Saturday, December 31, 2011

Speech by Vítor Constâncio, Vice-President of the ECB

Central bank reserves are held by banks and are not part of money held by the non-financial sector, hence not, per se, an inflationary type of liquidity. There is no acceptable theory linking in a necessary way the monetary base created by central banks to inflation. Nevertheless, it is argued by some that financial institutions would be free to instantly transform their loans from the central bank into credit to the non-financial sector. This fits into the old theoretical view about the credit multiplier according to which the sequence of money creation goes from the primary liquidity created by central banks to total money supply created by banks via their credit decisions. In reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money. As Claudio Borio and Disyatat from the BIS put it: “In fact, the level of reserves hardly figures in banks´ lending decisions. The amount of credit outstanding is determined by banks´ willingness to supply loans, based on perceived risk-return trade-offs and by the demand for those loans” [8] In modern banking sectors, credit decisions precede the availability of reserves in the central bank. As Charles Goodhart pointedly argued, it would be more appropriate talking about a “Credit divisor” than about a “Credit multiplier” [9]
Read the rest at the European Central Bank (ECB)
Challenges to monetary policy in 2012
Speech by Vítor Constâncio, Vice-President of the ECB,
26th International Conference on Interest Rates, 

Frankfurt am Main, 8 December 2011
(h/t Ryan V Markov in a comment addressed to me at The Economist)

A promising note on which to end the old year and welcome in the new.

Happy New Year to all from Mike Norman Economics!

Here's to another great year of spreading the word about MMT!

The macro choice — buffer of employed or buffer of unemployed

Bill Mitchell makes it clear that the choice in macro is between a buffer stock of employed or a buffer stock of unemployed in Whatever – its either employment or unemployment buffer stocks. This is the case since there are very few net export economies whose domestic private sectors save very little, therefore providing continuous full employment through the private sector alone. In all other cases the government has to step in and offset the demand leakage to savings, or there will be les than full employment (less frictional).

Why not just use the sectoral balance approach and functional finance to arrange the offset by government expenditure, e.g., through countercyclical infrastructure spending as many Post Keynesians propose? According to MMT economists, its a distributional problem as well as an issue of aggregates. Practically speaking, it is virtually impossible to eliminate unemployment at the bottom because government NFA injections do not make their way down there unless they start there.

So there is choice between an uncompensated buffer stock of employed (Dickensian times), a compensated buffer stock of unemployed (transfer payments like unemployment insurance and the dole), or a compensated buffer stock of employed (JG).

The MMT argument is that a compensated buffer stock of employed is a more efficient and effective way to deal with the unemployment arising from a lack of private sector hiring then either uncompensated unemployment or compensated unemployment. Bill Mitchell has given the accounting to show this in terms of waste that otherwise builds up as human resources degrade. See his posts, The daily losses from unemploymentEmployment guarantees are better than income guarantees, and Income or employment guarantees?

David Beckworth on recent The Economist article

David Beckworth responds to MMT criticism of the NGDP-targetting policy proposal he embraces based on lack of a transmission mechanism from reserves to bank deposit through bank loans. He claims that there is a different transmission mechanism operative — nominal expectations.
The real critique, then, is whether a change in  nominal expectations can really affect current spending decisions by firms and households.  I have an earlier post that shows inflation and nominal GDP expectations (as proxied by a survey of forecasters) do in fact influence spending decisions.  Josh Hendrickson and I also show in this recent working paper that shocks to inflation expectations cause households to adjust their portfolios in the manner outlined above.  Finally, as shown by Gautti Eggertson, a sudden change in nominal expectations was also key to FDR's 1933-1936 recovery.  If the MMTers (and Austrians) could come to accept this evidence, then we could truly have a deficient aggregate demand lovefest.  
Read it at Macro and Other Market Musings
The Market Monetarist, MMT, and the Austrian Lovefest
by David Beckworth

My comment at Beckworth's place:
Yes, I know neoliberals assert that the transmission mechanism is expectations and confidence, which they presume the central bank can use to manage economic behavior in aggregate. However, this is not an economic explanation that is empirically testable, but rather a pseudo-psychological one that has no basis in either psychological or sociological findings. It is a superstition that Paul Krugman has rightly lampooned as analogous to the tooth fairy.
Why would someone rationally expect something when there is no actual way to accomplish it in sight? It is like trying to rob someone with a toy pistol, hoping the victim doesn't notice it is just a toy. The Fed has been trying to stoke inflation through ZIRP and QE without success. Now people in aggregate are going to expect that inflation will rise because the Fed says to expect so? Please explain to me why anyone should expect that in light of what the Fed cannot do through monetary policy, which is its purview.

Expectations could perhaps work if the Fed were to threaten to do something it hasn't done, and the only actual policy gun the Fed has is the interest rate. That is already taking out the floor.

Afterthought: See Bill Mitchell's I am looking for the tooth fairy too
for an MMT critique of the fairy superstition in another context. See also Bill's Inflation targeting spells bad fiscal policy.

UPDATE: The debate continues at Macro and Other Market Musings. I can't find now to link to specific comments there so I am including them for the record here.

 David Beckworth said...
Tom Hickey:

"However, this is not an economic explanation that is empirically testable, 

I am sorry you haven't taken the time to actually read the literature and are thus making this misinformed claim. Again, take a look at Gautti Eggertson paper I linked to above and the reference found therein. Or at my working paper with Josh Hendrickson. There is plenty of evidence and expectations is a core part of modern macro for good reason. I was hoping for a more meaningful exchange with MMTers.


Paul Krugman has rightly lampooned as analogous to the tooth fairy. 

Here too you apparently haven't read the material closely.

Krugman is actually one of the strongest advocates for the the Fed committing to shaping the future path of nominal expectations. He has a famous paper in 1998 where he shows the way out of a liquidity trap is for a central bank to promise higher inflation going forward. He has blogged about this many times too. 

The confidence fairy that he torn apart has to do with the view that austerity will create more confidence. This is a different topic altogether.
January 1, 2012 8:12 AM

 Tom Hickey said...
David, correlation is not causation. What is the transmission mechanism from expectations (psychological) to behavior (real)? 

REH involves assumptions that are questionable in the light of findings in other social sciences.

OK. I was exaggerating on Krugman and the confidence fairy, but I think there is a close connection. And I think PK is as wrong was other monetarists are about inflationary expectations being a sound basis for monetary policy. I just don't but it as an actual transmission mechanism.

Look at the folks at Zero Hedge going long all sort of inflation hedges due to a misunderstand of what QE would do. Sure, they fell into the expectations trap, and many got burned. Bill Gross got his butt handed to him on tsy shorts, just as the MMT-based traders had predicted. (BTW, Mosler's bank had a three year average of 67.77% ROE.) But the neither firms nor consumers in aggregate caught the expectations bug, and the Fed is still fighting "deflationary expectations."

Now that the Fed has shot off all its big policy guns and used up its ammo, people are going to get inflationary expectations from what exactly?

The point that the MMT'ers make is that the way out through fiscal policy is clear, should politicians actually understand the potential of fiscal policy based on sectoral balances and functional finance, and compromise enough for the good of the country to use it.

This kerfuffle is essentially between monetarists and fiscalists, and I don't see any making nice as a way to fix it. MMT'ers claim that we need to debate the merits based on a correct understanding of monetary economics wrt the existing monetary system in general and the specifics of different countries. But you know that already from what commentators here have said previously and in interaction with Scott Sumner. 

Your guys criticize the MMT'er's for not being open to your pet ideas, but you seem resistant to looking at anything the MMT'ers say about monetary operations that calls your position into question.

MMT shows clear and actual transmission mechanisms that don't have to be "proved" though dubious correlation studies that don't show directly how psychological states translate into aggregate behavior. I think that it is a weak argument in the face of argument that show how transmissions occur directly in terms of actual and therefore observable monetary and fiscal operations. In my view it is magical v. scientific thinking, regardless of the sophistication of the models. Let's look at operations.
January 1, 2012 4:13 PM

Friday, December 30, 2011

Pew — Popularity of political labels

Read it at ThinkProgress
POLL: ‘Progressive’ Is The Most Positively Viewed Political Label in America
By Josh Dorner

Probably good for gaining acceptance of MMT.

