Saturday, January 28, 2012

Rogue Economist — Some suggestions to improve MMT and the JG proposal


Read it at Rogue Economist Rants
Some suggestions to improve MMT and the JG proposal
by Rogue Economist

40 comments:

Letsgetitdone said...

Sorry, I didn't see any suggestions from Rogue about how to improve the JG. All I saw was questions being raised about the JG that weren't rigorously derived from actual JG proposals and other assumptions. That is, this post was really short on analysis that just highlighted "problems" Rogue thinks exist, but it was hard. at least for this reader to see why they would.

TomatoBasil said...

When MMT develops a specific set of modifications to the US Constitution, the US Code, and the CFR for all of the concepts inclusive, then everyone can become irate at the specifics. It is odd that we have to develop specific legal frameworks for this JG concept and respond to numerous anecdotal scenarios before we have any concrete functional proposals on any thing. I think MMT should just ignore the calls for specificity and retain this tool as it is; an illustration of the buffer stock that necessarily exist in our economy but can be managed as we see fit.

Tom Hickey said...

The question comes back to the alternative to a buffer stock of unemployed or a buffer stock of employed. If one chooses the former then one has to make a macro case that the latter is less economically efficient.

All the other considerations raised are are distractions and diversions from this basic issue, which is a macro issue the way MMT frames it in terms of a comprehensive macro theory addressing full employment and price stability as an achievable outcome.

If the buffer stock of employed is more economically efficient then the question of implementation comes in . But that is not a a macro question unless it has macro implications., such as having an effect on production that cancels the cost saving from using otherwise idle resources. That, of course, would need to be shown rather than asserted or suggested.

The social and political implications are not relevant to macro either.

If it is accepted at the macro level that the buffer stock of employed is more efficient than the alternative or essentially doing nothing to ameliorate waste from idle resources, then micro questions become relevant as well as social questions about effectiveness and political questions about practicality.

It is misleading to call the MMT JG is a "proposal," i.e., policy tool. It is an integral aspect of a macro theory, which can be applied as policy instrument.

So far no one has seriously approached the MMT claim that as a macro theory MMT resolves the trifecta of growth (production), employment, and price stability.

Matt Franko said...

Related to the recent commentary by Bernanke and Eric Schmidt at Davos related to how they think our employment problems are related to a lack of education and training; here are some numbers:

13M full time unemployed (millions more part time unemployed)

18M enrolled full and part time in US colleges.

Very close to the same numbers. So are Bernanke and Schmidt saying that the 13M+ unemployed I guess have to "go back to school", if so then we would have to DOUBLE the current capacity of our secondary education system. This is absurd. Most of the current unemployed are highly educated and skilled in general.

I dont see how the math works in how you can get to the legal mandate of maximum employment without a JG, I'm telling you it's not going to happen unless the govt sector gets directly involved in the employment process.

Resp,

Rogue Economist said...

Joe, my suggestions came in the form of specific issues that need to addressed to make JG workable, and acceptable to many. There are no answers coming from me, that's why I'm making the questions. But if these are addressed, then the JG can be implemented without blowing up in the face of its proponents. Better a sympathetic person asking them now, than MMTers getting red-faced answering why and how entrepreneurial activity died when JG was tried out.

So let's see the 'analysis' on your part, though since I'm guessing you've never been an actual businessman, you'd just find it 'hard' to see why they're actually issues. I'd rather hear from someone who can actually address the questions, rather than someone who ducks and just says the questions lacked analysis. Because that attitude doesn't help advance the theory at all.

Rogue Economist said...

Tomatibasil, my thinking is that it would be easier to get laws changed once we can show lawmakers how the JG's transmission mechanism works in improving the economy, and of everyone in it, without it destroying an equal amount as it does so.

Lack of specificity means lack of urgency.

Rogue Economist said...

Matt, the current unemployment can be addressed with equal parts of bridge employment programs and other fiscal programs and trade and capital account controls. No need for a permanently-fixed jobs program, unless it has been developed and refined where it can successfully replace capitalism as a system.

