Friday, July 6, 2012

Cullen Roche, MMT vs MR and Related Matters

      I was just at Roch's Pragmatic Capitalism. Reading him again there's no question that he's a tremendous resource for those who want to really understand some of these interesting if counter intuitive ideas called MMT (Modern Monetary Theory).

     Of course, he himself no longer calls himself an MMTer but is now MR (Monetary Realism). So what are the real differences? Going in it's tough for the interested layman to find this all a bit too much-I mean it's enough to get a handle on MMT now there's sectarian shift? Isn't this precisely what probably makes many just say no thanks and chalk the whole thing up to a cult?

    Yet, Cullen sheds some very incisive light on the subject-he has a talent for making points simply and making them understandable. Part of the problem is the issue of descriptive vs. prescriptive discussions of the monetary system. For Roche and MR, MMT has gone a little too far in the direction of insisting that you can't have the baby without the bathwater as it were:

    "MMT is often described as having descriptive and prescriptive components, but as a whole MMT is one tightly knit comprehensive macro theory. It is an all encompassing theoretical view of the world that offers answers to the macro issues of full employment and price stability. In this regard MMT should not be thought of as having descriptive and prescriptive components."

    "Without the prescriptive policy approaches such as the MMT Job Guarantee you are simply not describing the world as MMTers envision it because you are no longer offering the comprehensive macro answers that MMT is specifically designed to provide. Pavlina Tcherneva made this very clear recently:
“Though clearly there is an aspect of MMT that is purely descriptive, I have always considered this division between the descriptive and prescriptive part of MMT to be a fundamentally flawed dichotomy.”
    "Bill Mitchel has made similar comments in this regard:
“The reality is that the JG is a central aspect of MMT because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and price stability.”

       Note that Roche isn't really criticizing MMT just simply describing the theory-basically you can't abstract from the JG and other progressive prescriptions and call yourself an MMTer. Roche maintains his high respect and regard for the school:

       "There is simply no such thing as being an MMTer without also including the prescriptive component of the theoretical framework. After all, it is a “theory” of modern money providing solutions to full employment and price stability. Removing the prescriptive component or the “theory” (how can you remove the “theory” in Modern Monetary THEORY?) leaves you with a basic post-Keynesian framework and not an all encompassing macro theory providing full employment and price stability."

       "That said, I do not believe you need to fully understand MMT in order to understand how a modern fiat monetary system with an autonomous currency issuer operates. MMT can be extremely helpful in aiding one in this process of understanding, but is not necessary in achieving this. In fact, as described below, MMT might mislead in some aspects of the operational realities of our monetary system."

       "MMT offers some superb insights into the actual workings of the modern monetary system, but given its “inherently progressive” nature MMT actually requires dramatic changes to the system to be applicable in its entirety. For instance, in order for MMT’s operational views to become consistent with the institutional framework the Fed and Treasury would need to be combined and the US government would need to halt many of the policies that impose real funding constraints on the Treasury. Ironically, MMT falls into the same trap here that neoclassicals do by referring to a set of institutional structures as though they have already been changed to adhere to their views even though they clearly have no. Ironically, post Keynesian Joan Robinson once criticized neoclassicals for this, saying:
[neoclassicals often view the world] “where somehow the future has already happened” (Robinson 1979: xiii)
          Roche them itemizes three things that you must agree with to be an MMTer:

          "While there are some overlapping ideas and conclusions MR and MMT are dramatically different. MMT is made up of three key components: Wynne Godley’s sectoral balances, GF Knapp’s State Theory of Money and Hyman Minsky’s Employer of Last Resort (the MMT Job Guarantee). MMT advocates combine these ideas to create one of the most dynamic and well-rounded schools of thought in economics. Monetary Realism rejects two of these core tenets (in addition to others), specifically the State Theory of Money and the Job Guarantee."

         I find all this helpful-there's much more in this link and Cullen explains a lot more in other pieces than just MMT vs MR of course. I've been attracted by some of MMT's ideas-though it was not love at first sight. Some of the MMTers-not necessarily the main theorists-Fullwiler, Warren Mosler, and Billy Mitchell-but some of the commentators can be a bit snarky and act as if they know darn near everything-not exactly the way to win over new blood.

         I was quite put off by Pavlina's attitude particularly that Cullen quoted above-she really seemed to be playing a game of moral blackmail-if you do anything but agree with her about the Job Guarantee she questions whether you're really a progressive-you are either "timid" or really a conservative.

MMTers in fact. To me there's a lot to say for the State Theory of Money-at least it's a corrective over the way the government side of things has been downgraded and impugned for so long.

       Perhaps it's somewhat a one sided view but maybe it's corrective for the other extreme libertarian view that has had too much currency for too long. When Roche says this:

        "Fiat money might be a creature of the state and its laws, but the state is ultimately a creature of the people. Resources precede taxation so while taxation plays a crucial role in binding the monetary system they are by no means the only link (or even the most important link) in the chain. Rather, money is driven by many factors with credit or trust in this specific form of money being the primary driving factor of money."

        "State monetary systems are merely an evolution of money as debt from unspoken bonds to formal institutionalized constructs with laws, taxes, and systemic infrastructure as the framework for a specific type of money. In a constitutional republic like the USA we choose how our government and hence our monetary system exists. Our system is specifically fragmented to avoid the capture of power by any one entity. We use the government as a form of partnership to better our collective living standards. The creation of state money and our monetary system exists to mobilize resources in an efficient and accepted manner so as to help improve collective living standards. Demand for state money is ultimately an extension of this societal understanding of which taxes, laws and systemic infrastructure merely help to organize the institution of state money. The existence of the state also plays a crucial role in helping to establish trust in the currency. But the state alone cannot force the private sector to trust state money.

      I'm not sure that I agree. Bear in mind that the State Theory of Money is meant to be a corrective on the libertarian fantasy of an original barter society and the introduction of money as kind of "original sin" leading to the hated distortionary effects of money. His point that money has existed in all human societies is true but then so has government-there's not on example of anarcho-capitalism either.

      Nevertheless, I think Cullen's overall approach-apart from the exact details of the dispute-is very welcome. While I like the JG idea I don't like to feel there's some gun to my head that I must affirm it. And I do think thta Cullen and MR is right that MMT probably overstates the ability of the JG wage to act as an anchor to prices. Indeed, I doubt that politically you could really create a low wage for JG that would not rise with inflation on only once every 10 years-in some ways it's the mirror of Sumner's NGDP trend rule-rules are an illusion in monetary policy. If the minimum wage rises, does JG continue to be paid $8 an hour or whatever even though this is below the new minimum wage? What about Medicare, SS, taxes, etc. All of this makes it more than the nominal $8 anyway.

      Again, I speak as someone who's liberal on most issues and if I could would love to see FDR's old WPA brought back tomorrow permanently. So I've always resisted calling myself an MMTer despite my agreement on most-though not all-political questions.

      Again, I think that Cullen gives us a tremendous resource for those who simply want to understand the monetary system better-with no hard selling tactics of accepting any particular policy prescriptions. For those who want to wrap their heads around the "descriptive" side it's the place to go.

      P.S. None of this means I am discouraging reading all the great MMT blogs. I prefer to utilize any intellectual resource that proves itself valuable. I visit all the Market Monetarists blogs every day too.


No comments:

Post a Comment