I will be on Fox News tomorrow at 10am ET

I will be on "Bulls & Bears" on the Fox News Channel, tomorrow (Dec, 31) at 10am ET. Try to tune in if you can!

-Mike Norman

MIT to take next step in free education


For Wall Street Occupiers or other decriers of the “social injustice” of college tuition, here’s a curveball bound to scramble your worldview: a totally free college education regardless of your academic performance or background.  TheMassachusetts Institute of Technology (M.I.T.) will announce on Monday that they intend to launch an online learning initiative called M.I.T.x,which will offer the online teaching of M.I.T. courses free of charge to anyone in the world.
The program will not allow students to earn an M.I.T. degree. Instead, those who are able to exhibit a mastery of the subjects taught on the platform will receive an official certificate of completion. The certificate will obviously not carry the weight of a traditional M.I.T. diploma, but it will provide an incentive to finish the online material. According to the New York Times, in order to prevent confusion, the certificate will be a credential bearing the distinct name of a new not-for-profit body that will be created within M.I.T.
The new online platform will look to build upon the decade-long success of the university’s original free online platform, OpenCourseWare (OCW), which has been used by over 100 million students and contains course material for roughly 2,100 classes. The new M.I.T.x online program will not compete with OCW in the number of courses that it offers. However, the program will offer students a greater interactive experience.
Read the rest at Forbes
M.I.T. Game-Changer: Free Online Education For All
by James Marshall Crotty, Forbes Contributor
(h/t Kevin Fathi via email)

This is huge step toward online degrees offered by established institutions globally through innovations in distance learning made available by technological advances.

Peter Cooper posts a sequel to the JG v. BIG

The job guarantee has been getting a lot of attention in the blogosphere lately. As Bill Mitchell notes in his latest post, some of this has involved questioning whether the job guarantee should be considered integral to MMT. Other discussion has been about the merits of the job guarantee itself. As far as I am concerned, the first question has been answered in the affirmative by the leading MMTers. In this post, I am not concerned with that issue. I am taking as given that the job guarantee is not only consistent with MMT but part and parcel of it. My concern, following on from my previous post, is with the merits of a job guarantee compared with other policy options.
My motivation in this post and my previous one is very different to that of right-leaning critics of a job guarantee. My emphasis is on finding ways to assist a transition to a society in which people can opt for more free time, if they wish. The likelihood of a high degree of mechanization in production in coming decades creates the potential for such a transition.
Read it at
Job Or Income Guarantee (JIG)
by Peter Cooper

Bill Mitchell answers John Carney

Read it at billy blog
Whatever – its either employment or unemployment buffer stocks
by Bill Mitchell

John said he wanted to spark a debate. Well, he's been quite successful. :)

Note to myself that others may be interested in: Let's do our best to keep this debate not only civil but cordial. We are attached to our own ideas, but human knowledge is tentative and advances through open debate of contending issues. No one has the ocean in their bucket. Heated debate is no more effective than cool-headed reasoning, and it may be less effective.

UPDATE: Scott Fulwiller comments at Bill's on the post link to above:
Very nice, Bill!
To re-emphasize . . .You are either in favor of an employed buffer stock or not. If the latter, you are in favor of an unemployed buffer stock–note that believing inflation doesn’t become an issue until productive capacity is reached (as MMT supporters of every stripe appear to believe) is inherently implicating a buffer stock of one or the other variety. There is no way around being in favor of one over the other.
And if you are in favor of an unemployed buffer stock, then you are also implicitly in favor of all the additional social and economic costs that come from involuntary unemployment relative to an employed buffer stock. As Bill has shown in earlier research, virtually every social problem has a a statistically significant relation to involuntary unemployment–crime, child/spouse abuse, divorce, poverty, poor physical and mental health, malnutrition, lower educational attainment, and so on. And because government’s invariably end up spending more in an attempt to alleviate these problems (via spending on welfare, unemployment benefits, the courts system, special education programs, healthcare for the poor, crime prevention, incarceration, and so forth), you are also in favor implicitly of such spending relative to what it would be under a job guarantee. And because such spending uses real resources, you are also in favor of whatever additional taxes are necessary to avoid inflationary impacts of such spending relative to what there would be with an employed buffer stock. And because any cost benefit analysis incorporating all of this in addition to whatever macro benefits there would be to an employed buffer stock, it’s conceivable that a well-conceived employed buffer stock can accompany a smaller govt and lower taxes than pursuing the same macro goals using an unemployed buffer stock. And so the argument that somehow the employed buffer stock necessarily requires “more govt” falls flat–it does not. And for the same goals and orientation of macro policy, it could very well require less.
It is certainly the case that a well-run employed buffer stock would be an enormous undertaking, and that is a valid cause for some to have their reservations. But it must also be recognized that the opportunity cost of the employed buffer stock is not private sector employment and productivity, but rather involuntary unemployment and all the social and economic costs that come with it. And if it is determined that an employed buffer stock is desirable, then it is possible to carefully study and prepare for such a program (however imperfect given political realities, etc.) as with Bill’s 300 page study and numerous others. There have been large and complex government programs before–military, infrastructure, etc.–given the political will. And regarding the latter, it is rather odd for an MMT supporter to suddenly worry about current political realities of MMT policy proposals. Certainly the employed buffer stock, at least in the US, has many more political obstacles in front of it than understanding how the monetary system works at the current time, but it’s generally been accepted by MMT supporters that the latter is a long way off, too.
In short, this is not to “ram” the JG down anyone’s throat. It is simply to encourage clearer thinking about what an employed buffer stock is, and what one who is against the buffer stock is inherently in favor of. The majority of arguments against the JG cropping up recently (Carney’s is a classic example) are simply ideological and don’t contribute anything to discussion (seriously–I haven’t heard even one argument against the JG on the blogs that I didn’t hear dozens of times the past 15 years from academics). I would be interested in seeing those against the JG address why they believe an unemployed buffer stock is superior–MMT economists in favor of the JG are not infallible and we don’t presume to have all the answers or to have thought of every possible continencies, but without such explication, those in favor of an unemployed buffer stock aren’t actually making a coherent argument to support their difficulties accepting an employed buffer stock.
Best wishes and happy new year to everyone (and happy birthday to my daughter, who turns 5 today–not that she’s reading this!),
Scott [emphasis added] 

More insanity: Spain's deficit unexpectedly rises so another round of austerity proposed!

Spain revises up deficit and raises taxes

Spain revises up 2011 budget deficit forecast to 8 pct of GDP; fresh austerity announced

MADRID (AP) -- Spain's new government warned Friday that the country's budget deficit will be much higher than anticipated this year, as it unveiled a first batch of austerity measures that include surprise income and property tax hikes.

Read rest of article here.

European leaders believe that the problems in Europe stem from too much debt and deficits being too high. So what have they been doing? Imposing austerity, purportedly to "cure" this problem.

And what has happened?

Deficits have gotten bigger.

So what do they do to fix that new problem?

Impose more austerity.

This is Einstein's definition of insanity. Doing something over and over again and expecting a different result every time.

When will this neo-liberal madness end? Unfortunately, not until most of the world is starving or, we're in WWIII, it seems.

Andreasen schools Draghi on the merits of having a national currency

Some recent video from Europe where a Representative from the UK Independence Party asks some pretty good questions of the ECBs Draghi, related to currency sovereignty.

Draghi responds while hopelessly caught up in Monetarism. He seems beyond reason in this regard. "There is no trade-off between austerity and growth".

So the right questions are being asked over there, at some level.