Matt Franko said...

Rogue,

"trade and capital account controls."

Have to agree with you here.

If we are willing to get involved with the external sector, then that is indeed a game changer...

Ir just seems like "free trade" is so ingrained right now with both sides that perhaps a JG would be easier to get passed! ;)

Resp

Rogue Economist said...

Tom, I agree that the JG seems elegant, with its marrying of growth, employment and price stability into the theory, but I'm thinking we may throwing away practicality in the name of perfection.

Tom Hickey said...

Yes, that's why we need to have a debate first over the macro and then its application as a policy instrument.

I think the point of exploring trade-offs at the macro level is well-taken. What are the trade-offs and what is the relative cost-benefit? Of course, other non-macro issues are involved, too, like whose ox gets fed and whose gets gored. But we don't really need to go there until the macro issues have been resolved.

I suspect that the major macro objection would be that a JG introduces more wage rigidity that inhibits markets from clearing naturally, thereby disrupting the invisible hand that presupposes free markets.

As far as policy implementation goes, I agree with Matt that it would be far more difficult to address the issue through the external sector, which involves dealing not only with the strong bias toward free trade and free capital in the US but also with ROW, much of which would likely object.

It would probably be more practical to address the relation between the domestic private sector and the public sector in the US, where people are already aware of the New Deal ELR programs and also of precedent elsewhere. While there is opposition from one quarter, there is support from another.

That would involve confronting the bias toward free markets, which is the other factor in the trifecta that also includes free trade and free capital flow. But that bias might not be as strong as the bias for free trade and free capital flow.

So I think that the questions begin at the macro level. Would theMMT JG do what the MMT economists claim to address FE and PS as a combo buffer stock of employed and a price anchor? If so, what's the cost-benefit? What could possibly go wrong?

If it's a potential go, then let's do the feasibility study regarding details of implementation before trying to pitch it as as policy option.

I confess I haven't read all the MMT lit on this, but from what I understand, the MMT economists believe that a lot of the groundwork has been laid already.

Matt Franko said...

I think both a JG and mods to external arrangements have their political obstacles...

If Cullen and Beo & Co. intend to examine an overhaul of external arrangements via "import certificates" (aka tariffs) vice a JG, then they certainly have their work cut out for them there too.

Warren's position is to take the external entities up on their desire to save in our currency, but we have to cut taxes at home and implement direct employment actions to adjust for this... this may be more achievable than implementing an ersatz tariff system these days.

Rogue Economist said...

Tom, if what is being proposed is a Roosevelt style WPA, which is a bridge employment program that was dismantled as soon as the economy boomed in the 50's, then yes, that would be easier to get passed. Is this the version of JG you support? Because I would too.

But if people realize that MMT economists are actually proposing a system with a buffer stock of 'failed small businesses', the program will likely get amended faster than you can say 'crony capitalist' probably with inputs from crony big business capitalists who may find a meal ticket in there somewhere. And MMT economists would probably be rundown with pitchforks by the anti-socialist crowd.

Rogue Economist said...

Matt, Warren's version seems the practical approach right now, because it's a good counter to mercantilist policies of other nations. But once mercantilism has been defeated, and eventually concerns turn to an overheating economy, would it be ok to have a buffer of failed small businesses?

Tom Hickey said...

Well, Rogue, politicians are now looking out their windows (literally) and seeing people with torches and pitchforks (figuratively). They are terrified. Fear of losing the next election due to a bad economy and high unemployment does wonders in focusing politicians' minds.

"Expansionary fiscal austerity" threatens to plunge the wold into depression and probably war. The participants at Davos know this. and if they didn't get it yet, George Soros spelled it out for them.

The game is not working as it is being played. There are two options, tough it out hoping for a miracle, or adopt new solutions. People at Davos, ie., the masters of the universe, are now casting about for a new paradigm.

There are going to be changes coming, big changes. They are not going to be changes around the edges either.

