Randy Wray

Richard Eskow Asks: Which Side Are You On?

Joseph M. Firestone — Sun, 23 Dec 2012 01:26:14 -0500

Richard Eskow of the Center for the American Future, posted a very good one a couple of days ago. He used the old union meme “which side are you on” to beat up the President and Congress about Social Security being placed on the negotiating table. I thought his writing on it was striking. Here's some of it:

“This is a moment of moral clarity. Right now there are only two sides in the Social Security debate: the side that says it’s acceptable to cut benefits – in a way that raises taxes for all income except the highest – and the side that says it isn’t.

“It’s time to ask our leaders – and ourselves – a simple question: Which side are you on?”

"Nancy Pelosi says she can convince most Congressional Democrats to “stick with the President” as he pursues his gratuitous and callous plan to cut Social Security benefits as part of a deficit deal – even though Social Security does not contribute to the deficit.”

I certainly hope that Nancy Pelosi cannot convince most Democrats to risk their seats and prepare the way for a Republican sweep in 2014 by voting to cut SS. The Republicans will respond to this by casting themselves as the protectors of SS, and while this is ridiculous, the Democrats will not be credible in claiming that they are its protectors, and they will lose their identity as the protectors of the safety net, a very high price to pay for the sake of raising taxes on the rich by an amount that is insignificant in the greater scheme of things. Eskow goes on:

“Excuse me: Stick with the President? What about sticking with our seniors and our veterans? What about sticking with our disabled fellow Americans? What What about sticking with the more than 4,000 children on Social Security who lost a parent in the Iraq War?

“If you want to “stick with” Americans on Social Security, it’s time to call everybody who represents you in Washington – your Representative, your Senator, your President – and tell them that they’ll lose your support if they do this deal.

“It’s time for an end to the Orwellian doublespeak. Cutting benefits won’t “strengthen” Social Security, as Nancy Pelosi claims. Cuts of 6.5 percent for a 75 year old and 9.2 percent for a 95 year old aren’t so small that “folks won’t even notice ‘em,” as President Obama claimed. They’re not a “technical” adjustment, as his press secretary argued, nor do “most economists believe … this about getting a proper measure of inflation.

“The smart economists know that even today’s cost of living formula isn’t enough. It undercounts the things older and disabled people use the most, like health care and public transportation. Some other people know the formula’s inadequate, too: Seniors. They live with the costs every day.

“So let’s stop all the double-talk and get down to the real question at hand: Which side are you on?”

The framing is “which side are you on”? Will you stick with the President and the people, who will do a deal at any costs, or will you stick with seniors and the American people. This reminds me of the frame Randy Wray recently used in one of his posts on re-framing MMT. That framing came from Bruce Springsteen:

We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own

And it's amplified by Randy Wray this way:

“. . . We don’t let old folks sleep on the street. We take care of our own. We don’t let children go hungry. We take care of our own. We don’t exclude the 47%. We take care of our own.

“We’re all stakeholders in this great nation. We take care of our own. White, black, brown, yellow and red, we take care of our own. Young or old, healthy or sick, we take care of our own. . . .

“We need a good government to help us take care of our own. We need good public services and infrastructure to keep our country strong so that we can take care of our own. Our government spends to keep our country strong so that we can take care of our own. . . .

“Sovereign government cannot be forced into involuntary insolvency. It can always afford to make all payments as they come due. It can always afford to buy anything that is for sale for its own currency. It can always financially afford any spending that is in the public interest. It can always afford to take care of its own.

“Anything that is technologically feasible is financially affordable for the sovereign issuer of the currency. It comes down to technology, resources, and political will. We’ve got the technology to take care of our own. We’ve got the resources to take care of our own. All that is missing is the political will.”

So, which side are you on? Are you on the side of most of us who want to take care of our own, wherever our flag's flown; or are you on the side of people who believe that the US Government's fiat money financial resources are necessarily constrained, so that we must choose between taking care of our own and making sure that our wealthy people and large corporations don't have to risk any of their wealth by giving their due to our country?

Don't get me wrong, I know the Federal Government doesn't need tax revenue from the wealthy or anyone to fund anything, because it's false that the Federal Government must spend only after it taxes or borrows. But there are still at least three good reasons to tax. First, the value of our fiat money is driven by the need to have enough to pay taxes. Second, taxing is needed to regulate and manage inflation. And third, taxing is needed to lessen economic inequality so that political inequality does not become so extreme that it poses a danger to democracy. All three reasons are ultimately about taking care of our own.

Eskow ends with:

“Tell the President you’re against the chained CPI. Tell your Senators and your Representative to declare their unequivocal opposition to it like Grijalva and Ellison and the others did, and to vote accordingly.

“And ask them that simple question: Which side are you on?”

I agree, and I'd also add:

Tell them that SS, Medicare, and Medicaid are litmus tests for them. Vote to cut them and you're gone after the next election. It will be “Bye Bye Marjorie” or whatever your name happens to be, for you!

More and more of us know the dirty big secret that there is no debt/deficit crisis. That the Government isn't constrained in the amount of fiat financial resources it can create.

So, we know that we can afford the cost of the social safety net, and even a lot more generous one than we have today. We also know that the Government has the financial capability to underwrite full employment, Medicare for All, a first class educational system, alternative energy development, infrastructure reinvention, programs to counter and reverse climate change, and whatever else we need to do to solve our problems.

So, don't you go telling us any longer about the fiscal constraints that excuse your not doing your jobs. We know those don't exist. We know you have no excuses.

So, get off it, and represent us! Help us take care of our own and each other, or resign from public office!

And that goes for the most junior Congressperson and also for the President of the United States! If you're not on our side and you don't want to help us take care of our own, then get out of our way and give somebody else a chance who's patriotic enough to serve!

(Cross-posted from New Economic Perspectives.)

John Carney Doesn't Believe Government Spending Can Achieve Public Purpose

Joseph M. Firestone — Fri, 02 Mar 2012 01:38:40 -0500

John Carney commented on a post by David Brooks and a follow-up by Randy Wray. Brooks says that a tax credit is essentially the same as Government spending and used an example from David Bradford, a Princeton economist, of the Pentagon wanting to acquire a new plane and paying for it with a tax credit.

Randy comments on the idea this way:

"What is a sovereign currency? It is (mostly) a keystroke that results in an electronic entry on a bank’s balance sheet. (Yes it can also be shiny coins, paper notes, and watermarked checks—but those are increasingly less important.) To be more accurate, it is two entries: an entry in the deposit account of the fighter plane’s producer and a reserve credit at the central bank for the producer’s bank.

"In the case of a modern “fiat” sovereign currency, what does the government promise? To “redeem” its currency in tax payment. When the fighter plane producer pays taxes, the keystrokes are reversed: the deposit is debited and the bank’s reserves at the Fed are debited. Presto-change-O the sovereign currency disappears in redemption.

"The fighter plane ends up at the government. That, of course, was the whole purpose of the keystrokes.

"Now let’s take Bradford’s example. Instead of keystroking a deposit, the government issues a “tax credit” to be used later in redemption of its tax liability. When tax time comes, the tax credit is sent on to the Treasury (presumably, it will be an electronic entry so little electrons pulse their way to Washington). Presto-change-O the tax credit is gone.

"Yep, Brooks has that part right. It is exactly the same thing. The fighter plane is moved to the government.

"After all, that’s what it is all about, right? From inception, the purpose of the monetary system is to move resources to the public sphere.

"And then the private sector gets all sorts of bright ideas about other uses for the monetary system, such as making subprime mortgage loans to those with no income, no jobs, no assets, packaging the trash into still trashier MBSs that get tranched and re-packaged into CDOs, which are further tranched to produce CDOs squared and cubed. And off we are to a GFC that the Fed then tries to resolve through keystroking $29 trillion of bail-out funds to save the banksters.

"But that’s a story for another time. Let’s congratulate David Brooks for (finally!) getting one thing right."

Jon Carney comments:

”What Brooks gets and Wray misses, however, is that government spending priorities are economically damaging. When resources are moved "to the public sphere" they are utilized to realize political ends rather than "public" ends. That is, they are used to satisfy the demands of special interests who influence lawmakers and regulators.

"Like overgrown weeds, the tangle of tax breaks distorts behavior, clogs the economy and deprives the government of revenue," Brooks explains.

"Forget about the revenue part. Otherwise, this is exactly right.

"It's a shame that a guy as brilliant as Wray doesn't quite understand that the "public sphere" is nearly always code for private interests expressed through political power.”

Now, that's not economics at all. It's a statement about politics and Government, and I have to wonder what John Carney's special expertise is in these areas, or what reason we have to believe any bald assertions he makes about them that aren't accompanied by good theory, good data, and tight arguments.

His statement above is also about as bald a statement of anti-government, and anti-progressive ideology as one can imagine, and also reflects a cynical political theory about politics and government which is a) demonstrably false as a generalization, and b) where positive instances consistent with the theory do occur, it is often in political systems where that false theory is itself broadly popular among citizens who are disillusioned with democracy, and who create their own self-fulfilling prophecy that it must and will be subverted by special interests.

Places like Germany, Italy, and Austria in the 1920s and France and Eastern Europe in the whole inter-war period. And places like the United States is becoming now, where no one believes in the legitimacy or possibilities of government anymore, nor in anything else except their own private advancement, and a neo-spencerian struggle for survival.

Do we really need to ask why we ought to believe that “. . . government spending priorities are economically damaging”? Can Carney show us empirical evidence that the actual, non-monetary, costs of government spending exceed the non-monetary benefits of that spending so that we can observe the economic damage he assumes? Or is he just blowing smoke?

Just as important, can he show us empirical evidence that the actual, non-monetary benefits of private sector spending exceed the non-monetary costs of that spending, so that we can observe the economic progress, healing, and prosperity that I suspect he wants us to believe would be the impact of a heavier emphasis on private rather than government spending?

Somehow I doubt that John can do either of those things. And I think that what he's doing in this column is just giving us his variant of neo-Hayekian/Austrian/libertarian theology in place of a real economic argument that Government spending can't or won't work for achieving public purpose, assuming a political sphere that wants to make it work.

I also think that the issue he raises comes down to whether we can point to times and places where political interests expressed through politics and government were largely in accord with the public purpose, and whether that can happen again if people can once again make their government representative and responsive. We can point to such times and places. They don't come often. The progressive period. The New Deal. The Second World War, and the post-War period up to about 1966.

After a long 15 year period of transition to neo-liberalism, the present period of corrupt Government subverted by special interests began in 1980 and is still continuing. What John Carney and David Brooks both miss, but what Randy Wray gets, is that the success of public purpose economics, including MMT, is going to depend on changes that free the political system from the burden of the financial and other special interests that now control it. But just, maybe the American people, and people in Europe too, are close to having had it with neoliberalism, and change may be coming.