Pew — Socialism on the uptick with US youth

Young people -- the collegiate and post-college crowd, who have served as the most visible face ofthe Occupy Wall Street movement -- might be getting more comfortable with socialism. That's the surprising result from a Pew Research Center poll that aims to measure American sentiments toward different political labels.
The poll, published Wednesday, found that while Americans overall tend to oppose socialism by a strong margin -- 60 percent say they have a negative view of it, versus just 31 percent who say they have a positive view -- socialism has more fans than opponents among the 18-29 crowd. Forty-nine percent of people in that age bracket say they have a positive view of socialism; only 43 percent say they have a negative view.
And while those numbers aren't very far apart, it's noteworthy that they were reversed just 20 months ago, when Pew conducted a similar poll. In that survey, published May 2010, 43 percent of people age 18-29 said they had a positive view of socialism, and 49 percent said their opinion was negative.
Read the rest at The Huffington Post

Thursday, December 29, 2011

Randy Wray on the development of MMT

I generally don't post entries on other prominent MMT blogs because I assume that readers here check them regularly. However, I am posting a few things, including this, owing to issues that are now arising. So here it is for the record.

Read it at New Economic Perspectives
MMT: A Doubly Retrospective Analysis
By L. Randall Wray

"Whatsoever may be just I shall be giving you."

(FD: This post doesn't have anything to do with MMT per se, etc., etc...)

In the Sacred Scriptures, Matthew 20, Jesus teaches through a prophetic economic parable, which begins:
1 "For like is the kingdom of the heavens to a man, a householder, who came out at the same time with the morning to hire workers for his vineyard. 2 Now, agreeing with the workers for a denarius a day, he dispatches them into his vineyard.
Here the householder hires a crew of workers for day labor, and the day wage agreement is for the oft heard "a denarius a day".  This agreement is priced in the form of the Roman state currency, or what is termed "nomisma" in Greek, a single denarius, what the archeological record indicates is the smallest denomination existent of the Roman currency. The day progresses and the householder still seeks to hire more workers even though the day is advancing.
3 "And, coming out about the third hour, he perceived others standing in the market, idle. 4 And to those he said, 'You also go into my vineyard, and whatsoever may be just I shall be giving you.' Now they came away.
At this point the householder hires others who appear and are idle, but no fixed price agreement is made with these new workers. The householder only commits to pay them "what is just". This process continues every few hours, perhaps this was harvest time in the vineyards, and harvest cannot be delayed.
5 Now, again coming out about the sixth and ninth hour, he does similarly. 6 "Now, about the eleventh, coming out, he found others standing. And he is saying to them, 'Why stand you here the whole day idle?' 7 They are saying to him that 'No one hires us.' He is saying to them, 'You also go into the vineyard.'
Here, at the latest part of the day, the householder inquires of others he again finds idle, as to why they are remaining idle for that day. The Scripture discloses they are being denied employment: "No one hires us."  With this disclosure, the householder immediately employs them for whatever time is left in the day. The workday then comes quickly to an end:
8 "Now, evening coming on, the lord of the vineyard is saying to his manager, 'Call the workers and pay them the wages, beginning from the last, to the first.'
So now the householder proceeds to pay the workers. He has at this point committed to pay the first workers, who have worked a whole day, a previously agreed upon day wage, and to the part-day workers, only what he believes to be "just".

These turn out to be the same amount.  The householder is here implementing what can be termed today in modern economics a Basic Income Guaranty for his workers.
9 "And, coming, those hired about the eleventh hour got a denarius apiece. 10 And, coming, the first infer that they will be getting more. And they also got a denarius apiece.
If we were to contemplate a present day implementation of such a policy of a Basic Income Guaranty, many I'm sure would complain of "unfairness", and this 2,000 year old parable reveals perhaps not much has changed since then;
11 Now, getting it, they murmured against the householder, 12 saying, 'These last do one hour, and you make them equal to us who bear the burden of the day and the scorching heat.'
The just householder reminds the day workers of their previous civil agreement, and unapologetically claims his authority to provide whatever he deems just and righteous to his other workers.
13 Yet he, answering one of them, said, 'Comrade, I am not injuring you! Did you not agree with me for a denarius? 14 Pick up what is yours and go away. Now I want to give to this last one even as to you.
The householder then senses their jealousy and wickedness upon being in sight of a just act.
15 Is it not allowed me to do what I want with that which is mine? Or is your eye wicked, seeing that I am good?'
Jesus then wraps up with the proclamation for the kingdom:
16 Thus shall the last be first, and the first last."
Some observations:

1. The parable takes place entirely inside the Roman economy as it is denominated in "nomisma", no "argurion" is involved.

2. The householder actually cannot pay the part-day workers less as the Roman currency system is designed such that there is no smaller a denomination of "nomisma" than the denarius which is the prevailing day-wage.

3. The householder would have had to have broken the original agreement of a denarius a day to be able to pay the full-day workers more than the part-day workers.

4. In His kingdom, the wicked will be dismissed, involuntary unemployment will not be tolerated, and there will be a basic income guaranty.

Bill Mitchell addresses points raised by John Carney

Read it at billy blog

MMT is biased towards anti-crony
by Bill Mitchell


Warren Mosler's comment at Bill's on this post:
Bill, this post ranks with your best!
Remember fondly all the time we spent way back working all this out, writing the early papers, giving the talks in Newcastle, Sydney, and Canberra.
Let me add that it begins with the fact the currency is a (simple) public monopoly, and as we all learned, monopolists are necessarily price setters. And in a market economy, the monopolist sets one price and lets the other’s adjust.
At one of Mario and Marcs ‘post Canadian’  conferences, I decided to rename my talk at the last minute calling it something like ‘maximizing price stability in a market economy’ and went on to show how price stability is always via some form of buffer stock or another, and how the most stable and the deepest, most liquid ‘commodity’ gives the best results, with unskilled labor being the most stable, deepest and most liquid, etc. concluding that price stability is maximized with a jg policy. And (jesting) that you just have to accept full employment as a side effect.
Back to the monopoly thing, when govt has any other monopoly is knows to set price and let q adjust- telephone, electric, water, sewer, etc. etc.
But when it comes to the currency, not realizing its just an other monopoly, it tries to set q via its budgeting process, and paying ‘market prices’ and then trying to figure out the right q to net spend for full employment and price stability. Of course it’s chaotic and requires thousands of analysts to get it even a bit right. Think of running the other monopolies that way- the electric company setting how many kw it’s going to sell and letting the market decide price, for example- and it would be just as chaotic and disruptive.
Also, none of the recent publicity would have happened without your blog paving the way and establishing
a virtual MMT text book.

Tom Hickey on the basic issue involved in the JG wrt macro

Repost of a comment of mine at Pragmatic Capitalism follows:

OK, let’s simplify this discussion of the JG. It’s essentially about targeting inflation using a buffer stock of unemployed as a tool (in violation of the Fed’s mandate) through monetary policy or aiming to achieve full employment (less frictional) using fiscal policy and a buffer stock of employed.

The former position is the current standard operating procedure of the Fed, based on the Phillips curve, NAIRU a Taylor rule and other aspects of mainstream monetarist economics. The MMT response is that full employment along with price stability can be achieved through fiscal policy and a buffer stock of employed (JG).

Present Fed monetarist policy reduces full employment by redefining it through positing a supposed natural rate of 4-6%. Now there is talk that the “new normal” may be more like 6-8%. Conversely, MMT claims that actual full employment (less frictional) can be achieved through fiscal policy and a JG, and that this this will actually promote price stability.

Those that reject the MMT solution are choosing the monetarist position over it, and the resultant chronic idle resources and economic underperformance — unless they offer a macro theory theory that resolves the issue differently. Takers?

John Carney attacks the JG

There are at least three reasons the Jobs Guarantee cannot work.1. It's massively inflationary.2. It's a bureaucratic nightmare.3. It's economically stagnating.
Read it at CNBC Net Net
Can the Government Guarantee Everyone a Job?
by John Carney, Senior Editor

My comment at CNBC Net Net:
John, have you read the extensive writing of people like Mosler, Mitchell, and Wray on the Job Guarantee? They have addressed these objections and many more in their professional writings and boiled this down for popular consumption on MMT blogs.
I am surprised that anyone would surmise that professional economists would not have anticipated such obvious objections and fielded them preemptively in their work. There are numerous papers at Levy (, CFEPS (, and CofFEE ( Bill Mitchell wrote his PHD dissertation in this field, and Bill and Joan Muysken published the definitive work to date, Full Employment Abandoned (Elgar, 2008).
Hey, John said before we were combative over here. :)

Dan Kervick elucidates MMT and JG

Promoted from the comments:

Tom: "MMT as a macro theory is chiefly about achieving full employment along with price stability."