This requires big thinking. I am not claiming that MMT has the answer but it does seem to be to be the best macro answer out there so far. It's a challenge to other economists to come up with something better that will handle the challenge of globalization as the present system breaks down, not only economically, but also socially and politically.

And this is just the beginning. We are only one crisis into this — about four years into it. Crises now come every five to seven years. If Randy Wray is correct, the next one is already baked in, and it is going to make the one from which the world is still trying to recover look like child's play.

Regarding implementing the MMT JG, MMT economists admit that a lot of peripheral businesses will no longer be profitable under a full-on MMT policy. They see that as a good thing, getting rid of worker exploitation. They don't see any problem dealing with it using MMT macro principles. Some creative destruction is going to happen along the way.

The idea that the world is going to move onto a new level using a new economic paradigm based on a different understanding of macro without significant changes involving trade-offs and creative destruction is myopic. But the MMT economists purport to show a way to a sustainable solution. In contrast, the present path is unsustainable and is in the process of breaking down.

My point is that this is a macro problem that affects the whole world, i.e., a global economy as a closed system. The present approach of mainstream macro is insufficient to deal with this, based on feedback from recent experience. The notion that a Great Moderation had been achieved was revealed to be a chimera.

Now it is time for the economics profession to come up with a fresh solution that can be successfully simulated, since it is unlikely there will be enough empirical evidence to corroborate it at this point. The world has never been here before, nor gone where it is going with increasing velocity and acceleration.

What the empirics tell us is what does not work. Why keep doing what doesn't work if there are other options that have greater promise and are founded on a solid rationale. Arguably, the world's chief social, political and economic challenge at present and in the foreseeable future is unemployment and underemployment. showing that the present tack has led to growth without prosperity.

An economy is the material life-support system of a population and culture is the spiritual life-support system. Both are founded on institutional arrangements. As a species we need to go back to the drawing board and try to get this done more efficiently and effectively. It's a management and engineering thing.

The MMT JG is a potential tool. If better tools are presented, of course, they should be preferred. But all tools have to be integrated into a comprehensive macro solution that can be implemented globally as a policy instrument. That's the challenge that the MMT economists have pick up, within the Post Keynesian tradition. Other PK'ers have been contributing in other areas than macro. Has anyone else?

Tom Hickey said...

Rogue: Warren's version seems the practical approach right now, because it's a good counter to mercantilist policies of other nations. But once mercantilism has been defeated, and eventually concerns turn to an overheating economy, would it be ok to have a buffer of failed small businesses?

I would say to meet this issue when it develops. We are going into a new world order, comprised of new social, political, and economic institutions. There are enormous changes in the works. Just look at what is coming out the conference in Brazil, for example.

Economics and social and political thinking have been dominated by the UK and then US for centuries. That is winding down and is in the process of changing big time. The ROW is looking at the mess in the US, UK and EZ and deciding that this is not a good model to follow. Old school capitalism is moribund, as are European ideas about the nation state. There are huge issues, massive challenges and great opportunities that face humanity as a result.

But speaking of small businesses, I come from Iowa where only a few decades ago it was a state of family farms and small mon and pop stores. New it is a state dominated by agribusiness and chains, with the small businesses being chiefly franchises. The only true small businesses left in any quantity are the various trades — carpenters, lu, auto repair shops, etc., all of which hire only skilled tradespeople.

The workers at the bottom are immigrants. They do the jobs that Americans won't touch for the money, like meatpacking. They are the equivalent of latrine cleaners in the Third World.

Clonal said...

Peter Cooper has his criticism of "Monetary Realists" - Monetary Realism and Guaranteed Employment

I tend to be sympathetic to Peter's point of view.

Clonal said...

Also, having been a serial entrepreneur, I would argue that any business, small or otherwise, that has to rely upon wages that are below a "living wage" does not have a viable business plan, or acute business acumen.

I have known people whose business plan relied on using free prison labor - in the guise of "training" them, with no plan to hire them at a living wage when they came out of prison.

I consider these people in the same category as I consider slave owners and those running "gulags"

Rogue Economist said...