It's going to require ending accounting control frauds and kleptocracy by prosecuting and convicting the kleptocrats who have destroyed so much middle class wealth and looted and continue to loot the public treasury. If we can do that, then Government spending can again serve the public purpose. If not, if Brooks and Carney are right about Government spending, then we will either continue with lemon socialism or move even further along the true road to serfdom. We will, in other words, lose the very soul and character of America for good.

(Cross-posted from Correntewire.com

One + One = Two (Not Too Wonkish)

Joseph M. Firestone — Thu, 16 Feb 2012 02:34:18 -0500

After reading one of my rants about the stupidity of policies aiming at a balanced budget, somebody in my Facebook environment, commented by saying: “1 + 1 = 2.” Here's my answer.

Yes, 1+1 = 2.

Now here's an accounting identity from macroeconomics, called the Sectoral Financial Balances (SFB) model:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.

It's like 1 + 1 = 2. But just slightly more "wonkish."

There's plenty of empirical evidence showing that the real world interpretation of this identity works. But, there's NO negative evidence refuting it.

Now, let's say that the income of the private sector exceeds the amount it pays to the other two sectors by 5% of GDP. And let's say that the income of the foreign sector exceeds what it spends on US goods and services by 4%, then what does the formula say will happen to the Government balance?

Government spending will have to exceed its income by 9%, that is it will have to run a deficit of 9% to support the foreign surplus and the domestic savings. i.e. 1+1=2; or in this case 5% + 4% + (-9%) = 0.

Now, what happens if we refuse to let the deficit be 9% and that we either cut Gov spending or raise taxes to make that happen? Let's say we want to balance the budget, so that we force that -9% to become 0 (Ron Paul's idea).

Then we have choices. We can force a zero trade balance, by refusing to import more than we export. But that still leaves us with the need to INCREASE private sector debt by 5% to get the Federal budget to balance without decreasing economic activity. There are other options here of course. We could leave the foreign sector balance where it is and increase private sector debt by 9%. But, do we really want to do either of these first two options or anything in between?

I really don't think so. Do you? Is there any way we can retain those private sector savings of 5% and keep a balanced budget? Yes, there is. We can decrease our imports and increase our exports so that the foreign sector has a negative trade balance. That is, we can get more income from trade than we spend on it by 5% of GDP, a shift of 9% from our current trade balance, provided we can increase our foreign sales (exports) by that much.

Of course, it would be very difficult for us to do that without engaging in a trade war since our attempt to decrease the foreign trade sector's balance so drastically and quickly would trigger a trade war with all our major trading partners. There would be an international race to the bottom, which, for us to win, would require US companies to cut prices and costs to the bone in order to export more. This however, would be likely to result in layoffs or lower wages or both, which in turn would be likely to reduce sales, tax revenues and GDP, leading a to a higher Government deficit which would defeat our goal of a balanced budget.

But getting back to eliminating the positive foreign sector balance through greater exports, the Government can neither do this for the private sector, nor maintain control over such a process once it starts. And, in any case, a change like this isn't beneficial in terms of adding to the real wealth of Americans, since even though imports cost money, they increase real, as opposed to, financial, wealth. But that's a story for later on.

For now the important thing is that 1+1=2, or, if you like 1+1 – 2 = 0, tells us that trying to balance the Federal Budget would be a disaster for the private sector unless we could develop a negative foreign sector balance by selling more than we import.

Even more, if you think about it, you can see that if we want to save 5% in in the private sector and import more than we export by 4%, then the Government would have to plan for a 1.44T deficit in the coming fiscal year. However, the President is only planning for a .9T deficit, about $500B short of the Government deficit we ought to have if we want to support our savings and desires for more in imports than we can export. That's too bad, because it's likely that if Congress and the President passed a full payroll tax cut, a State Revenue sharing plan and a Federal Job Guarantee Program, then this could produce the needed additional $500 B Government deficit we need given our current savings desires and import levels.

The programs would cost more than that, of course, but we'd be spending a lot less in unemployment insurance, income support programs, Medicaid, and other welfare programs than we are now because of the effects of these other initiatives. So for an additional $500 B we could have complete recovery from the crash and full employment. We're crazy, and maybe evil, for not going for this, and letting 30 million people looking for full-time jobs hang out there, instead.

(Cross-posted from Correntewire.com)

The JG and the MMT Core: Part 15, Components of MMT

Joseph M. Firestone — Mon, 23 Jan 2012 19:11:57 -0500

In this post I'll list the primary components of the MMT Knowledge Claim Network (KCN) classified under the major categories: the Social/Value Gaps; the Knowledge Gaps (Problems); the Descriptive Components (including Solutions); the Policy Prescriptions; and the Narratives.

The Social/Value Gaps mentioned by MMT developers

-- Failure of Economics to contribute to the Public Purpose as defined by the failure to close the other social value gaps listed below;

-- the gap between actual output and projected “full” output;

-- High involuntary unemployment vs. full employment;

-- Price stability vs. inflation or hyperinflation;

-- No right to a living wage;

-- No operative right to health care for everyone;

-- social exclusion and the loss of freedom;

-- skill deterioration due to unemployment;

-- psychological harm such as sense of identity, self-respect, and sense of empowerment;

-- much greater ill health and reduced life expectancy than necessary;

-- loss of motivation to live a full empowered life;

-- deterioration of social relations, communities, social networks, and family life;

-- increasing racial and gender inequality;

-- increasing educational inequality;

-- decreasing equality of opportunity;

-- loss of social values and sense of individual responsibility;

-- increasing economic inequality over time;

-- increasing poverty;

-- increasing crime rates including increasing use of control frauds by important economic institutions;

-- Failure to prosecute and punish people who commit control frauds;

-- The collapse of real estate values and the destruction of the wealth of working people after the crash of 2008;

-- increasing anger against economic and political elites that get more and more and more wealthy, and more and more immune to the rule of law;
-- increasing political inequality undermining political, social, and economic democracy;

-- increasing political unrest and threats of political violence both from the privileged and those seeking change.

The Knowledge Gaps/Problems Formulated and/or closed by MMT Developers

-- How do we, using Fiscal and Monetary policy, create Full employment (FE) with a living wage and Price Stability (PS) and maintain it the face of periodic business cycles?

-- How does a Government with a Sovereign Currency create and destroy high-powered vertical money?

-- How does a fractional reserve banking system create and destroy horizontal money?

-- Why is fiat money valuable?

-- What Are the Basics of Macro Accounting?

-- What Is the Sector Financial Balances Model, and what are its implications?

-- How do we design and create public sector jobs that will add value to the economy?

-- How do we train people for those jobs, if necessary?

-- How do we tax to avoid demand-pull inflation?

-- How do we combat and control cost-push inflation?

-- What are the causes of inflation?

-- How do we reform the money creation/destruction system to remove unnecessary Government Budget Constraints (GBCs)?

-- How can we build stock-flow consistent models of the economy?

-- How can we build valid impact models of changes in Government fiscal policy relative to the social/value gaps?

-- How can we prevent control frauds leading to extreme economic boom-bust cycles and political domination by wealthy elites and the financial sector?

-- What is the origin of money, and how has it developed over time?

-- What are the different types of money?

-- What is Government debt and how is it different from the debt of currency users?

-- What are the different kinds of Government debt?

-- What is the impact of “printing money” on inflation?

-- What would be the impact of very high profit coin seigniorage on inflation?

-- What are the key programs that can produce and maintain FE and PS?

-- How can we reform the banking system to remove its speculative aspects and orient it to public purpose rather than private gain?

-- How can we reform Wall Street to minimize the creation of real estate bubbles, commodity bubbles, and bubbles in other economic areas?

-- What are the effects of current account balances on other sectors of the economy?

-- Are Government deficits endogenously or exogenously determined?

-- What is Fiscal Sustainability and how can the Government maximize it?

-- What is Fiscal Responsibility and how can the Government achieve it?

MMT Solutions: Descriptive Components (Generalizations, Theories, Models, “Facts,” etc.) offered by the Developers Aimed at Understanding and Solving Problems

-- An account of the origin of money

-- The nature of credit money

-- The State theory of tax-driven money

-- The endogenous money approach

-- Relations between horizontal and vertical money

-- The functional finance approach

-- The theory of the Government Budget Constraint (GBC)

-- The role of the central bank in providing horizontal money and draining reserves

-- Modern money = Endogenous money + state money + credit money + functional finance

-- Heterodox approaches to money

-- The sector financial balances model of aggregate demand applied to closed and open economies

-- The State as the currency monopolist

-- Stock-flow consistent modeling

-- The Theory of a Sovereign Currency

-- The Theory of the causes of inflation

-- Theory about regulating the Financial System

-- Theory about Minimizing Control Frauds

Policy Prescriptions Offered by MMT Developers

-- Zero Interest Rate Policy (ZIRP)

-- The Job Guarantee (JG)

-- Payroll tax holidays

-- State revenue sharing

-- Banking reform proposals

-- Proposals placing the Federal Reserve Under the Treasury Department

-- Proposals for Federal deficit spending without debt issuance

-- Proposals for guaranteeing annual entitlement spending without regard to “trust fund” balances

-- Proposals about law enforcement for removing control frauds from the economy

-- Proposals for containing demand pull-inflation

-- Proposals for containing cost-push inflation

-- Proposals for regulating the Financial System

-- Proposals for Minimizing Control Frauds

-- Proposals for Reclaiming Currency Sovereignty and Exiting the Eurozone

-- Proposals for Fixing the Health Care System

-- Proposals for Ending the Energy Crisis

-- Proposals for Ending the Housing Crisis

The Narratives

-- The story of the origin and history of money

-- The story of the development of fiat money

-- The story of the development of MMT from Marx, Keynes, Veblen, the Institutionalists, the Post Keynesians, Chartalists, and Functional Finance

That's It!

I'm not certain that this list of MMT KCN components is complete. It's not intended to be authoritative, and even though I've read a lot of MMT by now, I don't have the background in its KCN that the developers or their current graduate students have. So, there's plenty of room for error in my specification of the components of MMT.

Since I'm sure that many of my readers this can improve on my list; I'd really like to "crowdsource" it. Please feel free to offer revisions/corrections, or complete reconstructions if I've made errors.

This list isn't gospel. It's a tool to try to get a broad view of the subject matter of MMT, provide some understanding of its range and scope, and prepare us to consider questions about “the core” of MMT. So, I want to sharpen it, and I hope you'll help me do that. My next and final post in this series will deal with the MMT core right now, and how it ought to change in the future.

The Job Guarantee and the MMT Core: Part 13, John Carney 's "Reply"

Joseph M. Firestone — Fri, 20 Jan 2012 19:08:02 -0500

In a piece called “More Questions About the Job Guarantee,” John Carney provides some links to the continuing debate on the Job Guarantee (JG). All the links are to posts critical of the JG idea except a link to one of my four posts critical of Carney's earlier work and supportive of the JG. The four posts are all at Daily Kos, but also at MyFDL, ourfuture.org, and correntewire.com. The correntewire.com links are here, here, here, and here.

