Saturday, February 18, 2012

MMT is not Monetarism

Interfluidity claims that monetarism shares more with MMT than we all think.
I think MMTers, market monetarists, and Keynesians have almost everything in common other than tribe and affiliation.
He then goes on to recommend a pro-cyclical inflation indexed government savings account. Crazy.

When seeing these hare-brained schemes, I always wonder just what problem SRW is trying to solve. There must be some policy reason I'm not seeing for complicated, rube-goldberg, counter-productive ideas. But let's review in detail:

SRW would give people a government backed, $200,000 max, inflation indexed savings account (real rate of zero). This is meant to help people with inflation.

Fine, so US has 300M people, so assume we have a 50% usage rate of this account, so a total of $3x10^13 is going to be in this thing. I don't even know what this number is.

Saudi decides to jack up oil prices. We get cost-push inflation of, say, 7%. In Steve's world, the Government would need to print an extra $2,100,000,000,000 and pump that into savings accounts. 12 zeroes makes that a US Trillion. The US National debt is $15T.

So, because of inflation, SRW is going to print $2T, an increase of over 10% of the national debt (not deficit).

What does everyone think is going to happen to inflation now? Instead of helping people during high-inflationary periods, this will trigger hyperinflation by design.

It gets worse in periods of negative growth -- account holders will need to take haircuts. So, you guessed it, when the economy is shrinking, the Government is going to start reducing the number in people's bank accounts. Nominal outstanding debt will stay the same, of course, so you'll get debt deflation the way we did in the Depression.

I can see the middle class singing Hosannas now.

If Steve claims MMT and monetarism are the same, maybe it's because he doesn't understand the differences.


Blogger JW Mason said...

You're focusing on the inflation-indexed part. To me, that's not the main point. The main point -- the problem the proposal is trying to solve -- is that we don't need the banking system to meet people's needs for a liquid store of wealth and, in fact, it's not very well suited to it.

I think it would be better to drop to the indexing part but I don't see the problems being as bad as you describe. Talking about hyperinflation is just silly in this context -- countries with functioning tax systems don't experience hyperinflation, period. (It's always and everywhere a fiscal phenomenon, to coin a phrase.) You are right that inflation-indexing -- not just here but in general -- which seems superficially like a way of avoiding the problem of inflation, actually makes the problem worse. But one thing MMT does know is that inflation/deflation occur because of a gap between the demand and supply for currently produced output, *not* because of anything to do with "the money supply". Now it's true that a fall in the nominal value of these accounts in a deflationary situation would tend to depress current spending -- as I say, I also would like the proposal better without the indexing. But keep in mind, the alternative to this is *private* financial assets, which, if they are not FDIC-guaranteed bank deposits, also are going to be falling in value in a downturn.

8:33 AM  
Blogger Steve Randy Waldman said...

So I guess I need to write more clearly or something.

I thought I stated pretty clearly though that it was crucial that inflation-protection be limited to no more than ~25% of GDP, to protect government solvency, and that an adjustable limit or real inflation rate schedule could enforce that. If, somehow half of the United States' men, women, and children came up with $200K in accounts that could not be used as security against loans, the limit would have to be adjusted downward or the real interest rate payable on high dollars made negative until the inflation-protected obligation was no more than 5 x 10^12 dollars. It is futile, as you suggest, to have, the US print money to service inflation-protected obligations. Traditional notions of government solvency must be respected with inflation-protected obligations in a way they need not be respected with respect to nominal obligations.

There are two purposes to my proposal. One is what JW Mason emphasizes above, but which I did not explicitly make much of in my piece: I would like there to be an explicitly public option in savings, rather than the indirect banks-and-FDIC shell game that leaves depositors protected but blurs the boundaries between what is public and private and who is financing what.

The second has to do with the politics of inflation, and is the reason for the indexing. The politically enfranchised class in the United States is not just the "1%", but the "30%". I would like to see a variety of policies enact that would be widely perceived to risk inflation. I'm pretty catholic about the policies. My own preference would be a universal basic income program combined with discretionary transfers by lottery to "fine tune" aggregate demand. But that's so far off the table, it hardly bears mention. Winterspeak has suggested, and I'd be very open to, much more aggressive use of payroll tax cuts and holidays as a tool for managing aggregate demand. Both Warren Mosler and Scott Sumner are with him on that, despite their positions of pater familias in dueling aggregate-demand tribes. More traditional Keynesians might suggest a big infrastructure push. I worry about corruption and quality of investment, but I'd sign onto that one too, as long as it's accompanied with some procedural care about how projects get chosen. More "hardcore" MMTers prefer a job guarantee, which, in various guises, I would also support. (cont'd)

12:53 PM  
Blogger Steve Randy Waldman said...

