Blogger BadTux said...

Capitalism is the notion that tokens of value ("money") can be used to train the economy to produce more of that which is in demand, and less of that which is not in demand. Capitalism works because people strive to increase their supply of these tokens. To state that taking some of these tokens away from some people and then giving them to other people (or even just throwing them into a shredder as jeff65 hypothesizes might happen in some universe where unicorns are pink and cotton candy grows on trees) will not affect the economic behavior of people is to basically state that capitalism is bunk. Is that *really* what folks are tryin' to say here? If so, I know a few Communist economic theorists who would agree with you... but somehow, not exactly what I expected to see here :).

- Badtux the Snarky Economics Penguin

6:23 PM  
Blogger Jazzbumpa said...

jeff65 -

No, they are not. But the primary function of taxation is to fund government spending.

Are you willing to arbitrarily sever the relationship between them?

Further, taxation redistributes wealth, and as Tux points out, taxation involves incentives and disincentives.

Do you deny that these effect the economy in profound ways?


5:13 AM  
Blogger jeff65 said...

JzB said "But the primary function of taxation is to fund government spending."

If you're going to comment here, perhaps you should read the host's other blog posts? You will see that your statement is not accepted as self-evident.

3:18 PM  
Blogger BadTux said...

Whether a "primary function" of taxation is to fund government spending or not, in any case in a capitalist economy (I assume we're still talking about a capitalist economy here, right? Not some hypothetical nonexistent economy?) the very act of taking away desired tokens ("money") from certain groups of people will change their economic behavior and thus affect the economy.

Regarding the notion of taxation being an exercise of sovereign power used to deal with inflation caused by seigniorage, I suppose that accounts for the failure of the Continental dollar and the Confederate dollar, both of which became largely worthless over time due to lack of an effective tax system to recapture a large percentage of the dollars being printed. Still, an examination of history shows plenty of governments which have fallen into that same pattern. The problem is that once you have gone to a fiat currency and have cut the strings between taxation and spending, the temptation to simply print more and more money to meet government obligations becomes difficult to resist. Who enjoys paying taxes, after all? But that's a study of history, i.e. actual observed reality, rather than theoretical economics, so perhaps not relevant to this blog :).

- Badtux the Snarky Economics Penguin

3:52 PM  
Blogger jeff65 said...


Most of the world has gone to fiat currencies. The link between taxation and spending is already cut. Are you saying it is useful to pretend this is not the case?

As for historical examples, any one you could name had some intractable issue that would have caused disastrous problems under any monetary scheme. Attempts to blame the underlying problems on a fiat monetary regime is simple myth-making.

4:24 PM  
Blogger BadTux said...

Is most of the world on fiat currencies? What happens if you ask the Irish that question? Or the Greeks? The question of whose fiat currency is an important one, and is one reason why the Federal Reserve was set up as a quasi-independent entity rather than an arm of the U.S. Government -- the notion was that this would make it more difficult for a U.S. Congress to decide to fund the operations of government by printing money rather than by issuing bonds or by taxation. For most of the rest of the world, they may have their own official national currency, but the world's de facto fiat currency is oil, and oil is denominated in dollars.

And what is taxation, anyhow, other than the government seizing economic output (or tokens thereof) via sovereign power? Money taxes are a fairly recent innovation, historically speaking. What differentiates levying an income tax from simply seizing a percentage of the goats in your subjects' yurts? What differentiates diminishing the value of debt obligations via inflation caused by seigniorage from simply seizing a percentage of the value of debt obligations?

Note that I am not an Austrian lunatic and am not blaming underlying problems on a fiat monetary regime. I am just pointing out that pretending that there is a link between taxes and spending is a useful pretense, especially since there is a rough correspondence with the actual reality that exists, where few countries are truly sovereign in their currency, and most of those countries have cumbersome institutions set up to prevent easy access to seigniorage as a significant source of income. Of course, this pretense becomes rather annoying in situations like the current one, where the only proven answer to our current problems is massive fiscal stimulus funded by issuing massive amounts of currency via selling bonds to the Federal Reserve in order to reverse the massive asset deflation that happened during the housing collapse and furthermore create inflation in order to deflate the value of the debts on household asset sheets in order to bring them back down to a reasonable level again... see WW2, except with fewer bombs and more infrastructure... but that's a different issue, and I'm not quite sure where MMT is regarding that classic Keynesian solution to our current problems other than as a source of funding it that doesn't require driving interest rates into the stratosphere.

- Badtux the Situational Penguin

5:26 PM  
Blogger Jazzbumpa said...

You will see that your statement is not accepted as self-evident.

But this is.

A government's capacity to impose taxes has nothing to do with the quality of the real economy it oversees

Allrightee then.

Confiscation of wealth/tokens to the tune of about 18% of GDP, redistribution, and incentives/disincentives are of no consequence to the economy.

Got it.

But I don't think you're going to convince Krugman (emphasis added):

Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)

So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.

Feel free to disagree with me or Krugman. That's fine. But the statement that started this discussion is also not generally accepted as self-evident.


6:48 PM  
Blogger The Arthurian said...

The Penguin makes an important point: "I am just pointing out that pretending that there is a link between taxes and spending is a useful pretense..."

I've not seen MMT address it; there is always and only a focus on the operational. And yet, value is in the eye of the beholder.

2:57 AM  
Blogger STF said...

Regarding the "useful pretense" argument, this may be of interest:

10:55 AM  

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