Here's Carney's casual take on my critical efforts:

4.Over at Daily Kos, I get taken to task for "bias towards private sector employment." Well, yes. I certainly do have a bias toward that.

But, as Randall Wray's comments to Roger Mitchell make clear, so do the MMT economists. So does everyone who knows anything about economics and politics. Except, it seems, this guy at Daily Kos.

Well, thanks John, for noticing I'm out here. I'm glad you've deigned to notice. Too bad you're too busy to pay attention to a pretty comprehensive critique of your entire position, though.

But wait, I forgot that the best way for a guy like you to handle a guy like me is to throw a little ridicule my way and never, never discuss the real issues I've raised.

Your coverage here ignores all the issues I've raised in the four posts, except my charge that you're biased towards private sector employment, and it's easy for any reader who checks out the link to see that your answer to that charge is completely inadequate, considering the context of my criticism and its full detail.

I'll quote that charge with its full context of quotes from you and my replies, so everyone can plainly see how ridiculous, superficial, and inadequate your little drive-by reference is.

Does the JG Really Solve the Mismatch Problem?

”The Job Guarantee gets around one of these problems: it guarantees that anyone who comes to the government employment office ready, willing, and able to work will be able to get work for pay and benefits. The problem of mismatch is seemingly solved since the government will just supply the demand for something the unemployed can do. Direct hiring works better, in this sense, than trying to jigger the knobs of monetary policy.

But is the problem of mismatch really solved? I do not think it is.

The jobs created under the Job Guarantee are specifically not supposed to compete with the private sector, which means that they supply goods and services for which there is not a market demand. The total output of the economy might increase, but much of this output is non-productive—that is, it doesn’t actually improve our lives."

Comment: This statement really reflects John Carney's bias towards private sector employment, and is simply ridiculous and outrageous on its face! We all know that Government work produces valuable goods and/or services that improve our lot in life, everyday. We also know that a lot of Government work is valueless or produces negative real value. But we can equally well say the same things about private sector work. Much of it has zero or negative real value from the viewpoint of those of us who aren't getting paid for doing it, and I won't trouble to even provide the very obvious examples of this. There's also much private sector work that adds real value to our lives and is well worth doing.

My point is that whether JG work produces real value has nothing to do with markets or whether businesses in markets believe they can make a profit from certain kinds of activity. But it has everything to do with whether Americans are likely to and, in the event, will value the goods and services produced by JG work. Whether the output of the JG program is “productive” will be judged by the people that will or will not benefit from it, and not by the private sector market that it will not be competing with.

"Now some people will say that this is fetishizing the market. Aren’t there things that improve our lives other than what the market will pay for? I don’t want to argue that there are not. I do not think, for instance, that these days we could pay for the Sistine Chapel but our lives are greatly improved by its existence. The problem is that there is no reason at all to think that people laboring in Job Guarantee positions will supply meaningful improvements rather than holes in the ground."

Comment: I'm sorry, but the quote just before the disclaimer does “fetishize the market.” It clearly does make the a priori assumption that what the market values is much more valuable than what the political system or society or people value. And this is a generalization that John Carney cannot establish with any scientific tests or data. It is an ideological view coming out of Austrian economics and Randian ideology. It is not an assertion that should be taken at face value.

Actually, also, contrary to John's view, there is plenty of reason to think that people laboring in JG positions will add value to the economy. We know that many non-profits add value to American life. We know that New Deal project outcomes added lasting value to American life and continue to do so. We also know that many government activities add value today. But, most importantly, we have plenty of reason to believe that the people who run the JG program will be able to design it so that JG workers will be very likely to produce value. We have the years of research on the JG by MMT researchers to show that many good ideas already exist for JG projects that have value. All we have to do to assure ourselves that this is true is to read that literature.

I know that John says that he has read the MMT JG literature and that he hasn't any reason to believe that value will be produced, so he wants to be cautious before implementing the JG. But I've read that literature too, and I totally disagree with John and think his view is colored by the bias I called attention to above. He is predisposed to think that the JG cannot add value, so therefore, no examples of projects that might produce value will persuade him.

I can't say for sure whether this view of mine about John is right. To see whether it is, readers of this post should read the MMT literature themselves and decide. Don't take my word for it, and don't take John's. Decide for yourselves! I'm confident that you will decide that John's claim that “The problem is that there is no reason at all to think that people laboring in Job Guarantee positions will supply meaningful improvements rather than holes in the ground,” is just false.

"The Job Guarantee folks seem to think that there are plenty of meaningful jobs that aren’t getting done but that could be done by the unemployed. I don’t think this is correct. In fact, I cannot really think of many at all. Sometimes things like caring for the elderly or constructing bridges and roads are nominated as candidates. But these are not jobs that can be done just by anyone. They require a certain sort of person with a certain set of skills. Most jobs do."

Comment: This is the same claim as the one made above. Read the literature! Decide for yourself! It's easy to think of productive work for people to do. I'll bet you can do it for yourself. Here's one, start a JG project to provide the SEC with 50,000 new investigators to ferret out the control fraud in the private sector that led to the crash of 2008. That one will certainly add value to American life; specifically a value it is lacking now – namely the value of justice and fairness under the law. Of course, the 50,000 new investigators will need some training; but I suspect Bill Black could design a brief educational program teaching the basics of investigation that wouldn't require more than two weeks of intensive training to complete.

There's a lot more critical evaluation in the rest of that Part Five post and also in the other three that Carney chooses to ignore. But as the title of this post says, his effort to criticize the JG is full of talking points and no serious reasoning. It is highly ideological, and is simply an attempt to cut a very important plank out of the MMT policy platform. The JG policy in the context of other MMT proposals like the full payroll tax cut and State revenue sharing is intended to produce Full Employment and Price Stability in the broader context of practicing economics for the public purpose.

Carney's real problem is that he neither believes in public purpose nor in FE with PS. His attack on the JG is just a way of getting at these higher goals and objectives. John Carney wants MMT to merge with Austrian economics to create an alternative to neo-liberalism that he likes. The real problem with MMT is that if its historical values, prescriptions, and policies remain in place, then he won't be able to get that done. MMT, as it now stands is progressive economics whose normative orientation is the same as John Kenneth Galbraith's. Carney needs to change that to get his new synthesis.

The Job Guarantee and the MMT Core: Part Twelve, Theory and Fact

Joseph M. Firestone — Wed, 18 Jan 2012 01:03:43 -0500

Cullen Roche continued his extensive and multi-faceted critique of the Job Guarantee policy and the Modern Monetary Theory approach to economics with a piece attempting to distinguish “theory” and “fact.” His piece is based on the common sense idea that there's a distinction between them, and Cullen tries to use it in his argument. There is, but, unfortunately, the common sense notion of the distinction has long been put aside in the philosophy of science, and in most of the sciences a decade or so later, because of its incoherence. So, in using it, Cullen's argument shares this incoherence.

The “Theoretical” and Something Else

“. . . . It is my responsibility to stick to what my message has always been and that is offering readers a clear understanding of the world we live in. . . .

This is an admirable goal, but, in stating it, I hope Cullen realizes that “a clear understanding of the world” doesn't only include understanding the events and sequences of events that have occurred, or are now occurring in the world, but also includes an understanding of the way the world works. Inevitably, understanding how the world works involves understanding how the systems within it work, and understanding the different kinds of causal and non-causal relations and the dynamics that occur within it. Those relations are descriptive in character, and may even be called “factual” if they correspond in some meaningful sense with reality. But they are not “facts” in the sense they are particular events with specific spatio-temporal locations that are described using singular rather than universal statements.

. . . There are parts of MMT that do that and there are parts that are slapped on as nothing more than policy fixes. The latter is a clear theoretical part. And yes, the JG is ENTIRELY theoretical (which could be ENTIRELY right – I don’t know).”

My problem with this characterization is its attempt to distinguish the parts of MMT that offer a clear understanding of the world and other parts that “are slapped on” and are “nothing more than than policy fixes,” on the basis that the first part is not “theoretical,” while the second part is clearly “theoretical.” And the further notion that the JG is “ENTIRELY theoretical.” I say this characterization is “incoherent” because no radical distinction can be made between the “theoretical” and the “non-theoretical” in attempts to offer narratives about the world. I also say that the “theoretical” parts of MMT come down to the parts that Cullen doesn't agree with and the “non-theoretical” “factual” parts come down to the parts of MMT he likes.

That “theories” and “facts” (in the sense of statements of fact) aren't separable, has been widely recognized beginning, at least, with Popper's Logik der Forschung, published in 1934 in German, and published in English as The Logic of Scientific Discovery in 1959. Since then, Popper extended his argument further, in many of his own publications in opposition to logical positivism and logical empiricism, and his views on this were famously adopted by Paul Feyerabend, Thomas Kuhn, and many other philosophers of science in the 1960s, and then became dominant throughout the sciences in the 1970s, and since that time.

Stated briefly Popper's argument is that a singular statement about a particular of fact “uses universal names (or symbols, or ideas).” (See pp. 94-95) These universal names involve theoretical commitments (See p. 95), For example, if you make a statement about a “glass of water” you're talking about “a physical body that exhibits “certain lawlike behavior,” and you can't even understand that statement unless you understand something about how “glasses” filled with “water” behave (See pp. 94-95). In short, “theoretical commitments” and assumptions pervade our descriptions/interpretations of fact, (pp. 423-424) and we can only construct the facts by making such assumptions. MMT descriptions of how the monetary system operates also involve theoretical commitments, interpretations, and assumptions. For these reasons, it is just wrong to say or imply that the parts of MMT describing monetary operations are non-theoretical, while other parts that deal with the JG are “theoretical.”

So, you can't say, I will accept one part of MMT because it's non-theoretical and reject another part because it's “theoretical” either partly or “ENTIRELY.” Instead, you always have to address the specifics of the theory in the various parts of MMT, and try to test and refute theoretical proposition you find questionable. Cullen has tried to do that in connection with the MMT hypotheses that the JG will work to create full employment with price stability. In previous posts, however, I've considered his various arguments, and given reasons why I consider his theories about this issue to be false.. My point here, however, is that both Cullen and the MMT theorists are theorizing when they write. They may agree that certain sets of propositions describe facts, the way the world really is, and so are true. But where they disagree about the descriptive aspects of MMT, both sides are disagreeing about “facts” as they are theoretically interpreted, or about factual things like the way the world works. There is nothing “factual” that is not also “theoretical.”