Dan: I that's an important point, Tom. I agree that MMT has a purely descriptive component. And I think it is completely fair to say that the descriptive component is the core of MMT. That descriptive component can be separated from prescriptive elements, and stand on its own.

But people don't develop novel descriptive economic theories in a vacuum. They are usually trying to show something about the way parts of the economic world work because they think it is important to understand those things.

Suppose you are looking at pages of a book, and the book shows detailed maps of LA and San Francisco, along with highway maps of the interstates between those two cities, with descriptions of rest stops, restaurants and hotels along the interstates and of facilities in the cities as well. The content is all descriptive. And that descriptive content can stand alone to be used by various people for whatever purpose they desire. But it’s pretty clear from the nature and structure of the book that the book was designed to serve a particular purpose – it is designed for travelers between LA and San Francisco, and provides them with practical know-how for that particular activity.

Now MTT isn’t a comprehensive description of every aspect of our economy. There are vast areas of economic life about which MMT has either little to say at all, or nothing original to say. So what is the purpose of MMT? What is the point of its careful operational descriptions of the particular parts of modern economic system on which it focuses?

In Bill Mitchell's post yesterday, he quotes Randall Wray’s CofFEE keynote speech this month:

"And then there was the job guarantee, which I immediately recognized as Minsky’s employer of last resort. I can’t remember what Warren called it but Bill called it BSE, buffer stock employment.

"I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand."

This idea of "standing the Phillips curve on its head" seems to have been a key eureka moment for some of the earlier developers of MMT. And it really is a key part of the rationale behind the development of the descriptive parts of MMT.

If you read a lot of the blogs written by mainstream economists, or any mainstream macro textbook, you see that mainstream economist have had the Phillips curve and its companions burned into their brains, along with ideas such as the natural rate of unemployment. They think instinctively in terms of a tradeoff between employment and price stability. They are constantly arguing that either we need to accept high unemployment to keep the inflation rate down, or produce inflation to get employment up. Overturning this broad front of depressing orthodoxy is the central reason that Wray and Mitchell, I think were so excited about the views they were developing.

Wray emphasizes that point in the preface to Understanding Modern Money:

“The primary policy conclusion that comes out of this analysis is, perhaps, shocking, but can be stated simply: It is possible to have truly full employment without causing inflation. This will appear to be a desirable goal, but a preposterous claim; no self-respecting Keynesian, monetarist or supply-sider would allow herself to entertain such hopes. But if the analysis here is correct – and it goes without saying that I am sure it is – then the logical conclusion is that we can move immediately to full employment with enhanced price stability. Indeed, as I will argue, the two goals are inextricably linked: the policy that is recommended to achieve full employment will also increase price stability.”

In answer to another comment, Dan writes:

Dan: ...everyone realizes that you can always get full employment by having the government hire everyone willing and able to work. But the controversy is over whether you can do this without creating higher inflation. Since the orthodoxy that you can't is very common in mainstream economics, and since some even go further and argue that in the long run reducing unemployment below the natural rate will cause not just increased inflation but a recessionary stagflation, then I think the ideas developed by Wray and Mitchell were and still are a pretty big deal, and deserve to be regarded as very innovative and heterodox.

Wray and Mitchell actually go further and argue that not only is full employment consistent with price stability, a job guarantee program can actually help promote price stability by providing a nominal anchor for the price of employed labor. That's a pretty big idea. And I don't think there are a lot of people out there promoting anything like it other than the MMT people.

I think it's important for people to continue to look at this seminal MMT thinking, because it is an answer to the frequent charge that MMT thinkers do not address the issue of inflation, or even have a theory of inflation, and promote reckless view of endless money-financed government spending. Warren Mosler constantly rebuts this by saying that the inflation concern should be the *only* concern when considering the limits on government spending - and there is no solvency concern. But Wray and Mitchell go even further in their work, because their version of MMT has a Keynesian theory of the basis of price stability built right into it, and an account of the actual mechanisms to use to achieve it - a mechanism that has the additional benefit of achieving the incredibly desirable social result of full employment.

John Carney (CNBC Sr. Editor) just gave a shout out to MMT and how we "got everything right!"

Everybody, email Carney and give him thanks. He's really been doing a lot to get us noticed.

By the way, John reads this blog. He deserves our support!!

Randy Wray on the JG

Read it Economonitor - Great Leap ForwardThe Job Guarantee as an Alternative to Enforced Idleness. But What Will They Do? Examples from the WPA
by L. Randall Wray

Peter Cooper on the BIG and the JG

The JG seems to be hot topic on some MMT blogs at the moment. Peter Cooper asks whether a job guarantee or a basic income guarantee is preferable.

Read it at The
The Transition to a Freer Society: BIG or JG?
by Peter Cooper
(h/t Clonal in the comments)

Good comments, too.

Humphrey–Hawkins Full Employment Act

MNE commenter "Laura" brought the existence of this Law to our attention in a recent comment and I thought it may be a good idea to post a link to the Act's wiki page to help familiarize or re-familiarize ourselves with this Act in light of recent discussions concerning the employment aspects of  MMT.

Some excerpts from the wiki page:
...the Act provides for measures to create temporary government jobs to reduce unemployment,...
...If private enterprise appears not to be meeting these goals, the Act expressly allows the government to create a "reservoir of public employment."...
Here is a link to the actual US Government H.R. 50 Legal Summary.
Declares the purpose of this Act to achieve a balanced Federal budget consistent with the achievement of the medium-term economic goals specified in this Act..........  Requires that the President's Budget recommend levels of outlays and receipts which are consistent with the short-term economic goals for employment and unemployment, production, real income, productivity, and prices and provide five-year projections of outlays and receipts consistent with the medium-term goals of reducing the rate of unemployment and inflation.

Wednesday, December 28, 2011

Cullen Roche on MMT v. Austrian Economics

In case you missed this.

Read the rest at Pragmatic Capitalism
The Fundamental Difference Between Austrians And MMT’ers
by Cullen Roche

The Economist on MMT

The crisis and the blogosphere have opened mainstream economics up to new attack
Read it at The Economist
Heterodox economics - Marginal revolutionaries

MMT goes mainstream.

UPDATE: Here is my comment at The Economist:

MMT proponents argue is that there is a difference between money created by fiscal deficits and money created by bank lending. When the government issues currency into non-government it does so through the Treasury directing its bank, the Fed, to credit non-government deposit accounts, e. g., to pay for fighter planes or to pay grannie's social security. The transmission from reserves to bank deposits is direct and does not depend on bank lending. Moreover, since there is no liability corresponding to the assets created in non-government in crediting these bank accounts, deficit disbursements inject net financial assets into non-government. Conversely, bank lending nets to zero since each asset has a corresponding liability, so non-government net financial assets remain unchanged no matter how much banks lend.

The reason that NGDP targeting will not work is the flawed notion of the transmission mechanism from reserves to spendable bank deposits. When the Fed buys financial assets of whatever type, it simply increases bank reserves. The erroneous presumption about transmission is that that banks lend against reserves or lend out reserves. Neither is the case, as MMT points out. Rather, bank lend against capital based on demand from creditworthy borrowers willing to pay a rate that is profitable enough for the bank to risk it's capital against. Increasing bank reserves does not spur banking lending and it does not affect the factors banks take into consideration in lending.

