Jan Hatzius On Wynne Godley On Odd Lots
Jan Hatzius of Goldman Sachs talks about how he drew inspiration from Wynne Godley in the latest Odd Lots podcast hosted by Joe Weisenthal and Tracy Alloway of Bloomberg.
He talks of how the private sector financial balance (or net lending) is an important thing to look at to predict crisis.
Jo Michell reminded everyone in a tweet of a quote from Joan Robinson with the comment: “Joan Robinson covered pretty much all of MMT in half a page in 1937.”
😉
It’s a passage from her book Introduction To The Theory Of Employment, pages 72-74 (in the second edition):
CREATION OF MONEY THROUGH A BUDGET DEFICIT
A budget deficit financed by borrowing from the Central Bank has effects similar to those of gold-mining. We have already seen how a budget deficit influences incomes. If there is an increase in government expenditure without any corresponding increase in tax receipts there will be an increase in incomes and activity. This is true equally whether the government borrows from the public or from the Central Bank. If the borrowing is from the public there is no further effect to be considered. But if borrowing is from the Central Bank, then on top of the direct effect of the deficit upon income there is the effect of an increase in the quantity of money. For the Central Bank, in lending to the government, increases the ” cash” of the banks, just as it does by buying securities or by buying gold. The direct effect of the deficit comes to an end as soon as the budget is balanced, but the effect upon the quantity of money remains as a permanent legacy.
The increase in the quantity of money, which takes place cumulatively as long as the deficit is running, will tend to produce a fall in the rate of interest and (unless confidence has been badly shaken) the effects of an increase in investment, induced by lower interest rates, will be superimposed upon the direct effects of the budget deficit in increasing consumption.
At first there will be a drag upon the fall in the rate of interest because the direct effect of the budget deficit in increasing incomes raises the demand for money, since the requirements of the active circulation depend upon the level of income. But the increase in demand for money will be very slight (so long as money wages do not rise) compared to the increase in supply, and it is a once-andfor-all effect, while the increase in the supply of money is cumulative.
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The whole difference between a budget deficit financed by creating money and one financed by ordinary borrowing lies in this reaction upon the rate of interest.
Marc Lavoie Interview On His New Book
This is a nice interview of Marc Lavoie by Louis-Philippe Rochon on his latest book Post-Keynesian Monetary Theory: Selected Essays.
Louis-Philippe Rochon — The Economics Of Basil Moore
Good talk by LPR on the evolution of Basil Moore’s views on endogenous money. Talk presented at the ‘International Symposium on Economic Thought’ conference, November 28th, 2020.
Gita Gopinath, the IMF’s chief economist is now arguing for a coordinated fiscal expansion, and that “coordinated spending is better than the sum of the individual parts” (CNN interviewer quoting her) and that “it is time for a global synchronised fiscal push to lift up prospects for all” (FT article referred in the CNN interview.
This is of course welcome! A lot of countries can’t do it alone and a coordinated expansion would allow them to raise output, keeping balance of payments in check.
It’s sad however, that the message was this late (although anything better than never). Also the characterisation of the problem as if we’re in a liquidity trap is dubious as they just want to say that fiscal policy will work only now, not after a recovery. But fiscal policy always works.
Sergio Cesaratto has a new book which:
with the further description:
This book discloses the economic foundations of European fiscal and monetary policies by introducing readers to an array of alternative approaches in economics. It presents various heterodox theories put forward by classical economists, Marx, Sraffa and Keynes, as a coherent challenge to neo-classical theory. The book underscores and critically assesses the analytical inconsistencies of European economic policy and the conservative nature of the current European governance. In this light, it examines the political obstacles to proposals to reform the European monetary union, as well as those originating in the neo-mercantilist German model. Given its scope and format, the book offers a valuable asset for researchers and members of the general public alike.
[the title is the book site at Springer]
Glenn Greenwald On The American Press: My Resignation From The Intercept
… The Intercept’s editors, in violation of my contractual right of editorial freedom, censored an article I wrote this week, refusing to publish it unless I remove all sections critical of Democratic presidential candidate Joe Biden …
…
American media is gripped in a polarized culture war that is forcing journalism to conform to tribal, groupthink narratives that are often divorced from the truth and cater to perspectives that are not reflective of the broader public but instead a minority of hyper-partisan elites. The need to conform to highly restrictive, artificial cultural narratives and partisan identities has created a repressive and illiberal environment in which vast swaths of news and reporting either do not happen or are presented through the most skewed and reality-detached lens.