Cullen's attempt to separate “theory” and statements of “fact,” reminds me of the creationists' attempts to emphasize that “evolution” is just a theory, and not a fact. Evolution, is a theory, and, in fact, it may not be true. But, people have been trying to refute evolution since Darwin advanced the theory in the 19th century. All those attempts have failed, and, in addition, there is much evidence that corroborates the theory and refutes the narrative about creation in the Bible, and many other versions of creationist theory. So, as far as we know, given our best present knowledge, while evolution is a “theory” it is also a “fact,” showing again that the kind of distinction Cullen is trying to make between the “theoretical” and something else, is invalid.

Selling MMT?

Cullen objects to the views of the MMT economists by saying:

“If the MMT economists want to sell MMT and “modern money” as part of a massive government labor program then that’s fine. It’s my opinion that no one in the world needs to understand large government labor programs in order to understand modern money. Instead, I think we should focus on giving the world a better understanding of modern money by focusing on the proven factual pieces of MMT (monetary operations, monopoly supplier function, etc). . . . .”

As in many of his previous posts criticizing MMT's emphasis on the JG as part of its core, Cullen misconstrues and mis-constructs what MMTers are saying and also shows political bias in his formulation of the issues. First, When MMT writers advocate for the Job Guarantee program they are proposing part of an MMT program for recovery and for strengthening the safety net of automatic stabilizers of the economy that they think will work. Selling that prescription is a separate issue. The primary issue first, is whether their prescription will help to achieve full employment and price stability. That has to determined first -- then you worry about “selling it” or “messaging it”.

Second, MMT writers are not proposing to have “a massive Government Labor Program,” in the sense of a massive expansion of the Federal Bureaucracy, they are proposing an addition to the social safety net in the form of millions jobs that will be funded by the Federal Government but that will be performed for community non-profits, States, and local governments. Also, the size of that jobs program will vary radically with the business cycle, whose swings it will contribute to moderating and stabilizing. In calling the JG a massive Government Labor Program, Cullen is just formulating the issue as the opponents of the JG would formulate it for political purposes. He is just giving them the “framing.”

We will not do that, we will deny the frame and we will frame the unemployment buffer stock as unnecessary and inhuman, as an instrument of 1% and Wall Street control and oppression, and as just the same old trickle down that has been making the rich richer and the poor poorer for more than 40 years. I think we'll win the battle between those political frames, as we won a similar battle in the 30s and the 40s of the last century.

Third, no one is saying that everyone has to understand all the details of the JG in gaining a basic understanding of Modern Money. All the MMT writers are saying is that people need to understand is that price stability requires a buffer stock and that our current choices are mainly between an unemployed and an employed buffer stock being paid a living wage with good fringe benefits. Guess which choice the public ends up favoring if they want price stability? Guess which choice they'll favor if they want full employment? Guess which choice they'll favor is they want a return to prosperity?

Fourth, Cullen talks about the “proven facts” of MMT and teaching people about those instead of the JG. But what actually is “proven” in the sense that it is 100% certain? Is there anything about MMT that is 100% proven? Some may say that the sectoral balance model is an accounting identity, so it's “proven.” However, the sectoral balance model isn't important because it's an accounting identity, and that status doesn't mean that it's been “proven” as a model explaining and predicting “facts”.

It's important because its factual interpretation in real world terms shows that the data we gather to test it (Scott Fullwiler, please note) never refute the factual interpretation of this identity. In other words, it's not the sectoral balance accounting identity that counts. Instead it's the sectoral balance financial model, which, along with its empirical interpretations, constitutes an empirical theory about the macro-economy that counts because it's falsifiable. And that MMT theory isn't “proven” in that sense that it is certainly true, though as far as we know from the data, it isn't false, and may well be true.

On the other hand, take the JG proposal. As Cullen rightly says, the part of MMT that says that combining the JG with payroll tax cuts and State Revenue Sharing isn't proven. But it's also not been tested, and so, it too, may be true. However, facts bearing on the Job Guarantee proposal, like the direct job creation efforts here in the 30s, the Jefes program in Argentina, the current experience in Hungary, don't refute that part of MMT theory. And since the JG has never been tested in the larger context of an MMT economic program like Warren Mosler's or Randy Wray's, the MMT theory about its likely effectiveness has also never been refuted. So, the JG idea, as far as we know, is promising, especially compared to the unemployed buffer stock, whose side effects we know very well are extremely harmful to much of the population.

So, why not teach people about the JG? Why are we doing MMT anyway? To teach people only “the facts” everyone who says they are part of MMT agree on?

What will people do with such knowledge? They will only use it anyway to go beyond that knowledge to use what they think are its policy implications in their own work and lives. Will their theories about the effects of MMT policies be better than ours? Will they be better than theories about the JG whose implications have been explored for many years by MMT economists?

Well, that's certainly a possibility. But the likelihood that these theories won't be, is very high. And the likelihood that an MMT recovery program based on payroll tax cuts, state revenue sharing, and other traditional stimulus measures, along with spending targeting productivity, will be more effective in creating full employment and price stability than Warren's, or Randy's, or Stephanie Kelton's, or Pavlina Tcherneva's MMT-based policies including the JG is also low, because such a program won't add anything to the automatic stabilizers. Of course, it may produce better results on the productivity dimension of economic change. But if that's true and we want to directly target productivity increases by including spending for that in an MMT-based recovery program, then I don't see anything in MMT that bars its inclusion.

Operational Aspects of MMT?

Cullen likes to talk about the “operational aspects of MMT” and the notion that it's policy proposals are “secondary”:

”. . . . If we offer policy proposals then that’s fine, but that’s secondary. I would expect the MMT economists to do that and it should be encouraged that they use their expertise in doing so! But the JG is a very clear case of embedding a policy proposal on top of operational aspects of MM(t) . . . .

Hmmm, “. . . embedding a policy proposal on top of operational aspects. . . .” What does that mean exactly? Well MMT provides an account of the nature of our fiat money system, how the Government relates to the banking system and actually creates and destroys money and net financial assets in the private sector, how the banks create money, but no net financial assets, how the Consolidated Government can and does control interest rates, a theory about the origin of money, a theory about the causes of business cycles, an account of Governments that are sovereign in their own currency differ from Governments that lack or have given up that currency, how all this relates to international trade, theories about how international bond markets and ratings agencies relate to national governments, both those who are currency sovereigns, and those who are just currency users. In addition, MMT economists have drawn policy implications from these theories, about how Governments with currency sovereignty can recover from the crash of 2008 and provide for full employment and price stability in the future.

Now my question is, what is the method by which I and others can tell, which parts of this mosaic are “operational” and which are not? Are all policy proposals “not operational”? If so, how about policies that are currently in place, like not allowing the Treasury to run a negative balance at the Federal Reserve? That's a current policy. Is it also not “operational”? If not, then what do we mean by “operational?” If so, then why is a policy currently in effect about “operations”, but a policy which is an alternative to that not about “operations”?

Moving along, perhaps by the “operational” aspects of MMT Cullen means to include only its narrative about monetary operations, the Government's role as a monopoly supplier of currency, and also any monetary policy that flows from this, but mean to exclude any current or future fiscal policies from the primary focus of MMT, and simply view them as secondary. While I recognize that this may be a clear distinction that could be made, I don't think he'll find broad agreement among people in the MMT movement on this sort of a distinction. Especially since most MMTers seem to think that fiscal policies are much more important than monetary policy in determining economic well-being.

In any case, my purpose in the above isn't to put words in Cullen's mouth, It is to point out that the distinction between the “operational aspects” of MMT and its other aspects is not an obvious one or easy to make. And if one can't make it coherently, then his advice about considering the “operational aspects” as primary, and other aspects as “secondary” will be impossible to talk about, much less to follow.

Next, Cullen continues his attempted distinction between the “operational” and “theoretical” or “secondary” aspects of MMT and his attack on the JG policy with this:

In this regard, it really is entirely theoretical and I appreciate and understand that the economists have built it this way. But there’s a difference between reality and theory and educators have a responsibility to very specifically differentiate between the two so as to avoid misleading those they are teaching.”

It's too bad that Cullen seems unable to take his own advice. As I argue above all of MMT, and every other economic narrative/ideology/approach/paradigm/theory, as well is “theoretical,” in the sense that it is permeated with theoretical assumptions and notions. We cannot say that any of these is ever reality. They are never reality. They are linguistic constructions of human beings.

Now, if you are a “realist” in your epistemology, you may want to claim that your linguistic construct corresponds to reality in some sense of that term. And you can certainly take parts of MMT and say some parts of the body of knowledge claims that is MMT are true, or perhaps closer to the truth, or perhaps more likely than other parts of MMT, and everyone teaching MMT does have a responsibility to do that.

The problem here is that there will be varying degrees of agreement even among MMTers about the parts that are closer to the truth and the parts that are further away from it. So, I think the best way to teach MMT is to teach all the parts of it as simply as we can. Express our individual views and the views of others about the strengths and weaknesses of various parts of it and leave it there. That's unbiased teaching. It is not biased teaching to leave out the parts of MMT that one doubts and call what remains, MMT. That is partisan, and keeps one's readers in ignorance.

One final note, if you're not an epistemological realist, then you'll make a slightly different argument from the one I just made, but there is no currently viable epistemology that will support Cullen's argument distinguishing fact from theory. The only kind that will do that is a foundationalist empiricism that few in philosophy or most of the sciences believes in anymore after the withering criticism it received over the period from the 1930s to the 1980s, and continuing to the present.

Descriptive and Prescriptive Components of MMT

In addition to the distinctions he makes between the “theoretical” and “non-theoretical” or “factual” parts of MMT, and also between the “operational” and the “secondary, ”theoretical” parts of MMT, Cullen also has something to say about the descriptive and prescriptive aspects of MMT:

“I had long been under the impression that there were two components to MMT – the descriptive and the prescriptive. Readers had always been perplexed by the name “Modern Monetary Theory” because what I taught them (by removing the JG) did not appear so theoretical at all. MMT has always been described to me as having a descriptive and the prescriptive component, but it is clear that this is not the case. There is only the “theoretical” under the MMT umbrella. And that’s great. I think it’s a fantastic theory (even though I disagree with parts of it). But there’s a big big difference between the theory and the truth. Parts of MMT are entirely factual (the operational aspects, monopoly supplier, etc) and then there are parts that are entirely theoretical (like the JG). I guess the name alone makes that clear enough (though it never occurred to this idiot)….“

In light of the comments I've made above, it should be clear that what the MMT writers are saying and also what Cullen is saying are both “theoretical.” Nor can Cullen “prove” that what he advocates is less “theoretical” than what they advocate. But there's something else about the above quote that glosses over an important distinction.

Cullen starts off by mentioning the descriptive/prescriptive distinction and then denies that MMT has these two components because, he claims: ”there is only the “theoretical” under the MMT umbrella”, as if to say that economic paradigms or approaches can't have both “descriptive” and “prescriptive” aspects because they have a “theoretical” aspect. But what can this mean?