From this is simple to see why NDGP through increasing bank reserves, e.g., via QE, will not increase effective demand and spur increased investment to meet it. The transmission mechanism is bank lending, which is in abeyance, and increasing reserves will not increase it as the failure of QE has shown. Unless the Fed would buy real assets like houses instead of financial assets like MBS, it cannot not inject net financial assets into non-government, and there is no reason to expect an increase in effective demand due to increased bank reserves.The US is already at ZIRP and has been for some time. That has done nothing either. MMT predicted the failure of monetary policy — QE1 and QE2, as well as ZIRP, and QE3 will also fail unless the Fed would purchase real assets, which it is not permitted to do under current statute even under emergency powers, at least as I understand it. Time for fiscal policy to step up to the plate. [link]

Thoma on Barro on Ricardian Equivalence

For those following the neoliberal notion of Ricardian equivalence as interpreted by Barro.

Those with even a rudimentary knowledge of MMT will recognize that Barro's notion of RE cannot be applicable in the current environment even if it is correct as it states it.
Barro: The Ricardian proposition is about the consequences of paying for a given amount of public expenditure in different ways.
Specifically, does it matter—or does it matter a lot—whether the government pays for its spending with current taxes or with current borrowing, which entails higher future taxes?
So, a central part of the proposition is that the amount of public expenditure—today and tomorrow—is being held constant. It's never part of Ricardian equivalence that the level of government expenditure doesn't matter. As [University of Chicago economist] Milton Friedman put it, the costs or benefits of government outlays depend on the amount and nature of what the government spends—there is no free lunch about paying for that spending. So whether you pay for it now or later is secondary.
As a first-order proposition, it is right that it matters little whether you pay for government spending with taxes today or taxes tomorrow...
Read it at Economist''s View
by Mark Thoma

Someone please tell the poor man that taxes don't fund federal spending under the existing monetary system in which the federal government is the monopoly provider of a non-convertible floating rate currency. Better yet, send him a copy of Warren Mosler's The 7 Deadly Innocent Frauds of Economic Policy.

2012 the year of the robot?

Japanese firm Kawada Industries is on the leading edge of a growing industry that threatens to become a major disruptive force in the coming years: automated labor.
At a recent robot expo, Kawada showed off Nextage, a human-shaped robotic laborer the company says is intended to “work alongside” people. In actuality, the robot could end up replacing people whose job it is to carry out menial tasks on assembly lines. And at just 1,500 watts of power consumption while it is working — less than some hair dryers — the device or one like it could one day become a compelling alternative to sweat shop labor.
That much seems to be true for Chinese electronics manufacturer Foxconn, notorious for paying workers a pittance and demanding long hours. The company said earlier this year that it would build a robot manufacturing facility, and that it hoped to replace most of its workforce with automation in the next three years.
Read the rest at Raw Story (with video)
by Stephen C. Webster

Zombie banks and robotic workers. Where is this headed?

ECB's "liquidity injections" just reinforcing deflationary forces already in place

The ECB's balance sheet (total assets) is now up to $3.5 trillion. That's 25% larger than the Fed's. (All this "money printing" eh? So where's the inflation? Why is gold falling?)

When the ECB expands its balance sheet, it buys bonds from the public and replaces those bonds with reserves (denominated in euros). Those reserves pay 25 basis points, however, the bonds paid far more. (Case in point: Italian bonds pay near 7%.)

So you can see how this “liquidity” operation is stripping a HUGE amount of interest income from the private sector in Europe. HUGE! If you sold an Italian bond to the ECB you just lost 675 basis points of income!

So rather than being inflationary or “stimulative,” the whole thing is massively deflationary because of the interest income reduction that is going on. This will exacerbate already weak economic trends in the Eurozone in 2012!

Treasury auction 7-times oversubscribed, interest rate, ZERO!

Treasury just auctioned off $30 billion of bills at a rate of ZERO and it was nearly 7 times oversubscribed!!!!!!!!!

Yet they keep telling us that the deficit and debt will cause rates to spike!!

When will they wake up??


Forget infrastructure for increasing jobs

Watch it at ABC News
U.S. Bridges, Roads Being Built by Chinese Firms


Tuesday, December 27, 2011

Was MF Global the canary in the coal mine?

Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal. 
My own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner.
Read the rest Gonzalo Lira
A Run On The Global Banking System - How Close Are We?
(h/t Zero Hedge)

Here's the clincher:
 ...I want to discuss one narrow aspect of the MF Global bankruptcy: How authorities (mis)handled the bankruptcy—either willfully or out of incompetence—which allowed customer’s money to be stolen so as to make JPMorgan whole.
From this one issue, it seems clear to me that we can infer what will happen when the next financial crisis hits in the nearterm future.
More indication that distrust of the financial system is growing, and that doesn't bode well.

More digital — Occupy to build a social network

“I don’t want to say we’re making our own Facebook. But, we’re making our own Facebook, ” said Ed Knutson, a web and mobile app developer who joined a team of activist-geeks redesigning social networking for the era of global protest.
They hope the technology they are developing can go well beyond Occupy Wall Street to help establish more distributed social networks, better online business collaboration and perhaps even add to the long-dreamed-of semantic web — an internet made not of messy text, but one unified by underlying meta-data that computers can easily parse. 
The impetus is understandable. Social media helped pull together protesters around the globe in 2010 and 2011. Egyptian dictator Hosni Mubarak so feared Twitter and Facebook that he shut down Egypt’s internet service. A YouTube video posted in the name of Anonymous propelled Occupy Wall Street from an insider meme to national news. And top-trending Twitter hashtags turned Occupy from a ho-hum rally on Sept. 17 into a national and even international movement.
Now it’s time for activists to move beyond other people’s social networks and build their own, according to Knutson. “We don’t want to trust Facebook with private messages among activists, ” he said.
Read the rest at Wired
Occupy Geeks Are Building a Facebook for the 99%

This type of innovation is going to have huge implications for the global economy in the near future. I think that alternative digital money is coming quicker than many people think. The savvy people already realize that control of money by the TPTB is one of their chief and most effective lever of power. There is a push developing to circumvent traditional markets and state money.

Oh, did I forget to mention that geeks are now at work building an alternative internet that governments cannot shut down easily or monitor at will.

Debt Ceiling to Hit this Week: Who Cares?

Treasury Department out today, with a statement that the total US debt will soon be within $100B of the current ceiling and this will trigger a request by the Obama Administration for an automatic increase in the current ceiling by $1.2T.  Story at CNBC.

Who cares?

Well Congress apparently also doesn't care as they are on break until January 17th and only have 15 days to deny the Obama Administration request and then it is automatically approved.

What happened to all of the political posturing around this issue that we were treated to this past summer?  Where is it this time?  This whole concept of a "debt ceiling" is an unnecessarily self-imposed constraint on the absolute fiscal authority of the US Government.

The previous debate and delay surrounding this legislation over the summer was a  complete waste of time and energy and led to damaging fiscal drag that hurt the nations economic output this year, at least we will avoid that media circus this week as we head into the new year.

Sample proposal for governance in a digital world

The world is long overdue for a completely new system of governance. The need for political representation or a paternalistic and opaque authority has been removed by technology. Governance by nation states is now as arbitrary and illogical as city states were earlier found to be. Corporations have the freedom to live in a world without borders or social responsibility, to own property no individual can claim and to control a one world government and legal system, with insupportable consequences for the world's resources and individual rights. To effect the change we require in 2012, to give individuals control and responsibility, to bring regional systems under regional governance and protect the heritage of future generations, we need a new political model.
Individual Rights
In any system where groups have power, individual rights are always at risk. Both pure democracy and communism have brought human rights horrors every bit as reprehensible as fascist states; in order to guard against genocide, torture, and other persecution of individuals in the name of the greater good, a system must safeguard individual rights above all other authority.
Read the rest at Wikileaks Central
A proposal for governance in the post 2011 world
Submitted by Heather Marsh

John Carney — "Modern Monetary Theory and Austrian Economics"

Thoughtful post advancing the debate between MMT and Austrian economics. It's definitely creating a buzz in the blogosphere.

Read it CNBC Net Net
Modern Monetary Theory and Austrian Economics
by John Carney- CNBC senior editor

I will likely take up some of the points raised in future points here, since they are also related to anarchism-libertarianism. Obviously, the major sticking point between MMT and anarchism-libertarianism is that MMT is policy oriented and its prescriptions rely chiefly on fiscal policy, although that is much more of a problem in the eyes of Libertarians aka Anarcho-capitalists than left libertarians aka Anarcho-socialists.