Clonal: " I would argue that any business, small or otherwise, that has to rely upon wages that are below a "living wage" does not have a viable business plan, or acute business acumen."

So any business that is currently paying at the proposed JG wage level is paying slave labor and below the living wage'?

Tom Hickey said...

Clonal, I agree that so far the MR presentation is loose in the respect that Peter mentions. But they are just getting going, so we'll have to see how they flesh it out.

The difficulty I see in that MR is specifically stated not to be a macro theory. Well, if it is not a new macro theory and not MMT as a macro theory, then what macro theory does it presuppose?

It is not possible to have an economic understanding that this theory-free. That just means that the theoretical model is implicit and unstated. It is also necessary to have a methodological approach. MMT is institutionalist rather than being based on the methodological individualism of the neoliberal approach.

Looks to me so far like they want to seat it in the New Classical model, specifically the neoliberal approach, which is right libertarian, as you observe, but to weave in Post Keynesian elements. Seems to me like there is a need there to avoid conflating New Classicalism and Post Keynesianism, since there are fundamental disagreements.

Clonal said...

Rogue,

I would argue that it is indeed the case. The marginal wage rate at which a labor market clears, is not necessarily one which is either socially optimal, or even sustainable in the long term. Paying below a living wage by definition is impoverishing somebody who makes above a living wage, for the employee earning below a living wage has to rely upon some other well wisher giving him or her a "charitable" contribution in order to survive.

Tom Hickey said...

So any business that is currently paying at the proposed JG wage level is paying slave labor and below the living wage'?

The way I would put it in terms of economics is that such businesses are taking advantage of a government subsidy to the "working poor" that permits this practice of hiring below subsistence. There is a rising public outcry against this practice, and Wal-Mart specifically has already seen the light of approaching torches and is taking action to deflect the tips of the pitchforks.

Rogue Economist said...

Clonal: "I would argue that it is indeed the case."

So why would the JG be proposed at below livable wage right now? That wouldn't solve the current deficient demand problem, neither does it help those given the JG job. I would argue it should provide the livable wage now, then scale down below it once the private sector starts hiring again at that livable wage.

Tom Hickey said...

I think that the JG would have to be the "living wage" as a compensation package of wage and benefits. This would require firms to offer more than basic compensation to attract workers, or else something else more attractive.

If the JG replaced the minimum wage, firms could lower starting compensation with a promise of increased compensation if the worker is retained after a reasonable time-defined training period. Word would soon get around about firms that tried to cheat by rolling over workers instead of advancing them. Workers taking a chance would not be risking much other than a temporary pay reduction since they would have the JG as a safety net.

The big problem in the US is health care. The US needs to follow the lead of other developed countries and make basic health care a public utility supported by public investment. This alone would resolve what is now the most pressing hiring issue. The present system is designed to fail, and it is just crazy to continue it.

Another issue that needs to be addressed is that of entrepreneurship. Many people suppose that sufficiently motivated people would be able to self-employ through entrepreneurship, which is presumed to be "the American way." Well, that's very severely restricted these days owing to changes in the US economy. The US is losing small firms and making entrepreneurship more difficult as the micro-economy moves toward greater consolidation and centralization. Economy of scale and intense competition by larger firms have make much small businesses unprofitable.

This is a disturbing trend since small business is "the American way." The American way is becoming unrecognizable as large corporations increasingly dominate. Yes, there are still Horatio Alger stories, but they are getting rarer and exist mostly in cutting edge digital fields where start-up costs are not as prohibitive as in other areas. Moreover, these are high-skill areas that can easily be outsourced.

I have a young friend who is a successful entrepreneur in web development and multimedia. He is the only person in his company that that is physically located in the US. The employees and servers are all in Bangalore.

Matt Franko said...

Rogue,

Good point.

The JG wage that is most bandied about ($8.00/hr) is too low imo.

$16,000 per year, at least for my area is not enough.

I would think families would still have to access the subsidies that Tom mentions (Housing/Nutrition Support, Medicaid, etc...)

