Thursday, September 2, 2010

Money is merely a unit of accounting



Modern money is merely a unit of accounting. When people ask, "Where does the government get the money to pay for this or that?" they fail to understand that the government's "money" is merely an accounting entry on a spreadsheet. To better understand this think about where you got the number "1" the next time you type it on your spreadsheet? Or the number "1000?" Or the number "100,000,000,000,000,000,000?" You just typed it in. Same thing with modern money. Many people have trouble with this idea because they still believe that money is something we dig up out of the ground.

10 comments:

Joe said...

I'm a recent discoverer of MMT, and am irritated that it took this long for me to read about it. Even when I was an undergrad econ student in '04 none of the professors ever talked about how our modern monetary system works the way MMT describes it.

However, it seems like many MMT proponents, like Bill Mitchell, are far too eager to use fiscal stimulus as a means to achieve prosperity. In my view, the danger of aggressive fiscal policy can lead to two highly negative outcomes which don't seem to be talked about much.

1. Moral hazard. All the stimulus money is rewarding bad behavior which led to the massive indebtedness of the private sector. More firms and households should have been allowed to fail. The Fed holding interest rates low punishes those who were prudent, and now we are left with the same zombie banks and firms Japan had after their burst.

2. Malinvestment. Money going towards make-work projects which don't offer any economic productivity are a drag on the real economy. Where is the incentive to educate yourself, take risks and work hard when you can be an overpaid govt bureaucrat? Why should states or businesses be prudent in their taxing and spending if the fed govt will continually bail them out? Why take care of yourself when the fed govt provides free health care? (since the govt is never revenue constrained)

Also, federal stimulus money is grossly skewed towards politically connected groups, rather than an equitable distribution. Obama will dump stimulus dollars to environmental groups, unions, and his democratic allies, but not simply give everyone a pay raise via tax cuts.

My solution would be to expand federal spending on productive projects, like infrastructure, while slashing taxes across the board, especially for middle and lower income earners.

Tom Hickey said...

Joe, Bill is on the left of the MMT'ers, and Warren Mosler is on the right. See Warren's site here. Warren is proposing a payroll tax holiday for instance.

MortgageAngel said...

"because they still believe that money is something we dig up out of the ground."

Picture that! Working twice for one wage? Oh no! NOW I get it! The money is more valuable because someone had to labor to create it.

That is so effed up! Ewe - yuck! I need a shower now!

Red Rock said...

Joe. I'm in the same position as you. Also a recent 'convert', I do find many MMTers to be almost closet socialists and as such I fear what would happen politically if MMT becomes accepted orthodoxy. Politicians will use it as cover to fund every bad idea out there and reward cronies.

Tom Hickey said...

Red Rock, the term "socialism" ans "socialist" are bandied about pretty indiscriminately. Here's the lede to Wikipedia article on socialism. There is no MMT'er I know of that is remotely like this. This is just a canard.

Socialism is an economic and political theory advocating public or common ownership and cooperative management of the means of production and allocation of resources.[1][2][3]
In a socialist economic system, production is carried out by a free association of workers to directly maximize use-values (instead of indirectly producing use-value through maximizing exchange-values), through coordinated planning of investment decisions, distribution of surplus, and the means of production. Socialism is a set of social and economic arrangements based on a post-monetary system of calculation, such as labour time, energy units or calculation-in-kind; at least for thefactors of production.

Mike Norman said...

Joe and Red Rock:

I'm fine with the "Socialist" label if you want to pin it on me and if you believe that Socialism entails some kind of central planning. Because if that's true, then we're all Socialists even if we don't know it.

We've had central planning in this country for the past 40 years, perhaps not from the government, but from the corporate "state."

Everything we buy; all of our consumption decisions, plus, income policy, wage policy, trade policy, monetary policy, tax policy, the way the nation's resources, capital and labor are allocated...ALL of these things are dictated and decided by corporate interests. The government has been COMPLTETELY out of the equation with the exception of enforcing what these interests desire.

And what do we have to show for it? A vapid, ignorant, programmed consumer class that ends up buying lots of platic junk because some philandering golfer or the Kardashian girls tell them to.

Either that, or we have an arrogant coterie of professional gamblers who call themselves "financiers" who feel it's their birthright to eviscerate private savings, create untold havoc and instability and destroy companies because their "analyses" tells them it's okay to do so.

On the other hand, if I'm a Socialist because I want to see more public investment in infrastructure, education, health care, basic R&D and transportation, for starters, then by all means call me a Socialist!

Red Rock said...