UPDATE: Austrian economist Edward Harrison who has adopted MMT has posted on MMT several time in the past on MMT.

MMT For Austrians

Economics 101 on government budget deficits

MMT: Fear of Hyperinflation

Hyperinflation in the USA

Modern Monetary Theory: Market Discipline for Fiscal Imprudence; Term Structure of Interest Rates

MMT'ers also responded to the criticism of MMT by Prof. Robert Murphy from the vantage of Austrian economics. The links can be found at the MMT Wiki here. See the replies in the comments.

Senators Max S. Baucus (D), Jonathan Tester (D), and Rep. Denny Rehberg (R) face recall effort over NDAA vote

Read it at The Huffington Post
Montanans Launch Recall Of State's Congressional Delegation Over Votes On NDAA, Indefinite Detention

Here we go again...Obama appoints two new "fiscal conservatives" to Fed board

Here we go again as if we haven't had our fill of this lunacy. More fiscal conservatives in the Obama Administration. And you guessed it!...they've got either Harvard or Goldman Sachs' ties. (Or both!)

Jerome Powell and Jeremy Stein. Powell is a lawyer with no economics background (bad) and Stein is a Harvard professor (worse!).

Powell quote:

“I am by any fair reckoning a fiscal conservative,” Powell, who goes by Jay, said in a May 16 interview with Bloomberg Television. At the same time, allowing a default is “just not a risk that you run.”

“That doesn’t mean that you don’t negotiate very hard to get additional spending cuts and get the deficit under control,” he said. “You do. But that crosses the line into hostage taking, I’m afraid, and is just tactically unacceptable.”

Did you get that part about "getting the deficit under control?"

And here's a Stein quote:

“The Fed in the early part of this decade would have been better had they been a little bit more aggressive in dealing with the housing bubble in its early stages, both through interest-rate policy and potentially through worrying a little bit more about the buildup of all this leverage on bank balance sheets,” Stein said...

Nothing in there about rampant fraud and lax oversight. Only implies low interest rates created the "bubble" and there was too much leverage. Peter Schiff stuff.

Frank replies to Wallison on the cause of the housing crisis

If you are following this.

Read it at The Atlantic
Who Is Really Responsible for the Housing Crisis?
by Barney Frank

Brandeis Tax (continued)

Remarkably of the hundreds of emails we received in reaction to our op-ed, almost no one questioned Brandeis’s idea that we can have great concentrations of wealth, or democracy but not both.  People questioned other aspects of our proposal, asking questions like (1) how would it work in a world of income bunching; (2) would people still have the incentive to work hard; and (2) is it fair to have very high tax rates on the affluent.
Our last post talked about alternative potential triggers.  Here we tackle some more detailed questions about implementation including how to trade off different kinds of distortions. [emphasis added]
Read the rest  at Freakonomics
Of Lags and Caps: Possible Implementations of a Brandeis Tax
by Ian Ayres

Interesting that no one has questioned the premise that wealth/income concentration is incompatible with liberal democracy.

Private investment contribution to GDP over the business cycle — Calculated Risk

Those familiar with MMT know that the domestic private sector balance is comprised of consumption and investment and that the shifting level of business investment and firm saving is a key contributor to the sectoral balance identity, in that investment creates income, thereby adding to effective demand, while saving constitutes demand leakage. Calculated Risk investigates the contribution of private investment over the business cycle.
Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but one key is to watch private domestic investment. Even though private investment usually only accounts for about 15% of GDP, private investment experiences significantly larger swings than PCE during the business cycle and has an outsized impact on GDP. Note: currently private investment is just over 12% of GDP - much lower than normal.
Read the rest at Calculated Risk
Private Investment and the Business Cycle

Back to 1999 — Calculated Risk

Is the bottom in housing just about in? CR thinks so.
In real terms - and as a price-to-rent ratio - prices are mostly back to 2000 levels and will probably be back to 1999 levels in the next few months.
Note: Last year I guessed that prices would decline another 5% to 10% on these national indexes (from October 2010 prices). So far prices have fallen another 3% to 4% on these indexes - with more to come - but most of the price declines are over.
Read it at Calculated Risk
Real House Prices and House Price-to-Rent

What do biology and soft currency economics have in common? A lot!

This post by Roger Erickson (a contributor to this blog) appeared at Global Economic Intersection.

Here he talks about how a cell creates the energy it needs to survive.

What PRIMARY internal currency system do amoebas, and all known cells use? A molecule called adenosine. Adenosine can be loaded with energy value by attaching one, two or three phosphate bonds, making adenosine mono-, di- or tri-phosphate, respectively AMP, ADP or ATP.

The question most orthodox economists would ask is, "how much adenosine does every cell make?" The answer is, "as much as it needs." What's the mystery?

Does any cell "borrow" adenosine? What a silly question. No system borrows its internal bookkeeping methodology.

The analogy Roger is making is, does a fiat currency system have to "borrow" its own fiat in order to spend?? Of course not, yet that's the thinking.

Larry Wilkerson — Sliding down the slippery slope

Wilkerson: New Military Powers the Road to Tyranny

It's the corruption, stupid — Naomi Wolf on the violent OWS crackdown

The violent police assaults across the US are no coincidence. Occupy has touched the third rail of our political class's venality

Read the rest at Deep Journal
The shocking truth about the crackdown on Occupy
by Naomi Wolf
Sadly, Americans this week have come one step closer to being true brothers and sisters of the protesters in Tahrir Square. Like them, our own national leaders, who likely see their own personal wealth under threat from transparency and reform, are now making war upon us.
BTW, many Occupy groups around the country were forcibly evicted during the Christmas news lull. Unless you were paying close attention, e.g., via Twitter, you would have missed it.

Monday, December 26, 2011

Randy Wray on the Job Guarantee

Read it at Economonitor — The Great Leap Forward
The Job Guarantee as an Alternative to Enforced Idleness. But What Will They Do? Examples from the WPA
by L. Randall Wray

Beowulf on a land value tax — promoted from the comments

"nonetheless, a land value tax would be much better than an income tax."

You're probably right but there are two problems with a federal LVT, one legal and the other political.

There's a constitutional restriction on direct taxation of property that would kneecap a federal LVT. A workaround here would be to use the income tax to levy annually the imputed rental value of land (It would take a brave congressman to sponsor that bill).

However even with a workaround, any effort to levy federal taxes on land would lead to the state governments waging Jihad on Congress. Regardless of party, state governors will line up shoulder to shoulder to keep the Feds from stepping on their monopoly on taxing real property.

So what can be done?
Federal taxpayers are already given an income tax credit for foreign taxes paid (and the estate tax used to credit state inheritance tax paid).
If Congress understood MMT, there'd be no reason not to create a federal income/payroll tax credit for any state LVT paid (as with the foreign tax credit, phased out for higher incomes).

It would take state governors and legislators about 10 seconds to figure out that every dollar of tax burden they shifted onto land was a dollar their residents could legally avoid paying those suckers in Washington. (link)

A federal credit for LTV paid that phases out with higher income (remember a 100% tax credit is worth more than an at most 35% tax deduction) would divide the economic interests of the vast majority of property owners-- middle class homeowners who'd pay dramatically lower federal taxes -- from the tiny minority of very wealthy land barons who'd still be paying full freight on their federal incomes as well as their new state LTV.

The purpose of the LTV tax credit isn't to replace the federal income tax with a federal LTV (which is impossible in any event for the reasons I mentioned above) but to bribe state governments into shifting their tax burden off of sales, incomes and property improvements and onto land value.