Resp,

Clonal said...

Rogue,

I have argued vociferously that the JG has to be at a living wage, and not at the market clearing marginal wage rate.

The problem is that most economists use equilibrium models to work with, and most of these have unrealistic base assumptions, and these basically rely upon clearing at the margins to work (bid/ask have to be equal.) Stock/flow models with time lags can be made much more realistic, and have real life datum built into the models. To me the JG or BIG stes the minimum wage. That is the only way to set a minimum wage - otherwise there will always be an incentive to cheat, as there will be always be workers and employers willing to go below the minimum wage (making use of the charity of the friends and family of the worker - an illegitimate use in my view)

Also, training wages for independent adult workers cannot be below a living wage. This has to be codified into law. Even slave labor had to be given a living wage - if you didn't, you did not have much of a work force left!

Senexx said...

and not at the market clearing marginal wage rate.

Is there such a thing?

Rogue Economist said...

Senexx, yes, that's the prevailing wage without the JG

Clonal said...

Senexx said:

Quote:
Is there such a thing?

In practice, the answer is "No" - see Efficiency Wage

See also Sticky Wages Revisited: Organizational Responses to a Declining Market-Clearing Wage

That is why we (supposedly) suffer from unemployment

Tom Hickey said...

that's the prevailing wage without the JG

Neoliberals in the US argue that the labor market is not clearing due to wage rigidity resulting from unions and imposition of a minimun wage. They argue that if such rigidities were removed, then wages would would correct and the labor market clear, since bids would fall in line with offers at a striking price where business would be profitable. All that has to happen in this scenario is to give employers freedom in making offers. (Btw, some of these folks also want to repeal child labor laws while they are at it. Seriously.)

Opponents (you know, Marxists and socialists) say that employers are just as rigid in resisting margin compression that would reduce profit but permit increased hiring. Moreover, they point to the 2 trillion that firms have on their books, as well as rising profit and increased productivity but stagnant wages, to show that it's not workers being rigid as much as employers being rigid about excessive profit expectations. Thus the demand "from the left" for greater profit sharing with labor.

This kerfuffle is not coming to a head in many places and is even spilling into the streets in some places. Social unrest is rising owing to worker perception of galloping inequality based on overreach of managers and owners who want an increasingly large share of the pie at workers' expense.

Unless the US economy turns around soon and there is a tangible recovery, or some remediation is instituted, this is going to get uglier in the spring and escalate toward the November general election. Right now the signals are mixed.

Rogue Economist said...

Clonal, if the market clearing marginal wage rate, as your links indicate, is sometimes stuck at the higher sticky wage rate (which results in unemployment), it's usually because that's the living wage rate. Private sector knows it can only keep employees productive if it pays at least that, so JG would likely need to follow that constraint too (until at least when private sector starts hiring again, in which case, it wouldn't matter anymore if it pays below).

Clonal said...

Rogue,

I would agree that the JG has to pay at least a living wage. I believe that Letsgetitdone (Joe Firestone) also makes the same point that the goals of MMT are "Public Purpose" and "Full Employment at a living wage"

Tom Hickey said...

One potential problem is making the JG a living wage in terms of the compensation package is wide regional disparity. It could not be something a one-shoe-fits-all federally mandate affair. It would have to reflect the disparity which probably means administration at the regional (state) level and in some places the local level as well (intra-state). While a complication, it is not an insurmountable obstacle.

geerussell said...

I've seen Mosler point out that there are still opportunities for a private sector employer offering a sub-JG wage to compete.

The huge trump card the private sector has is potential for advancement. You're never getting a raise or a promotion in a JG job.

I can easily envision some (many? most?) employers able to offer sub-JG starting salaries at some entry level jobs.

Even if the opportunity for advancement isn't present directly at that employer, there will be many types of desirable work experience the JG jobs won't provide for people looking to further their prospects.