Doesn't Political Theory have a descriptive and a prescriptive aspect? Doesn't policy analysis have both of these two aspects as well as a theoretical aspect? Doesn't Cullen's work have all three aspects. I think that it's very clear from the various posts in this series that his writing does reflect all three, and that he is no different from other MMT writers in that respect.

Cullen goes on to repeat his notions that there's a difference between a theory and the truth, and that parts of MMT (“the operational aspects)” are “entirely factual” while other parts “(like the JG)” are entirely theoretical. Cullen's right that there's a big, big difference between theory and the truth, because many, maybe most of our statements are not true. But he's got the meaning of this difference wrong. It's not that “factual” statements are true, while “theories” are untrue. It's that some descriptive statements are true, and when they are they're factual, and when they're false they're not, even if they purport to be.

Also, as I said earlier, every statement about the world has “theoretical” aspects. So, in some sense every statement about the world is “a theory,” whether or not it's a universal or singular statement. So, parts of MMT may be true and descriptive, and so, factual, but this has nothing to with whether they are “operational” whatever that may mean, and it also has nothing to do with whether Cullen considers some of them (like the JG) as entirely theoretical, whatever that may mean.

“In my writing I like to stick to the facts even though I am guilty of veering from that goal at times. What you want to do with those facts is entirely up to you. It is not my job to force you to use that understanding in a certain way even though I might, at times, interject my opinion on policy. But what we need to be very clear about in the future is that MMT is in fact theoretical in its current form. I won’t spend my time shooting down MMT because I respect those involved in it far too much. But I won’t be spending my time selling it to readers as though it’s fact. It is in fact theoretical and I hope to use the parts of it that are factual to further the public’s education.”

Translation: I'm going to tell my readers about the parts of MMT that I think are true and I'll use those “to further the public's education But I won't spend my time selling those parts I think are false or don't like. Instead, I'll call them “theoretical,” which I think MMT is in its current form.

Well, Cullen that's just fine. I'm sure no one in the MMT group wants you to advocate for policies that you don't think will work or those parts of MMT you don't believe in. Just please don't label your version of MMT as “MMT,” or tell the rest of us that the JG isn't currently part of the core of MMT, because we know that it's currently essential to MMT, and its progressive prescriptive orientation, which following John Kenneth Galbraith might be called Economics for the Public Purpose, and for which a Job Guarantee with a living wage and good fringe benefits is the best policy we know of right now for enabling full employment with price stability.

Job Guarantee and the MMT Core: Part Eleven, Price Anchor or Price Buoy

Joseph M. Firestone — Mon, 16 Jan 2012 22:53:46 -0500

Is the JG a Price Anchor?

More on Cullen Roche's claims about the JG, this time a discussion of his price anchor vs. price buoy post.

Let's begin with:

”. . . This is right in theory and entirely unproven in reality. . . . with regards to the price stability issue, the term “price anchor” is misleading as it gives the impression that the JG can serve as a highly effective way to contain inflation over the course of the business cycle . . . More likely, the JG would serve as a good deflation fighter and only a “soft ceiling” (per Warren) or marginally better inflation fighter than what we have today . . . .”

Cullen also thinks the deflation fighting properties of the JG are not so important because modern governments have become adept at fighting inflation, as illustrated by the fact that the US just had only its first deflation episode in 50 years in 2009. So, he doesn't think it's the downside we're worried about so much as the upside.

He's right that deflation hasn't been a concern for a long time now. But, as I recall, Ben Bernanke and Timothy Geithner were pretty concerned about that in the early part of 2009, and they'd certainly become gravely concerned once again, if the banks in Europe would suddenly collapse, or if any “black swan” bringing the banking system to the brink of solvency suddenly hit the economic system.

With respect to the JG and inflation, Cullen says further:

”. . . its effectiveness in stopping high inflation will still rely on the boys switching the policy levers at Fed, Treasury and Congress….In this regard, I think the JG is severely lacking and requires something greater involving counter-cyclical policy (not men with perfectly trimmed beards making predictions!).”

Cullen then digresses and restates his view, expressed in previous posts, that full employment with price stability are the wrong goals for modern macroeconomics. He thinks the goal should be: “. . . full productivity (leading to full employment) focused on maximizing living standards over a multi-generational period. He thinks “we should use our proven MMT understanding to implement policy approaches that get the economy operating at full productivity . . . “ And he claims that:

"The counter-argument in MMT is that you need the JG because it will help contain inflation over the cycle by serving as a “price anchor.” Of course, I am divorcing price stability as a secondary goal (it’s not “central” to my thinking though that doesn’t mean it’s unimportant) so I don’t know if that makes me non-MMT or not (perhaps it does)….Nevertheless, I think the inflation fighting argument is vastly overstated because the JG doesn’t serve as a price anchor at all. It serves as a price buoy.”

I think Cullen is distorting the MMT reply here. The first reply of the MMT founders and their students would be that you need the JG to create full employment and maintain it and to fulfill this component of public purpose. Then they'd say that the JG also helps to achieve price stability because it does serve as a stabilizing influence on prices throughout the business cycle. It is in this sense, that it is “a price anchor.” Here's Bill Mitchell's basic formulation:

”The fixed JG wage provides an in-built inflation control mechanism. In an earlier published paper I called the ratio of JG employment to total employment the Buffer Employment Ratio (BER).

“The BER conditions the overall rate of wage demands. When the BER is high, real wage demands will be correspondingly lower. If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers transferring from the inflating sector to the fixed price JG sector.

“Ultimately this attenuates the inflation spiral. So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG policy achieves this via compositional shifts in employment. That is it can also deal with a supply-shock that generates distributional demands that ultimately cause inflation.

“The BER that results in stable inflation is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy.” (emphasis mine)

Let's see what Cullen says to deny this claim.

”Robert LaJeunesse wrote an interesting book titled “Work time regulation as a sustainable full employment strategy” in which he explained the misguided thinking of the JG as a price anchoring buffer stock:

“During robust economic times, buffer stocks offer little prospect of abating wage pressures in the primary sector. Since buffer stocks target a minimum price of labor, an earnings floor if you will, and do not create a wage ceiling they will have little impact on the primary sector wage demands. Capitalists will be able to maintain a significant degree of labor market segmentation, allowing them to avoid hiring from outside the primary sector. As such they will avoid payroll expansion and attempt to squeeze more from existing workers in the form of longer hours and greater work intensification. One only has to look at the history of commodity prices (such as oil) to realize that buffer stocks do not place a ceiling on prices. Buffer stocks may mitigate price swings, but they tend to prop prices up rather than restrain them, particularly when the commodity is in short supply. Buffer stocks, therefore, do not serve as a price anchor but rather as a price buoy. That is, they represent an earnings floor rather than an earnings ceiling. Public and private sector employees alike will still face pressure to work long hours under a job guarantee – either to maintain insatiable consumption desires or to retain jobs that offer long hours on a take-it-or-leave-it basis. Such behavior would most certainly become inflationary as Mitchell and Wray (2005) concede when they write, ‘if the government decides not to deflate demand, the ELR pool still allows the economy to operate with higher aggregate demand and lower inflation pressures, although inflation can still result.’”

This argument is very unconvincing to me, because it seems to assume that the JG would operate in isolation. But that's not what the MMT advocates, including Bill Mitchell just above, assume. They assume instead that if demand-pull inflation threatens, then the Government will respond by raising interest rates, raising taxes, or both.

At that point, Aggregate Demand (AD) will be reduced in the private sector, sales will decline, and the private sector will cut back on employees. When that happens, the JG will expand, preventing people from becoming unemployed, but also paying them at less than the private sector prevailing wage they received before. This will cool demand further, but much less than would be the case if people were plunged into unemployment. Nevertheless, the JG program will certainly provide a price anchor, since as more and more people join the ranks of the JG employed, both AD and upward pressure on private sector wages would surely be reduced, but not by so much that there is likely to be price deflation as there was recently. I do not see how this conclusion can be avoided. Nor do I see that LaJeunesse's argument, quoted by Cullen, even touches it.

The last part of the LaJeunesse quote is hand-waving. If the JG is paying a living wage then why should workers want to work long hours to fulfill “insatiable desires.” And why should JG public sectors have such desires, or the JG program accommodate them? Finally, even if this dynamic obtains to some extent, then why should it be strong enough to overcome the tendencies toward weaker demand being created by private sector lay-offs? That is, what percent of the labor force would be involved in this dynamics? Not much of it, I think.

Finally, even though Mitchell and Wray “concede” that inflation can still result if the government doesn't do anything to deflate demand, clearly this isn't anything to worry about if the economy becomes over-heated. At a minimum, the central bank will raise interest rates, reducing the level of business activity and private sector employment, and at that point the JG program will work according to the dynamic outlined above. So, Mitchell and Wray may be conceding a theoretical possibility, but that possibility goes against both what they recommend, and also what is likely to be done.

Some Distractions and Irrelevancies

Next, this piece from Cullen seems entirely irrelevant to the argument:

"The commodity buffer stock comparison has weak points, but one recent example of this sort of buffer stock idea surrounded the release of reserves from the Strategic Petroleum Reserve in the middle of last year. I spoke to several analysts and traders who, at the time, said the move was a desperate attempt to pull prices down and stimulate the economy. President Obama pulled hard on that buoy and released a small amount of this buffer stock into the market, but he couldn’t pull the prices down for long. Capitalists got back to being capitalists and market dynamics took control once again as prices floated higher. The labor market works a bit differently, but contains some of the same problems that specific commodity price targeting would."

This is more hand-waving. What does it have to with the Government expanding the buffer stock when private sector employment contracts, or with the private sector expanding its employment and shrinking the public buffer stock when it decides to do so? Nothing, as far as I can tell. Would Cullen care to explain the connection to slow folks like me?

"The problem in the labor market is one of money neutrality (a concept that MMTers very publicly reject). In order for the buffer stock to control the market it essentially has to be THE market. But labor is not like any simple commodity. It is a highly specific and specialized commodity. We know this from the remarkable wage discrepancies that exist in the world today. A job at Goldman Sachs is a commodity unlike anything seen in the rest of the labor market. So setting the price of low price unskilled labor doesn’t have a sufficiently uniform effect across the entire labor market to keep wages low when the economy is booming and Goldman Sachs is poaching from Bank of America, Boeing is poaching from Caterpillar, and Microsoft is poaching from Cisco."

Forgive me, Cullen, but this comment is ridiculous! Obviously the Executive level employees of GS, BOA, and Boeing, and other large organizations aren't numerous enough that competition for them can cause wage inflation, when private sector demand for all other workers is rapidly declining. Sure, the price of certain kinds of labor will be sticky in the face of a serious recession. But the pay of 150 million workers across the economy will have a tendency to decline as more and more people leave the private sector and join the JG. The JG doesn't have to be "THE market" to cause that to happen.