I would like to think that furthers the purposes of the LTV admirably. (link)

Noah Smith on Ron Paul's Texas Libertarianism

Noah Smith has a post examining the shortcomings of Ron Paul's Libertarianism based on its ignoring the local bully factor.
I have often remarked in the past how libertarianism - at least, its modern American manifestation - is not really about increasing liberty or freedom as an average person would define those terms. An ideal libertarian society would leave the vast majority of people feeling profoundly constrained in many ways. This is because the freedom of the individual can be curtailed not only by the government, but by a large variety of intermediate powers like work bosses, neighborhood associations, self-organized ethnic movements, organized religions, tough violent men, or social conventions. In a society such as ours, where the government maintains a nominal monopoly on the use of physical violence, there is plenty of room for people to be oppressed by such intermediate powers, whom I call "local bullies."
The modern American libertarian ideology does not deal with the issue of local bullies. In the world envisioned by Nozick, Hayek, Rand, and other foundational thinkers of the movement, there are only two levels to society - the government (the "big bully") and the individual. If your freedom is not being taken away by the biggest bully that exists, your freedom is not being taken away at all.
Read the rest at Noahopinion
The liberty of local bullies
by Noah Smith
(h/t Kevin Fathi via email)

My comment over there:
Anarchism is a political philosophy that places liberty of individuals at the apex of the value system in terms of which policy is determined. There are many flavors of anarchism on both eft and right. Contemporary Libertarianism is a congerie of various flavors of anarchism of the right, which are also called anarcho-capitalism and individualist libertarianism, Economically, this is laissez-faire capitalism. The left has its corresponding flavors, called anarcho-socialism, for example. Outside the US, this is called libertarian socialism.
We are going to be hearing a lot more about anarchism in the coming years, since lies at the heart of both the Tea Party, which has already positioned itself politically and garnered a modicum of power, and the Occupy movement, which has not yet coalesced as a political force.
Anarchism is essentially opposed to institutionalism. Strict anarchism rejects institutions in all forms, holding that institutions are loci of power, and politics is essentially competition for power among vying groups, which inevitably leads to the attempt of one group to control other groups and individuals.
The challenge for strict forms of anarchism is to explain how the local bully problem can be avoided in the absence of some form of institutional governance. The challenge for loose forms of anarchism is to explain how minimal institutionalism can be contained.
In a complex world with a global economy this is a daunting challenge indeed. It would seem that both the strict and loose forms of anarchism required some policing power to prevent abuse. And that introduces the potential for both violence and the capture of a monopoly on violence by some individual or group.
Many contemporary LIbertarians and anarcho-socialists have not really though this through. As a result their nostrums are not only unconvincing but also if followed, counterproductive on their own terms.
This can have extremely untoward consequences. For example, Mikhail Bakunin presciently warned that Marx and Engel's notion of the dictatorship of the proletariat would result in tyrannical dictatorship. On the other hand, laissez-faire capitalism tends toward monopoly capitalism and unbridled rent-seeking, as we are already witnessing in the US and other developed countries, where business has managed to remove government regulation, oversight and accountability. (link)
We are going to be hearing much more about anarchism and its various flavors in the coming year, so I plan to be examining it more closely in future posts. Interest in it is a rising trend among youth, and it is going to be with us for a long time.

Those who were politically active in the Sixties and Seventies probably remember that this was a hot topic then, too. It's been kept alive by public intellectuals like Robert Nozick on the right and Noam Chomsky on the left, and now it is re-entering US politics through the Tea Party and Occupy. So expect to be hearing a lot more about it either specifically in terms of policy discussions, or implicitly in terms of the buzz around these movement.

Technological innovation in the works

IBM predicts that over the next five years technology innovations will change the way we work, live and play in the following ways: 

  • Energy: People power will come to life  - using local motion
  • Security: You will never need a password again - biometrics
  • Mind reading: no longer science fiction - electronic control of devices using by sensing brain functioning
  • Mobile: The digital divide will cease to exist - mobile devises spread communications technology inexpensively
  • Analytics: Junk mail will become priority mail - priority sorting and delivery  of messaging
Read the rest at IMB
The Next 5 in 5
(via The Economist)

US becomes net exporter of petro in 2011

One big story of 2011 was the United States switched from being a net importer to a net exporter of petroleum products.
Read the rest at Econonbrowser
U.S. net exports of petroleum products
by James Hamilton

I guess the media should be asking the GOP presidential candidates whether US export of petroleum products should be allowed at all. I thought "Drill, baby, drill," was about obtaining oil domestically for domestic use.

Steve Randy Waldman — "Why is finance so complex?"

Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.
[emphasis added]
Why is finance so complex?
by Steve Randy Waldman

The clear case was recently in the lead up to the financial crisis when complex products of "innovation in financial engineering" were given stamps of AAA approval by complicit rating agencies and foisted off as "reducing risk by spreading it" when in fact they were magnifying system risk. Private communication such as emails reveal that the originators knew of the actual situation when they were doing this. See the voluminous work of Prof. William K. Black on operation of financial institutions as "control frauds by their CEOs

We see much the same attitude and practice at the Federal Reserve. Powerful insiders in the financial sector are often not only informed in advance about policy decisions but also permitted to shape them behind the veil. Is this in the public interest. Should it be opaque even to Congress? Is this necessary for "political independence." When does "political independence" conflict with democratic principles. When does "political independence" serve privilege?

I think that we can compare opacity in finance with secrecy in government. As the release of the material collected by Wikileaks, including that provided by Bradley Manning, goes to show, much government opacity and secrecy are simply covers for what is illegal or would be embarrassing, rather than being vital not national security. Would the country be willing to bear the risks and costs of domestic and foreign policy if they knew the underlying truth? Secrecy and opacity are often simply a means of control.

SRW brings up some excellent points. I think he has put his finger on an essential issue that needs to be addressed. Here is my comment over at Interfluidity.
What I am chiefly concerned about in lack of transparency is not only implications fo risk and risk-taking, but also lack of trust in institutions. The “need” for lack of transparency, ranging from opacity resulting from complexification and to mandated secrecy, betray lack of trust in the basic institutions underlying the great themes our this era, liberal democracy and free market capitalism, neither of which can exist without transparency. So is “progress” a justifiable tradeoff, or do we have to admit that “liberal democracy” and “free market capitalism” are empty slogans and the stuff of children’s stories, which do not reflect reality? It seems to me that this is close to the basis of the upheaval of the developed world is now undergoing as its principle institutions are being called into question, not only the financial sector and the Federal Reserve, but “democratic” governments subject to elite capture, and, indeed, capitalism itself as the preferred life-support system. Indeed, the revelations subsequent to the invasion of Iraq on “fixed intelligence” and the more recently the Wikileaks material shows that a great of the lack of transparency in government was for expediency rather than national security requirements. It does not seem to me that Jesuitical argument really works in any of these cases, due to unintended consequences. While such consequences may be unintended, they are not unexpected. Once truth is suppressed, illusion and hypocrisy grow. Little while lies sprout into the Big Lie. (link)

Mike Konczal on actual unemeployment

Mike Konczal ask about the actual reate of unemployment in light of the rather unusual conditions surrounding this recession — persistent high unemployment and underemployment, with a bulging drop in participation rate.

What is the Real Unemployment Rate, and How Could We Tell?
by Mike Konczal

This is doubly a disaster in that it is not only actual, in spite of widespread lack of recognition in the media, but it is also completely unnecessary, as MMT shows. The sectoral balance approach predicts unemployment when the combined saving desire of the domestic private sector and the external sector is not sufficiently offset by a deficit ("dissaving") of the government sector. This is explained by the identity stating that the balances of the government, domestic private, and external sectors sum to zero. Thus, if demand leakage to saving by non-government is not offset by government, then the figures will adjust accordingly, reflecting an output gap as business contracts.

The the sectoral balance approach is a macro approach and does not reveal how this will manifest in the economy wrt those affected. This is not only an economic phenomenon, but also a sociological and demographic one.

As Konczal observes, the present course of events is generational. This has generational implications broader than employment, as we see from restive youth not only in the US but also in various places around the globe. Spain, with youth unemployment above 20%, is a case in point.

The US has the financial capacity to counter its high unemployment by increasing its fiscal deficit in order to achieve a sectoral balance at optimal performance, which implies full employment. The US can do so because it is sovereign in its currency, so that the only contraint is availability of real resources. Availability of real resources is not an issue here, owing to the output gap and high unemployment. Under such conditions, injecting net financial assets into non-government by increasing the government's fiscal deficit in order to increase effective demand, which would spur investment, need not be inflationary.