Tom,

I do recall Bill Mitchell expressing support for Hugo Chavez. I'll admit to using the term "socialist" a bit dramatically, but Chavez comes fairly close in that he certainly advocates "public ownership" of many industries (and much of the media). This goes a long way to explaining Venezuela's miserable economic performance. If you support Chavez, does that make you a socialist? Perhaps not, but it certainly puts you way out in left field. Bill Mitchell also expressed an odd view of North Korea, saying that we shouldn't pass judgment because we don't really know what's going on there. That in itself should be very worrisome to Bill, but he prefers to give it a pass.Despite this, Bill has a wide and supportive following in a swath of the MMT community.

Red Rock said...

"Everything we buy; all of our consumption decisions, .... are dictated and decided by corporate interests".

Not sure what to make of this statement Mike. If you mean corporations are responsible for producing the products we purchase, certainly true as for the most part the government sector doesn't make products.

If you are claiming that Apple forces consumers to buy iPhones or networks force citizens to watch the Kardashians (as pathetic as the show may be)you have a different concept of "force" than I do.

googleheim said...

@ TOM :

YOUR EXCERPT SAYS THAT THERE IS A FREE ASSOCIATION OF WORKERS - BUT UNIONS COST A LOT AND THEY ARE NOT FREE FOR WORKERS AS THEY ARE MANDATES - THAT IS LIKE THE UNIONS ARE A CAPITALIST THING

@ RED ROCK

CHAVEZ IS NOT A SOCIALIST AS PER A DENMARK COMPARISON, NOR IS HE AN ENVIRONMENTALIST. NO TRANSPARENCY AND HE IS AN OIL HOG.

ARGENTINE PRESIDENT FERNANDEZ KIRCHNER JUST TOOK OVER THE ONLY PAPER COMPANY IN ARGENTINA CITING THAT THE NATION'S MAIN 2 NEWSPAPERS HOG THE PAPER SUPPLY AND DO NOT PROVIDE ENOUGH PAPER FOR THE OTHER NEWSPAPERS - SO SHE IS IMPOSING EQUITABLE REDISTRIBUTION OF SUPPLY ACCESS TO THE PAPERS THAT WILL WRITE SOMETHING NICE ABOUT HER BUT RESTRICT THE PAPER FROM THE 2 MAJOR NEWSPAPERS WHO CRITICIZE HER.

MEXICO PEMEX STATE RUN OIL COMPANY IS NOT EXACTLY PRIVATE.

APPLE DOES FORCE THE CUSTOMERS INTO THEIR LEGAL ENGINEERING - JUST LIKE WINDOWS WAS A LOCKED SYSTEM WHICH THWARTED OUTSIDE CO-DEVELOPERS FOR MANY YEARS COMPOUNDED BY MICROSOFT'S DESTRUCTION AND PURCHASE OF COMPANIES WHICH TRIED TO COLLABORATE OR COMPETE, APPLE TOOK IT FARTHER

APPLE TOOK IT FARTHER BY LOCKING OUT BOTH THE HARDWARE AND THE SOFTWARE, NOT JUST THE OS.

THESE TYPES HAVE NOTHING TO DO WITH SOCIALIST OR SOCIALISTA !

THIS IS FASCISM AND DICTATORS.

MIKE IS LOOKING AT THE DANISH AND EUROPEAN SOCIALISM IDEAL - CREATING ASSETS AND PROTECTING THEM FROM GAMBLERS AND MECKLENBERG PIRATES FROM GERMANY, AND FASCISTS
WHO RAZE THE SMALL GUY'S WINDOW SHOPS BY BREAKING THE FRONT GLASS EN MASSE ( LIKE CRYSTAL NACHT ) AND THEN TURNING AROUND AN DREVOKING THESE SMALL BUSINESS' ABILITY TO RECEIVE COMPENSATION FROM THE INSURANCE.

CRYSTAL NIGHT / NACHT WAS NOT ONLY A VIOLENT ANTI-SEMITIC OCCURANCE, BUT IT WAS ALSO A FINANCIAL AND INSURANCE SCAM

national socialism ( aka fascism ) NO

traditional european danish-ideal socialism - yes > that's why the danes can still create the Kroner along with the Scandinavians - not completely out like the British but they are hedged

beowulf said...

If you support Chavez, does that make you a socialist?

Have you seen the documentary "The Revolution Will Not Be Televised"? Its available to watch online (description and link below) Chavez comes across like a Venezualan Al Sharpton, kind of a goofball but likeable. And he's been blessed with unusually stupid domestic opponents.

HUGO CHAVEZ ELECTED PRESIDENT OF VENEZUELA IN 1998, IS A COLORFUL, UNPREDICTABLE FOLK HERO, beloved by his nation's working class and a tough-as-nails, quixotic opponent to the power structure that would see him deposed. Two independent filmmakers were inside the presidential palace on April 11, 2002, when he was forcibly removed from office. They were also present 48 hours later when, remarkably, he returned to power amid cheering aides. Their film records what was probably history's shortest-lived coup d'├ętat.
http://video.google.com/videoplay?docid=5832390545689805144#