Cullen's next point is equally out there.

"To make this point clearer, arguing that the JG is a strong upside inflation deterrent is a lot like setting the price for wool and then claiming that you’ve stopped commodities from rising above a certain point. Clearly, that’s not true. You’ve set the price of wool relative to other commodities, but for instance, you haven’t stopped oil market dynamics from sending oil prices through the roof. Now, if the government set all prices in the labor market then we’d be having a different conversation, but the JG would cover roughly 3-5% of the unskilled laborers at a point approaching full capacity. Because this buffer stock will have been dwindled down to largely low-skilled workers whose convertibility into private sector jobs is likely negligible, it will have an equally negligible impact on the broader wage scale."

I think an argument like this one, shows that Cullen is really “reaching”, and is ideologically biased against the JG. A fixed floor price of wool wouldn't affect very many other products in the economy. But a price floor for labor specified in a JG program will aways mean that the private sector must offer jobs at a higher price and with equal or better fringe benefits than the JG program offers. Otherwise, why would people work for the private sector? Who cares if the JG is only 3-5% of the unskilled or the total employed, when the economy is near full employment? It will still provide a floor that the private sector cannot breach without either losing workers or hiring undocumented laborers who can't take those JG jobs if they're unhappy with substandard pay.

”So the upside benefits will be relatively muted regarding price stability during an economic boom (when we’re nearing traditional “full employment”). Additionally, the job guarantee pool at 3-5% of all unemployed will be so small and non-convertible into widespread private sector jobs that it won’t come close to impacting prices and wages (when it’s most needed) to the extent that private sector jobs will (which will see substantial wage pressure during a boom period as skilled laborers compete for the other 95-97% of jobs). As Mitchell and Wray say, this would most certainly add to aggregate demand during the boom times which would lead to higher inflation. Ultimately, we will still rely on men with perfectly groomed beards pulling levers regardless of whether we have a buffer stock of unemployed or employed so the fact that the employed buffer stock acts as a price buoy and not a price anchor is quite substantial. Given the fact that modern governments have become particularly adept at fighting deflation, I think the price stability case for the JG is vastly overstated (not to mention that the policy, in my opinion, is off target).”

Bill Mitchell and Randy Wray make the point that the JG will only work to cool a boom, along with other Government deflation mechanisms. They've never said or implied that the JG will do it alone. Just look at the quote from Bill above. The question is why is Cullen distorting the MMT position here and in the other places we've indicated in this series. What axe is he grinding? What ideology is he defending?

Summing up the Anti-JG Indictment

"Importantly, none of this even touches on the various other risks involved in such a program. I have contended that there is potential for such a large government program to become overrun by other problems (corruption, praxeological issues, lobbyist/political controls, regulations, mismanagement, lack of productive work, various forms of moral hazard, etc) creating sizable risks. The fact that its impact as a superior price stabilizer is muted is further cause for concern. In addition, the goals of targeting price stability and full employment don’t necessarily maximize our true target – full productivity. And perhaps most importantly, the idea that the JG is embedded in MMT as a “central” piece of the theory distracts from the core proven concepts and gives the impression that you cannot understand modern money without understanding a massive government spending program that is unproven in the real-world (on any scale as would be introduced in the USA) and entirely theoretical."

This is just a repeat of earlier posts by Cullen and John Carney, which I've evaluated, and, I think, refuted in earlier parts of this series. The bottom line is that if you don't agree with the MMT normative structure centered on public purpose, then you won't accept the JG as core. So, what? All Cullen's saying is that he doesn't share the normative side of MMT. He just doesn't believe that economics ought to be practiced for the public purpose.

If he did, and he also believed in the importance of “full productivity”, then he'd be arguing that “full productivity” and “prosperity” were part of the public purpose of economics; but not that full employment and price stability are not, because according to all the survey data we have, people believe that economics should be about helping the economy get to full employment and price stability. Obviously, they want “prosperity” too, and one can make the case that increasing productivity, innovation, creativity, and technological advance are all very important for “prosperity.” But I really don't think that people will agree that full employment and price stability aren't also very important components of public purpose.

So, let me ask you Cullen, do you think macroeconomics should be practiced for the public purpose; or do you think it should be a tool for private gain alone? If you think it it's for public purpose then let's see your narrative relating “full productivity” to public purpose. And if you think it's for private gain, then let's see your narrative explaining why MMT ought to commit to that goal.

The Job Guarantee and the MMT Core: Part Ten – A 180 Mic Check?

Joseph M. Firestone — Sun, 15 Jan 2012 18:28:26 -0500

Cullen Roche continued his attack on the JG and his critics with a post asking whether America really needs to do a 180? I see the post as a set of distractions and straw man arguments that misconstrue the positions of his critics. The post quotes no one and constructs their positions fictionally without any documentation.

A Drastic Overhaul? Who Said Anything About That?

“This whole job guarantee debate has really shed light on the schism in many MMT thinkers. One group wants you to believe that the American way of doing things is so broken that it needs a drastic overhaul (in this case, the hiring of up to 30 MILLION government employees). . . . “

There's no group in MMT that wants you to believe that a “drastic overhaul” is needed. There is a group that wants you to believe that 25 – 30 million Americans want full-time work and can't get it, and that the Federal Government ought to put an end to this situation by passing and implementing an aggressive fiscal policy including a full payroll tax cut, $1200 per person in revenue sharing aid to the States, and a Job Guarantee program paying a living wage to all who want full-time work. What's “drastic” about that? That's just fulfilling the public purpose of fiscal policy. No more and no less!

Nor does this group contend that the Federal Government needs to hire 25-30 million Federal employees, It just contends that the legal obligation to provide work for them be implemented with a JG program. Since that program would be implemented along with the other MMT proposals, there would be far fewer JG workers actually hired. Most of the new jobs created by an MMT program with a JG would be created in the private sector as the economy grew, and the JG jobs actually provided would be transition jobs, most of which would be voluntarily given up in favor of new private sector jobs within a year's time

Ideals That Made America Great

”My position has been that we need to maintain a more measured approach and acknowledge that while America is in a deep hole currently, it does not require such a drastic overhaul (yes there are big problems and I’ve spent years being bearish and discussing them, but let’s keep things in perspective). There are things our government can do that will help enormously, but won’t risk undermining the ideals that helped build this great nation.”

It would be nice to know what 'ideals” Cullen has in mind, and what he means by “measured.” Does he mean an approach that won't produce full employment? I ask that question because all the "measured approaches" we've been employing in the US since 1970 have failed to produce full employment.

Also, I think the two primary ideals that have made America what it is, are individual freedom and equality of opportunity. These ideals have been emphasized to varying degrees at different times throughout our history. When one or the other gets emphasized too heavily, America loses its balance, and its other primary ideal and its political system are both threatened. This is what's happening now.

Equality of opportunity has been diminished over the past 30 years at least, and one kind of individual freedom, economic freedom for large corporations and wealthy individuals has gotten way out of balance, to the point where it threatens to devour its own long tail and eat the economic freedom of others including that of its very children. It's the way things have been going in America that is jeopardizing our ideals, not those MMT fiscal policies that will eliminate unemployment and contribute to greater equality of economic opportunity for everyone.

Is There Simply No Refuting That “Fact”?

”I think a little perspective will help with this whole debate. People seem quick to forget what has been built here in the USA. In just 235 short years we have built the most prosperous wealth creating economy ever known to man. EVER. There is simply no refuting that fact. . . .

Well, I'd like to know how Cullen measured that. The World Bank Total Wealth Per Capita estimates in 2000, showed the United States at 4th in the world on this indicator with close to $513,000 in wealth per capita. Sweden was third, about $800 per capita more than the US. But Switzerland was first with more than $648,000, and Denmark was second at just over $575,000 (See p. 20).

These estimates are out of date; but it's doubtful whether newer ones would show that the US has been gaining ground on the nations ahead of it, since none of the three has suffered as greatly from the crash of 2008, as has the US.

If we use GNI per capita as the measure, then this much more imperfect but also more recent (2010) measure of wealth shows that the US is 6th at $47,184, far short of Luxembourg, first at $108,921. Norway, Switzerland, Denmark and Sweden are also ahead of the US on GNI with Norway and Switzerland rather far ahead. Also, there are five other countries, including Canada that are rather close to the US on this measure, though they are a bit lower lower in the GNI rankings.

When you take into account the discrepancy between other modern nations and the US on the GINI index, a popular measure of inequality both across and within nations, you get a better perspective on the approximate median wealth per capita, a measure that is hard to find. The GINI index value for the US reflects much greater inequality than the other nations named above. The US's GINI is .45; whereas the GINI value in the other nations is in the low .30s and Sweden is even lower at .23.

This suggests that if a median wealth per capita measure were available it would show that the US economy has been a much less effective wealth generator for the American “man-in-the-street” than the economies of other nations. Considering all this, it's very likely that's Cullen's very bald statement about the US being the most successful economy ever at generating wealth, not only can be refuted, but already has been by a number of counter-instances.

Small Government and Individualism

The ideals that built that economy were based on small government and individualism. We took the idea of a constitutional republic and combined it with a rugged sense of individualism that unleashed a whirlwind of innovation and wealth creation.

Our ideals may have been based on small government and rugged individualism, but at least since the Great Depression, our practices, our wars, our booms and our busts, our technology and a lot of our innovation is traceable to the activities of a big Government and considerable collaboration among Americans during the Depression, the War, and the post-War era. We're now talking about close to 80 years of bigger and sometimes very, very, big Government. And, last time I looked there's not a lot of scope for rugged individualism in our large corporations, or in our other large organizations, either. Nor is there much respect for the law, or the constitution in many of those places, as we all know.

There may have been some measure of reality to the picture Cullen sketches above in the 18th and 19th centuries. But since the 20th Century began, our National Government has played a much larger role in our lives, since it was the only institution capable of constraining the giant corporations from controlling the market in their own interests. It's too bad that over the past 35 years the Government has gradually grown incapable of maintaining those constraints, and that as a result we are now rapidly approaching a kleptocracy.

Those Evil Capitalists? Why Are They Relevant to the JG?

That shirt on your back? Yep, an evil capitalist likely helped in its creation. The computer you’re staring at? Yeah, some evil capitalist likely helped make that. The medicine that helps save millions of lives every year? Yeah, capitalists help fund those. The hundreds of billions of dollars Bill Gates and Warren Buffett have convinced themselves and their rich friends to give to charity? ARRGGGG, THOSE GOD DAMN CAPITALISTS! This is not to imply that capitalists are some world saving group out to find world peace. But let’s not throw the whole idea under the bus just because a bunch of bankers got together and threw a wrench in the machinery over the last 20 years….