Clonal said...

geerussell,

See my comments about prison and slave labor. Yes, an employer may offer sub JG "training jobs" as long as he meets minimum wage laws. However, if no advancement of employment takes place, then there may well be a backlash against such an employer, either legally, or an inability to find new employees. Sub living wage jobs are subsidized by the friends and families of the worker (as I have already stated earlier)

Senexx said...

Rogue, I can just look at unemployment levels whether now or in boom times in any sovereign economy country to disprove that the definition you provide for market clearing wage is false.

Thanks Clonal, I'll check up on those links.

In practice and theory I say "No" too but I am open to arguments. After all I was heading for an Austrian-like market clearing wage belief but I stumbled on MMT before I got there. And there is just so much clarity with MMT.

Rogue Economist said...

Senexx, you mean wages do not clear right now? How does anybody get paid any wage at all? Who determines the wage then, if not the market? The government? Or perhaps you don't call what people get paid a wage? But seriously, what did you mean when you asked what a market clearing wage was? Were you asking me what concept I have in mind when I respond to a comment about it, or were you asking me whether I believed wages were always at the efficient level?

Anyhow, Tom's comment shows that there could be places where I can agree that a permanent JG could be helpful. These could be places where the private sector would normally not invest in because it wouldn't be profitable. But there are other places where a permanent JG could eventually become counter-productive. These are the places where private sector activity tends to congregate. That's why when you propose the JG, it's important to make nuances, and signify how it rolls out by sector and geographic location. It's can't be a one size fits all for the entire country.

Tom Hickey said...

Rogue: These could be places where the private sector would normally not invest in because it wouldn't be profitable. But there are other places where a permanent JG could eventually become counter-productive.

I think that the MMT economists basically agree with that. The JG should be involved with public goods or in areas that the private sector could enter but no one is willing or else it's not really profitable to do so. Actually, some of these latter areas, e..g, where initial investment is high and breakeven either far in the future or uncertain, could be transferred to the private sector later. Again, where a JG might become counter-productive would be a signal that it may be time to privatize that program.

Tom Hickey said...

What I hear from neoliberals is that high employment is the result of either a preference for leisure, eg. made possible by subsidization in the form of unemployment compensation, and the failure of the labor market to clear due to the minimum wage and collective bargaining, which introduce wage rigidity.

These may be correct notions in terms of the assumptions of neoliberalism, but, even granting those assumptions for the sake of argument, the question is whether that is the kind of society that we as a nation want to live in — that is, one in which US is engaged in a race to the bottom with emerging markets in world where labor is fungible. I don't think so.

Politicians know that this is not a practical solution politically. There is a reason that we have a mixed economy rather than a neoliberal one. Voters don't want to live in a society that is governed on the basis of economic neoliberalism. The invisible hand is too harsh socially.

Moreover, from the Post Keynesian-MMT analysis we can see the deficiencies of neoliberalism, especially, lac of recognition of demand deficiency. Many neoliberalism presumptions are incorrect.

If wages fall and prices fall in line, then the same game is just recalibrated at a lower nominal level (leaving debt at their previous level, however). But if prices don't fall and wages do, where is the effective demand going to come to purchase output other than through increasing private debt, which is unsustainable, or increasing exports, which is impossible for all nations to do (as the world is about to learn the hard way).

Neoliberals think in terms of labor bartering units of work for units of goods, overlooking that this is a monetary economy rather than a barter economy and being unaware or in denial of the consequences of that.

Once the basics of a monetary economy are understood then it becomes clear that government is an essential player not only in the game as a participant in markets, but also above the game providing the money used in the economy. That means that the currency sovereign can do many things that currency users cannot.

Most economists still see the government as only a participant in the economy, relegating to itself a share of the pie. The truth is that government is a major determinant in changes in the size of the pie, either increasing it or shrinking it. MMT explains how this happens through demand distribution, and how to use this knowledge to grow the pie for the good of all.

Rogue Economist said...

Our points are converging finally! I feel the concept getting sounder from where I'm looking at it. Hooray!

Tom Hickey said...

The dialectical method at work doing what it is supposed to do!

When parties simply assert categorical views, the debate comes to a screeching halt.