On the other hand, Spain and the other countries of the EZ, have given up currency sovereignty in adopting the euro. As a result, they are no longer currency issuers but currency users and must obtain funding through revenue or financing.

The US, UK, and EZ are all experiencing generational unrest and restive youth. As currency sovereigns that issue their own currencies, the US and the UK have the means to deal with this issue directly by offsetting demand leakage to saving by increasing their deficits to make up for the leakage by increasing effective demand.

Presently, the EZ has not come up with a strategy for getting around its self-imposed limitations. Meanwhile, its policy of "expansionary fiscal austerity" (an oxymoron) is failing the people of many countries. This does not seem to be sustainable politically, even as TPTB kick the can down the road with temporary monetary fixes but continue to insist on a policy of austerity. Unless they change policy and strategy, their ad hoc tactics will fall short in dealing with the rising political problem. Time is running out for putting together a real fix before there are political explosions in Europe.

The same explosions will also occur in the US and UK unless the governments realize their ability to counter the situation and take steps to implement it. Time is not on the side of the status quo here.

Then there is the question of reform. If reforms are not instituted, another more serious financial crisis awaits. This is the elephant in the room that is being ignored. Another leg down from an already historically low level would be catastrophic economically, politically and socially.

Ignoring the sociological and demographic implications of the present situation is just marching toward the cliff.

Saturday, December 24, 2011

So easy even a kid can understand

We don't borrow from China or anybody else. In this video I explain it in a way that even a kid can understand. Watch the entire video.

Friday, December 23, 2011

Charlie Chaplin — Final Speech in The Great Dictator

(h/t OccupyMarines via FaceBook)

We WON!!! MMT got everything right...EVERYTHING!!!

Modern Monetary Theory (MMT) scored a knockout this year, correctly predicting all the major economic events and their outcomes.

From the downgrade of the US credit rating and the resulting interest rate decline, to the lack of hyperinflation from QE, to the increase in deficits in Eurozone countries imposing austerity, MMT had it all right...EVERYTHING.

The other guys have egg all over their face and continue to look like ignorant fools.

Personal saving hits lowest level in four years

Households have been drawing down savings as incomes stagnate. Savings can only fall for a period of time before people start cutting back consumption to rebuild those savings.

In 2007, just before the economy crashed, the savings rate had fallen to 2.0%. What followed was a pullback in consumption that weakened the economy and contributed to the overall downturn.

The savings rates is now down to 3.5% (down from a peak of 8.3% in May ’08). While 3.5% is better than 2.0%, unemployment is still far higher than it was in 2007, so it’s reasonable to think that 3.5% (or thereabouts) may be the new, 2.0%. Incomes have to rise from here for this trend not to become problematic.

Thursday, December 22, 2011

Here come the lawsuits

Read it at The Huffington Post
Occupy Wall Street Protesters Sue Over Free Speech, Use Of Force
by AP

Satyagraha — "If police are stepping up their violence, we need to go and step up our nonviolence."  

The police had declared Monday, November 14th of 2011 as the day of the raid on the Occupy Oakland encampment.  It was the first Occupy site to call for a general strike that shut down the fifth largest port in the country; it was also the first Occupy gathering to report a shooting and a murder, as police violence also reached new heights.  With tensions mounting amidst political chaos, police escalated their violent crackdowns and the narrative of fear.  Hundreds of thousands of dollars were spent in preparation for the raid, police from around the state were called in, and uncertainty filled the air.

The night before, Pancho Ramos Stierle heard about growing tensions in the community and thought, "If police are stepping up their violence, we need to go and step up our nonviolence."  So on that Monday morning at 3:30AM, Pancho and his housemate Adelaja went to the site of the Occupy Oakland raid.  With an upright back and half-lotus posture, they started meditating.  Many factions of protesters were around but the presence of strong meditators changed the vibe entirely.  Around 6:30AM, the police showed up in full force.  Full-out riot gear, pepper spray, rubber bullets, tear gas.  All media was present, expecting a headline story around this incredibly tense scene.  Instead, they found 32 people, all peaceful, with Pancho and Adeleja meditating with their eyes closed in the middle of the Plaza.  As the police followed their orders of arresting them, people took photos -- particularly of two smiling meditators surrounded by police looking like they're ready to go to war. 
Within a day, that photo would spread to millions around the world, as Occupy Oakland raid ended without any reported violence.

One such experience can be enough for a lifetime.
Read the rest at Daily Good
If You Want To Be a Rebel, Be Kind
by Nipun Mehta , Nov 29, 2011
(h/t Clonal in the comments)

Paul Farrell — 2012 will be the year of Occupy

Warning to America’s Super Rich: Think Occupy Wall Street disappeared in winter’s cold? Wrong: The 99% just declared a new aggressive, covert special-ops war strategy to take back our democracy in 2012.
No more peaceful tent encampments in parks. No more Mahatma Gandhi nice-guy stuff. Not enough. Escalation time. Wall Street, the Super Rich and their Washington lobbyists are tone deaf, blinded by greed, trapped in their post-2008 business-as-usual bubble.
Warning, OWS tells us America’s going to be shocked by not one but hundreds of wake-up calls in 2012.
How? In a recent Washington Post op-ed column, OWS leaders are clearly accelerating their battle strategy in 2012. In what amounts to a new declaration of war that promises to electrify the 2012 elections, OWS will be using new asymmetrical warfare strategies, write the two men who’ve been the driving force behind the movement since early this year, Kalle Lasn editor-in-chief of Adbusters magazine and senior editor Micah White.Listen to some of the specific guerilla tactics they warn will be used in their coming 2012 “American Spring” assault: A “marked escalation of surprise, playful, precision disruptions, rush-hour flash mobs, bank occupations, ‘occupy squads’ and edgy theatrics.” And in a New Yorker magazine interview shortly after New York Mayor Bloomberg’s “military-style operation,” Lasn warned: “this means escalation, pushing us one step closer to a revolution.”
So get ready: 2012 promises to be a relentless succession of hit-and-run attacks during what already promises to be a hotly-contested presidential campaign. So forget Zuccotti Park. No long camp-outs and sit-ins. That’s so ‘60s. So last fall. Instead, be prepared for endless surprise attacks, albeit non-violent amateur versions of Seal Team Six, in-and-out fast.
Read the rest at MarketWatch
by Paul B. Farrell

Want some goals and demands? How's this?
“Robin Hood tax on all financial transactions and currency trades; a ban on high-frequency ‘flash’ trading; the reinstatement of the Glass-Steagall Act to again separate investment banking from commercial banking; a constitutional amendment to revoke corporate personhood and overrule Citizens United; a move toward a true cost market regime in which the price of every product reflects the ecological cost of its production, distribution and use;” and they are in favor of “the birth of a new, left-right hybrid political party that moves America beyond the Coke vs. Pepsi choices of the past.”
Farrell's prediction:
My prediction: Wall Street will never change, never, until they suffer another catastrophic meltdown, with no bank bailouts. We haven’t completed the natural economic cycle Paulson’s team aborted in 2008.
Paul B. Farrell is one of the few financial commentators that integrate geopolitics into their economic analysis. Don't ignore what he has to say as merely peripheral. While one may or may not agree with his analysis, this kind of analysis is essential in this environment. It accounts for a lot of the post that I put up that may otherwise seem random and disconnected. They are indications of patterns unfolding and trends developing.

The pattern and trend that Farrell sees? Eating the young to preserve the status quo. (Life scientist and MMT'er Roger Erickson has been shouting about this for some time from the perspective of evolutionary theory)
Repeat that “bottom line: You cannot attack your young and get away with it” And yet, that’s exactly what Wall Street, America’s Super Rich, their lobbyists, and all their bought politicians are doing: “Attacking our young.” Attacking our next generation. Attacking America’s future.Our leaders are ideologically blind to the need to invest and invest big in jobs before this accelerating rage reaches a critical mass and ignites, triggering another American Revolution and the Second Great Depression.