But regardless of whether the economics of the perception is right or wrong, all of these are policy options widely perceived by the "30%" as threatening inflation and therefore their hard won savings. I don't think the main concern is hyperinflation: among the successful conventional professionals of the "30%", hyperinflation in the US is still unthinkable, and as JW Mason points out, as a matter of economics it's unlikely.

But ordinary inflation and more steeply negative real rates are pressing concerns to the "30%", who thought they were on the road to a safe retirement and now find their nest eggs ever more deeply underfunded. 5% inflation wouldn't be macroeconomically tragic, it might be macroeconomically beneficial even, but it would be tragic for near-retirees whose retirement becomes suddenly underfunded. Whether or not affluent real retirees deserve any special accommodation in macro policy, as a matter of politics, they will have it. The US political establishment is responsive to the needs of this group of people.

Maybe the MMTers are right and a job guarantee would provided an anti-inflationary anchor, rather than stoke inflation. (I'm a bit skeptical of that claim, but open to it.) Maybe in the context of an IS-LM liquidity trap, we just don't need to worry about inflation qua Krugman. The economic arguments are interesting, and might be right or wrong.

But I think the "30%" has a very simple theory of the world. Government deficits are inflationary, if we don't "tackle" them, my savings will be taxed to make up the difference. Perfectly understandable risk-aversion provokes them to oppose policies that risk deficit expansion (or capital losses at the central bank). After all, even if these policies "work" for the economy, this group doesn't have all that much to gain, but in a re-1970s scenario (not hyperinflation!), they have a great deal to use. Somehow, expansionary fiscal policy needs to find some support, or at least reduced opposition, from this group of people. Offering them a bit of sanctuary from the costs of inflation, shifting some of those costs from the "30%" towards the "1%" would help.

The argument for inflation protection is a matter of politics more than macroeconomics. But getting the macroeconomics right does nobody any good if all of your "solutions" are politically unachievable.

12:54 PM  
Blogger NeilW said...

Surely the solution there is to realise that private pensions are a very silly idea indeed almost guaranteed to create a paradox of thrift scenario.

The solution is to have what we have in the UK - National Savings. Where the ordinary citizen can effectively get an account at the central bank.

You then provide index linked saving certificates (or a bank account doing the same thing if policy doesn't want to enforce a term on the savings).

I would probably go further and look at state earnings related pension schemes - where you just get a state pension based on some average of your lifetime earnings.

All this gets away from the crazy hoarding that goes on and just lets people spend what they earn safe in the knowledge that they won't starve on retirement.

The federal system is very good at paying for things. Use it.

11:43 PM  
Blogger Ramanan said...

"I can see the middle class singing Hosannas now."

Hosanna is my latest favourite song!

Can sing even if no debt deflation.

4:25 AM  
Blogger winterspeak said...

SRW: I agree that the 30% want to see their nominal nest eggs retain value and so oppose deficit spending because they see it as inflationary. People want responsible government, and a responsible government does not inflate away the value of its currency.

However, peoples idea of what causes inflation is *wrong* and it is wrong because economists have told them the wrong things. People think excess reserves are inflationary because academic economists have told them that. People think deficits per se are inflationary because academic economists have told them that.

As a step 1, I would like to see professional economists say "we were wrong about how the economy worked because we did not understand banks or accounting, but now we do, and here's the skinny". Pigs will fly and hell will freeze over at this point as well.

But as I have no interest in saving the Academy's face, I don't need to humor rube Goldberg contraptions (like your idea--25% GDP limit? Really?) that try to do the right thing while preserving the lie. Catholicism lived after Gallileo. It just ceased to concern itself with the movement of planets.

Step 2, please show me where Sumner advocates for a payroll tax holiday and on what grounds he justifies this

10:47 AM  
Blogger Steve Randy Waldman said...

winterspeak — i've just seen your response. re Sumner & employer-side payroll tax cuts, he's advocated them a lot, for a long time. See e.g.

7:54 PM  
Blogger winterspeak said...

SRW: This thread is old, so I'm going to make a fresh post.

9:36 AM  

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