With nearly all major media institutions captured to some degree by this dynamic, a deep need exists for media that is untethered and free to transgress the boundaries of this polarized culture war and address a demand from a public that is starved for media that doesn’t play for a side but instead pursues lines of reporting, thought, and inquiry wherever they lead, without fear of violating cultural pieties or elite orthodoxies.
So Labour under the new leadership of the rank imperialist Keir Starmer has suspended Jeremy Corbyn from the party with the campaign of smears about antisemitism.
Jeremy Corbyn is far ahead of any politician in the advanced world and one of the nicest human beings. He was strongly anti-imperialist and that explains the hatred of the establishment toward him.
Unfortunately, even people who call themselves leftists—such as Owen Jones of The Guardian—tried their best to stop him from rising to power. In the 2017 elections Corbyn was really close to winning the elections and since the conservatives in the UK didn’t have a majority, Corbyn had to be stopped at all costs. So the charges of antisemitism kept appearing in the media.
There was also an internal struggle led by the now leader Keir Starmer to stop Jeremy Corbyn from taking the side of leaving the EU. Corbyn was always anti-EU, as it’s an imperialist/neoliberal institution built on the idea of free trade. But around 2016, when it was becoming apparent that the leave side was going to win, the establishment started smearing everyone as racists and xenophobic. Labour is heavily neoliberal, so except Jeremy Corbyn and a few they all wanted to remain the EU. Corbyn erred by presenting himself as a remainer before the referendum. This gave the right-wing an opportunity to exploit the situation and present themselves as the party of the working class. They knew that people would vote for them simply because voters would want to protest, not because the working class supported Conservatives‘ policies.
Jeremy Corbyn was a bit cornered and he had to pander to the remain camp and it cost him the election in 2019.
You keep hearing that neoliberalism is dead but that’s all wrong. In recent times—during the lockdown—countries have adopted expansionary fiscal policies but it’s an illusion. The politicians themselves have made it clear that those policies are temporary and would return to restrictive fiscal policy soon. Neoliberalism is stronger than ever. The fall of Jeremy Corbyn is a proof of it. So has to be fought harder than before.
Source: Instagram
The question is wrong 🤡
It’s commonly claimed by the opponents of neochartalism or “modern monetary theory” or “MMT”, that the theory advocates the use of “money-financed deficits” or “printing money”—the lowbrow language. This claim is because of a poor understanding of the theory and I say this as a critic. Many Post-Keynesians who don’t identify as chartalists also keep spreading this. Of course this isn’t the complete story as the neochartalists themselves create this confusion indirectly/unknowingly about their own theory.
Imagine a financial system such as in Canada where banks have zero reserve requirements and little bank settlement balances/reserves outside crises. The government can expand fiscal policy by simply raising government expenditure. You could think of the deficit in one period/year as “endogenous”, which will depend on how much taxes come in, which in turn depends on how the private sector responds to the stimulus (with complications of international trade). The difference between the two will be the “net borrowing” in the language of national accounts. If there’s a surplus, the government would be a net lender. But let’s assume it’s in deficit. The government has an account at the Bank of Canada and it will make this shortfall by issuing debt.
The private sector would have additional income and wealth because of the stimulus and the borrowing. Because: the stimulus would raise output and income of the private sector and also because the very act of deficit also adds to the private sector wealth.
Banks would lend more because of the rise in output would lead to more demand for loans, the central bank has a large control of the interest rates and could even set the whole yield curve. There’s no crowding out and the reserve requirement is zero! Banks would also also have more income and their capital-adequacy would improve to allow them to lend more.
Loans make deposits and in the aggregate they won’t be constrained really in lending although individual banks would need to fund themselves as not raising would cause them to have large overdrafts at the Bank of Canada, the central bank and they might run out of collateral to post at the central bank.
The private sector would decide how much of its wealth it wants to allocate in banknotes and how much in government bonds and other financial assets. If the private sector wants more banknotes, they’ll ask their banks which in turn would obtain from the Bank of Canada by going in an overdraft. The Bank of Canada would buy government bonds in the financial markets and bring the reserves back to zero from negative.
In other words, the amount of banknotes and government bonds that the private sector wishes to hold is entirely decided by the private sector. The phrase “money-financed deficits” implies that the Canadian government and the Bank of Canada decide how much this is and is misleading.
Anything here is a typical story in neochartalism. Although neochartalist would like to go more such as proposing “no-bonds” with all deficit spending from the beginning of time to be reflected in banks’ settlement balances at the Bank of Canada, it’s not like a strict requirement that neochartalism would only work with zero-bonds. They’d be comparatively happy with more fiscal expansion than no expansion or contraction or an expansion which is not much.