I'm not sure what Cullen has in mind here. Our MMT buddies are certainly not proposing to get rid of capitalism. They're just proposing a fiscal program which features a JG program providing a living wage and good benefits to people who want to work full-time, but who the private sector chooses not to employ, or to employ only part-time. So why include the paragraph above as part of the post. If it's directed at people who are not MMTers advocating a JG, it's irrelevant, and if it is directed at that them, then it's a straw man, clearly raising a non-existent issue. I think that paragraph is a clear attempt on Cullen's part to mis-characterize and brand his MMT opponents as anti-capitalist. But that is clearly nonsense since their intention is to save capitalism from its own very visible excesses.

American Exceptionalism? What Does That Have to Do With the Price of Eggs?

I know we’re in a rut right now. But before we start thinking about completely overhauling a system that has served so many incredibly well over the course of hundreds of years, let’s try to put things in perspective and not forget that while government can certainly help our society, it is not the answer to all of our problems. Call this story one of American exceptionalism or whatever you want to. I call it our reality. We know for a fact what built this great nation and we can prove (factually) how well it has performed and how far it has come in such a short period (despite recent turbulence). If your economic policy involves a drastic overhauling of that system then the onus is on YOU to prove that the current system is not only broken, but can be outperformed by another type of approach. To those people, I say good luck. You will need it.

More red herrings. The onus is not on MMT JG advocates to prove anything more than anyone else has to prove. Now is now! That is the reality! We have to make decisions about what to do now based on the choices we have now, all the ones we have time and resources to consider.

As I argued here, Cullen's put on the table three alternatives

1. continuing with our present policies.

2. Putting into practice Cullen's alternative using some MMT measures, pursuing “full productivity,” and retaining an unemployed buffer stock. And

3. pursuing the MMT program including the FE buffer stock through the JG.

Anyone considering the three alternatives has to fairly compare them and pick the one that stands up best to criticism and data which appears to contradict it.

There's no greater “onus” on 3, than there is on either of the other two alternatives. Alternative 1 isn't “working.” It's being refuted by the lack of a recovery that's gone beyond the wealthy and the upper middle class. So, we have to compare alternatives 2 and 3.

I did that in my last post, and I think I showed that Cullen's alternative is the weaker of these two. I'm sure there are other alternatives we can formulate and evaluate as well, and perhaps one of them will be better. But, as long as the current alternative is failing us, it makes no sense to claim that there is a greater “onus” on newer alternatives, either Cullen's or the full MMT alternative, just because they haven't been tried before.

Nothing “new” has ever been tried before. That doesn't mean it has a greater weight to overcome then something old that's not working. That viewpoint is just conservative ideology. It's just: Tradition! Tradition! Tradition!

Sorry about that; but the old something isn't working. We need something new. We need to move on! So, let's compare the new alternatives and see what looks like it is most likely to work best, then do that, and see if it works. If it doesn't, then let's move on to the next solution. Let's do what FDR did, try, try, try, until we get it right.

Also, as I indicated above, no drastic overhaul of the US economy is being suggested by MMT. Capitalism will remain the primary component in our mixed economy. All that will happen, if MMT policies are fully adopted, is that the social safety net will be strengthened with a JG, payroll tax cuts, revenue sharing and I'm sure, very soon after the real recovery starts, Medicare for All, more generous SS benefits, and free public higher educational opportunities.

The rule of law will be re-instated so that it again applies to businesspeople who commit fraud. Regulation will be perfected and implemented, and the Government will have a big role in helping us to solve other economic problems that we've been refusing to do anything about, like creating new, renewable energy foundations for the economy, new industries that produce sustainability for the economy, and re-invention of our crumbing infrastructure and public buildings and spaces.

In spite of all this, however, most of our mixed economy will remain capitalist. Most people will still work for managers and owners. Entrepreneurs will have a better economy to innovate within. And capitalism will be saved from itself once again, as it was during the 1930s. So, I don't see these things as a “drastic overhaul.” I just see them as the kinds of reforms that democracy needs from time-to- time to maintain itself.

The Job Guarantee and the MMT Core: Part Nine, The Wrong Goal?

Joseph M. Firestone — Sun, 15 Jan 2012 00:52:57 -0500

Spilling Electronic Ink

Earlier in this series, here, here, and here, I discussed and critiqued an earlier post of Cullen Roche's expressing his criticisms of the Job Guarantee (JG) policy advocated by MMT economists, and contending that the JG proposal wasn't core to MMT. In the previous eight parts of this series I've argued against that view in the context of a blogosphere explosion on the subject. Since the earlier post I addressed, however, Cullen has spilled a lot more electronic ink trying to make his case. Specifically, he's offered four new posts on the subject. In my next few posts I'll review these new efforts, beginning with his conversation with Warren Mosler.

He begins:

“Anyhow, Warren and I had a nice exchange and we agree far more than recent debate has likely implied. We’re just sort of on a different page about how we should meet our goals. . . . ”

Differences in Normative Structures

Here, Cullen suggests that his difference with Warren Mosler is only about means, and that they share the same goals, so that their differences are small. But, Warren is very plain in his book that he considers “public purpose” to be the overall standard that guides his thinking, and that he thinks that two essential aspects of public purpose that economic policy should fulfill are full employment with price stability. But nowhere in this or earlier posts does Cullen express agreement with these normative basics of MMT. As I pointed out here and here, part of the reason why Cullen doesn't agree with Warren and the academics who developed MMT is because he doesn't share these normative views. So his disagreement is not a small thing (which Warren confirms in this dialogue), however much he may want to minimize it. It goes to the core of the policy side of MMT.

Also, Cullen speaks to this disagreement on goals later on in his post on the conversation. He says that he's for “prosperity, increasing living standards, and says that subsidiary goals are innovation, increasing productivity, and a “real goal” of “full productivity.” He also says that:

“. . . . massive increases in living standards come from increases in innovation and productivity (which are MOSTLY pvt sector and profit driven). So my thinking is rather basic. Why obsess over FE (I am referring to low unemployment here) when the real goal is full productivity (which is a vague concept I know)?”

“Full Productivity” (FP) is a vague concept, but, in addition, prosperity is only one dimension of public purpose. Why should we accept it as the primary standard, along with increases in living standards coming from increases in innovation and productivity leading to “ full productivity”? Why does Cullen propose that our goals should be these rather than “public purpose”?

After all, public purpose can include full employment at a living wage for all who want to work with price stability, prosperity (including innovation and increasing productivity), freedom, environmental sustainability, political, economic and social justice, renewal of our individual rights under the constitution, decreasing economic inequality with increasing economic opportunity for all, fair elections free from the power of money, and more generally the list of things FDR laid out in his second bill of rights. But “prosperity” is a much narrower goal, than “public purpose,” so why should we agree with Cullen that this, alone, is our goal? And if we don't, then doesn't Cullen's whole case fall to the ground?

Cullen continues by saying “. . . that perhaps” FE is “ the wrong goal to have . . . “ because we know we can have prosperity with a UE buffer stock, but we don't know if it's possible to have it with an FE buffer stock on a “long-term multi-generational” basis, and he concludes his argument with:

“So a lot of this comes down to potential downsides of employing workers in the JG (some excellent questions were asked here) versus leaving them unemployed. One of the big problems with the JG is that it has never been done in any mass scale that has resulted in prosperity over any multi-generational period. So, it’s very hard to prove that the JG can work because it has never worked in the past. What we know has worked is having an unemployment buffer stock. We know for a fact that human beings can achieve enormous prosperity despite unemployed people."

I've already examined the argument that an unemployed buffer stock has worked in the past in creating prosperity here and here. While I agree that many of us have been prosperous while unemployment remained high. There's no evidence suggesting that our unemployed buffer stock was somehow a positive factor in creating and maintaining this prosperity, and there's also the fact people who were part of the UE buffer stock didn't share in “prosperity.” In other words, there's no evidence that a UE buffer stock “worked” to create prosperity, or that whatever prosperity existed was not created in spite of it, or reduced due to it. We only know that UE buffer stocks have accompanied prosperity for those who were prosperous. Correlation, we all know, is not causation, nor does it even indicate a necessary condition for an outcome.

Unfair Comparison

This doesn’t make this the optimal position and it doesn’t mean we shouldn’t strive for full employment, but what if the approach of plugging in the unemployment hole via government workers is the wrong approach? . . . What if there is an optimal way to leverage the government’s monopoly supplier powers that doesn’t involve unproven and potential downside risks? . . . ”

First, up until this statement, Cullen's view has been that FE is the wrong goal to have, which, I think, does imply that we should not strive for it. Instead, he suggests that we should strive for FP, and that he expects that if we reach it, that will create FE as a side effect.

Second, in asking for “. . . an optimal way to leverage the government’s monopoly supplier powers that doesn’t involve unproven and potential downside risks? . . . ” Cullen is asking for the impossible. Every new fiscal policy the Government may select will involve unanticipated consequences and “unproven and potential down side risks,” since the economy isn't a mechanism, but a complex adaptive system. For that matter, even continuing old policies involves such risks, since the future is often not like the past in such systems.

Third, in asking what if the approach of direct Government job creation through a JG is the wrong approach, I think Cullen is using a biased frame, because it is much too narrow in scope and doesn't even make a minimal attempt at fair comparison of alternative policies.

A Fair Comparison Approach

A more unbiased approach to prospective policy evaluation would be something like the following.

Given these choices:

1. Creating and implementing a JG with a living wage and full benefits program to achieve an FE buffer stock within the context of other MMT stimulative fiscal policies such as payroll tax cuts, State revenue sharing, and infrastructure;

2. Creating a set of programs to achieve FP within the context of other MMT fiscal policies, while maintaining a UE buffer stock;

3, Continuing with the present spectrum of policies mostly relying on Fed monetary policy, and occasional minor fiscal initiatives like the “paid for” 2% payroll tax cut and UE extensions, to “fuel” the economic recovery while maintaining a UE buffer stock;

a) which of these alternative courses of action is most likely to produce the most progress toward public purpose, the best balance of benefits to costs across the various dimensions of public purpose, given an agreed upon time frame; and, b) in addition, what is the risk of error of each of these alternatives in the context of the others assuming we choose it as the best of the decisions to implement?

Continuing the Present Fiscal Policies

We know that the third of these alternatives is likely to have the highest costs among the three, because we've seen these in the past few years. Bill Mitchell lists them again in a recent post:

It is well documented that sustained unemployment imposes significant economic, personal and social costs that include:

-- loss of current output;
-- social exclusion and the loss of freedom;
-- skill loss;
-- psychological harm;
-- ill health and reduced life expectancy;
-- loss of motivation;
-- the undermining of human relations and family life;
-- racial and gender inequality; and
-- loss of social values and responsibility.

To which Bill might have added other likely effects, such as:

-- increased economic inequality;
-- increased poverty;
-- increasing crime rates
-- increased anger against an elite that gets more and more and more wealthy;
-- increased political inequality undermining democracy;
-- possible increasing political violence in major American urban areas.