The main reason for the stimulus and the rise in output would be the act of increased spending of the government itself. Money vs. bonds decided by the private sector needs.
The reason neochartalists’ claim sound like “printing-money” in the lowbrow language is that the above dynamics is poorly understood by their opponents, because monetarism is a prejudice which affects almost everyone.
But to complicate that’s not all. There’s a Stephanie Kelton paper with the title Can Taxes And Bonds Finance Government Spending?
This misleads the reader into thinking that neochartalists are advocating “printing money” but the arguments above show how misleading the phrase itself is. What the “MMTers” are saying is that the government has a virtually large borrowing ability. The phrase “borrowing” makes us thinking that there is some sort of intrinsic constraint. Hence their rejection of the word “borrowing”.
To prove all this, neochartalists try to draw long T-accounts so that the reader is convinced that everything is fine, government deficit is actually mirrored as private sector deficit, the mechanics of central banking in trying to prove in detail how the government can raise as much funds as it wants, so that the reader is convinced there’s no hanky-panky.
But in an effort to prove that they go into overkill. So for example, typically governments can’t have overdrafts at their central bank because neoliberals have made this the law to “discipline” the government. So some positive critics such as Marc Lavoie would try to constructively critique them in a friendly way but others would simply dismiss them using this as an excuse. Neochartalists would respond to former saying that it still doesn’t constrain the government which is true but it’s not a perfect argument.
And in all this they also end up claiming horribly wrong things that taxes needn’t be increased. That is unfortunate as it gives their opponents an even bigger chance to dismiss them. Some like me have criticised them for this too but “MMT” has kind of become this catch-phrase for everything Post-Keynesian so the ones with bad faith exploit it to dismiss the whole of Post-Keynesianism.
More than that, the story falls short because in the case of open economy, the government has constraints, brought because of historic reasons causing large differences in competitiveness between nations. Trade imbalances can cause fiscal policy to be constrained and the international investment position to be unsustainable.
But this part is a digression for this post. The main point is that the claim that “MMT advocates printing money” is a lowbrow claim.
The new issue of Review Of Keynesian Economics (ROKE) is out. Thomas Palley has another critique of Neochartalism or “Modern Modern Theory”, tilted What’s Wrong With Modern Money Theory: Macro And Political Economic Restraints On Deficit-Financed Fiscal Policy.
I don’t agree with many things but it’s worth a read, as has his other critiques been. From a political economy perspective, the problem of the world is the the liberal international economic order which exists and is totalising. This imperialism needs to be overthrown and new order needs to be established. This is completely missed by the neochartalists because they tend to think that as long as a country’s currency is truly floating, fiscal policy can do the trick. Dismissing the constraints brought from international trade, this way.
Globalists need to be defeated.
Neochartalists also do all sorts of verbal gymnastics in throttling any debate about increase in tax rates. In fact Warren Mosler argues for removal of most taxes. Oh wow! How did us mortals miss such a simple solution to the problem of the world!
Basically neochartalists blur the distinction between two separate issues:
One can believe both (1) and (2) consistently as typically economies run at less than full employment. Neochartalists however use (1) to throttle the debate on (2).
But if you discuss these issues with them, they concede this but yet the next time seem to argue like before. Another way to see this is that they have no proposals to raise taxes even though they have all sorts of proposals everywhere.
Thomas Palley warns us against this hilarity. He says:
More generally, it is pure semantics whether taxes raise money to finance government spending, or taxes destroy money in order to create the space for reissue of money to finance spending. Taxation and spending occur simultaneously, and taxes are an intrinsic part of the system and cannot be done away with. Even when the economy is far from the full employment/inflation target, taxes are needed to finance the vast bulk of spending. Money-financed budget deficits provide some space at the margin for temporary additional spending, which eventually either has to be cut or be financed by some combination of taxes and borrowing when the economy’s constraints bite.26
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- If the economy is away from steady state, and the inflation rate and the money–GDP ratio are both rising, then there will be additional temporary financial space along the traverse to the steady state.
Fiscal policy is hugely important and mainstream economists underplay the role of fiscal policy even after so much fiscal policy came to the rescue in this new lockdown crisis. But the problems are much deeper. Imperialism has to be defeated. A new international economic order with planned trade instead of free trade, together with coordination of policies (including fiscal policy) needs to be established. Without the imperial power of either the United States or other international institutions. But something democratic at the international level. Nor is neochartalists’ claims about the importance of fiscal policy original as there’s a tradition of Post-Keynesian economics stressing the importance.