As far as benefits of the present course are concerned, these will depend on other occurrences, for example the possibility of another bank crash spreading from a European collapse. If that happens, then reliance on a UE buffer stock will accelerate a very rapid downward plunge into a depression and erase all likely benefits of continuing current policies, the costs will be like those most Americans paid in the 1930s, and the risks of political extremism and civil strife will be very great.

However, if a crash doesn't occur, then we will have:

-- continued deficit spending sufficient to expand GDP slowly;
-- continued slow decline in unemployment
-- continued slow recovery in the housing market
-- continued slow repair of private sector balance sheets
-- continued enormous paper profits and bonuses for Wall Street banks and Trading Houses

So, it seems that the likely benefits of continuing the present course are very hard to name or underwhelming for most Americans; while the likely costs associated with it are very high. On the other hand, if we project these results, the risk of error associated with this theory is relatively small because we've had plenty of experience in recent years seeing things turn out this way using the fiscal policies being followed by the Administration and Congress.

Cullen's FP/UE/”MMT” Alternative

But what if we follow the FP/UE/”MMT” stimulus alternative, then what are the benefits and costs likely to be associated with that?

Benefit possibilities:

-- the ability to produce material goods at much lower cost than today, thus increasing business profits to unprecedented levels;
-- the ability to reduce work hours substantially while producing all our material needs;
-- the ability to provide renewable energy at costs competitive with fossil fuels today;
-- the re-invention and enriching of our societal infrastructure at lower costs
-- the invention and dispersion of new electronic and computing devices that can enrich our lives in various ways
-- greater profits for business than ever before
-- greater AD injected into the economy through payroll tax cuts; State revenue sharing; and deficit spending on infrastructure and new technological developments

And possible costs:
-- continued recession and high unemployment rates, due to a failure to pass any productivity gains along to employees, and accumulation of new AD in the hands of higher income people;
-- faster trading than ever, giving technologically advanced investors and traders advantages over everyone else;
-- further concentration in business as large corporations leverage productivity gains and accumulate new technology innovations for their own use;
-- further decline in middle class purchasing power as wealth concentrates in a smaller and smaller group, preventing full recovery and resulting the need for continued deficit spending;
-- plus all the costs listed for alternative one by Bill Mitchell and myself.

These benefits and costs are possibilities. To compare alternatives we have to assess the probabilities of both positive and negative outcomes and also assign values to the benefits and costs. We may make errors either in listing the outcomes, assessing the probabilities or assigning the values. If we err we may very well make the wrong selection of an alternative, and buy the negative consequences of that choice, including unanticipated costs of our error.

In arguing for his FP/UE/”MMT” alternative, have we seen an analysis even remotely like this sort of fair comparison of alternatives from Cullen? The answer is no. He does some “handwaving” about benefits and about the costs of continuing with a UE buffer stock not preventing "propserity." But his analysis is very vague, even though, if we take him seriously and select his alternative, the probability of serious consequences for millions of people looking for jobs is very high.

The JG/FE/MMT alternative

Benefits:

-- Full employment at a living wage with full benefits for JG participants;
-- Higher wages; in the private sector;
-- Higher sales in the private sector;
-- growing private sector employment;
-- improving middle class balance sheets;
-- Higher AD;
-- Closing the Output gap;
-- Lower profits for big businesses;
-- Strengthening of the counter-cyclical social safety net;
-- Strengthening of the automatic stabilizers
-- social inclusion and expanding freedom;
-- skill gains;
-- positive psychological reinforcement;
-- greater health and increased life expectancy;
-- strengthening of motivation;
-- mending of human relations and family life;
-- increasing racial and gender equality;
-- reinforcement of social values and personal responsibility;
-- increased economic equality;
-- decreased poverty;
-- decrease in crime rates
-- less anger and resentment against the wealthy;
-- decreasing political inequality undermining democracy;
-- avoidance of political violence in major American urban areas.

Possible Costs:

-- One-time price adjustment upward if JG wage is set too high;
-- Decrease in legitimacy of program if JG wage is too low
-- Shock to business from higher wage costs causing price adjustments upward
-- Administrative failures resulting in unpopularity of JG program
-- Lack of fit of available JG and private sector jobs to available skills
-- Substantial inflation
-- Slower or less new technological innovation

In all three cases above the possible benefits and costs may occur. To compare the alternatives one needs to assign probabilities to the possibilities and also values to the outcomes to really do a good job of selecting among them.

But here are some things to consider for a loose ball park assessment. The negatives of a UE buffer stock are pretty well-established, and if the FP/UE/”MMT” alternative is selected, then the probability of many of the negatives listed occurring seems pretty high, along with the negative values of the outcomes (risks), while a lot of the benefits may be less than high probability, but have high value (opportunities).

For the FE/JG/MMT alternative, many of the benefits seem to be very high probability, while some of the costs are lower probability and some of the values are much less negative than the values associated with the negatives in the other alternatives.

What if I've erred in this assessment? Then the most likely error is in the choice between the second and third alternatives, since the first one is the slow boat to plutocracy city. If I act on the third (FE/JG/MMT) and the second is true, then what is the consequence of the error? There may or may not be less technological progress, somewhat more inflation, and higher dissatisfaction with the bureaucracy, but there will still likely be near full employment and the worst consequences of the UE buffer stock will have been avoided.

On the other hand, what if I act on the FP/UE/”MMT” alternative, and the FE/JG/MMT alternative is true, then I will have condemned millions of people to unemployment, poverty, and lack of opportunity for the sake of pursuing and perhaps not achieving FP.

The Bottom Line?

Cullen Roche asked the risk of error question in connection with the FE/JG/MMT alternative; but didn't ask it in connection with the other two alternatives. That's why I said that he was failing in his duty of fair comparison.

But, if you ask the question in connection with all three alternatives, then it looks like both the conjectured “real” risk and the risk of error are much less with the FE/JG/MMT alternative than with either of the other two. So, I don't think raising that question benefits Cullen's argument, so much as it calls it into question even more.

But the worst thing here, I think, is that my analysis lays bare the lack of it Cullen has given to the full productivity idea, at least in "print." Cullen says that FP should be our goal, but he hasn't really told us what “full productivity” is. Until he does that his proposal for abandoning public purpose and the normative structure under that goal including FE with a living wage, and price stability, to pursue FP will really seem blue sky to me and perhaps other MMT writers as well, and will have the feel of a political slogan, rather than an economic goal that we ought to pursue.

The Job Guarantee and the MMT Core: Part Eight, The JG Rate

Joseph M. Firestone — Fri, 13 Jan 2012 01:14:17 -0500

A little time out from my critiques of the various posts contending that the MMT Job Guarantee (JG) proposal is not the core of MMT as an approach. As I've argued in previous posts in this series, I very much think that it is, because I think it is the best means we know of right now to achieve the view of public purpose which is at heart of the prescriptive side of MMT in democracies. However, I think I've seen some disagreement among MMT proponents who think the JG is core to MMT, about the level at which the JG wage should be set in the US.

Everyone agrees on the accompanying benefits however, which would would be a full “standard” package, including Medicare or something like it for all JG participants. But when it comes to the wage level itself there's now wide variation among some leading MMT practitioners.

Here's Randy Wray, in an address he gave at a conference organized by Bill Mitchell in December, for example:

Rather, the best way to operate a money monopoly is to set the “price” and let the “quantity” float—just like the water monopolist does.

My favorite example is Bill’s buffer stock job guarantee program in which the national government offers to pay a basic wage and benefit package (say $15 per hour plus usual benefits), and then hires all who are ready and willing to work for that compensation.

And Pavlina Tcherneva says:

It is time for policy makers to take the Job Guarantee (JG) proposal seriously. Direct employment by government at living wages is the most immediate method for reducing the unemployment rate and keeping the jobless and their children out of poverty.

In another post, she says that a figure closer to a living wage than Warren Mosler's preferred $8.00 per hour JG wage is $10.00 per hour, suggesting that her own notion of a “living wage” may well be on the order of $12.00 per hour, which she notionally suggested earlier.

Also, Bill Mitchell has advocated a JG wage sufficient to meet "a minimum acceptable living standard," while I've seen other statements by Randy mentioning JG wages of $10 and $12.00 per hour.

However, Warren Mosler continues to hold to his position that the JG wage should be $8.00 per hour.

My own view, as a policy analyst, rather than a professional MMT economist, is that a $10.00 per hour JG wage with full fringe benefits is OK for the lowest cost areas in the US, but that the JG wage should be cost-adjusted by region, with the JG wage in New York City or other areas of comparable cost being about $24.00 per hour. I think that Warren prefers the $8.00 per hour rate because he proposes the JG in the context of State revenue sharing and a full payroll tax cut for employers and employees, and he fears that a more expansive JG wage rate could provide sudden demand and competition shocks to the private sector that might trigger inflation.

That's a real concern. But in my view, it would be better to design a program that provided for automatic tax increases based on excessive increases in the CPI, while no longer postponing the day when a living wage in America is the same as the minimum wage, which in effect would be set by the JG wage. In my view, there is no place in the US where $8.00 per hour is a living wage. There are probably some places where one can probably live on $10 per hour, but in most places in the US a good deal more is needed, and in our most expensive cities, wages of $10 per hour are a cruel joke, not a living wage.

In any event, my main point in this post is to call attention to the disagreement among MMT adherents in their proposals about the appropriate JG level. Disagreements aren't necessarily bad, but I think we ought to make clear to one another the differing judgments/assumptions/ trade-offs that account for the differences we see in the JG wage rates being proposed by various leaders in the MMT field. We also need some modeling and and to use whatever empirical data we can get to decide how far we can go in providing a “living wage” for JG workers, while also providing price stability, as the private sector begins to hire back people and JG employment shrinks to a relatively small level.

In proposing this, I'd like us to keep in mind the idea of “public purpose;” to ask ourselves what the major components of this notion are; and to also consider whether there are still conflicts among its various components. MMT suggests that Full Employment with Price Stability can both be achieved without conflict.

But, the question being raised by Warren's post linked to above, is whether Full Employment at a living wage, is possible with price stability. Warren seems to be implicitly questioning this, and also implying that public purpose is better served by placing more weight on avoiding an unwelcome one-time price adjustment to a JG that is set at too high a level, than it is by avoiding a JG wage that isn't really a living wage.

For my part, I think our private sector businesses need to pay more for labor and to have less profit. For far too many years they have taken advantage of a friendly political environment to keep wages down, and to pass most productivity gains to the top of increasingly steep income and wealth pyramids.

This has to stop, and a JG that pays a living wage is one way we can begin to stop it. So, my trade-off is to take the risk that the one-time price adjustment from too high a JG wage level won't be near as important to people as the end of unemployment and of employment that doesn't pay a living wage. So, I'm for a JG wage a good bit higher than the $8.00 per hour proposal. How about you?