Wednesday, July 25, 2012

Randy Wray — On The Supposed Weaknesses Of MMT: Response To Palley


Randy (whose Native American name is "Big Knife" — just kidding) cites references.

Read it at Economonitor | Great Leap Forward
On The Supposed Weaknesses Of MMT: Response To Palley
L. Randall Wray
(h/t Scott Fullwiler via email)

This is what Randy is referring to about ELR and inflation in his post. First, Thomas Palley introduces an objection to ELR and then Warren replies.


32 comments:

Dan Kervick said...

So it sounds like Palley's objection was based on the idea that ELR would be bad - or at least politically problematic - in an economy that is already producing at full capacity. And part of Warren's response is that if there are unemployed people capable of producing anything useful, then that means that the economy is not at full capacity - by definition. Palley's inflation objection only works if we assume that the output the unemployed are capable of producing if they are employed would not be equivalent in value to the claims on output (money) they would be given in return. Why believe that?

STF said...

Exactly, Dan. Now you see what we've been dealing with for 15+ years. I'm not kidding when I say critics of MMT don't understand MMT yet (which is different from saying there aren't legitimate criticisms of MMT to make, just that the ones made thus far don't get MMT right in the first place).

STF said...

And even if Tom's right, that just means you set the JG wage too high.

Tom Hickey said...

Palley's inflation objection only works if we assume that the output the unemployed are capable of producing if they are employed would not be equivalent in value to the claims on output (money) they would be given in return. Why believe that?

It's the old leaf raking argument, or dig the hole and fill it in. Same-o, same-o.

How many time have we heard this now from people that don't like the concept of ELR? It's not an economic argument, and as a social argument it clearly fails, since full employment (job offer for all willing and able to work) is a social good. Ergo, political, and largely due to ideological bias.

Tom Hickey said...

And even if Tom's right, that just means you set the JG wage too high.

I wouldn't rush to grant that easily. There are other ways to approach this than jam down the bottom. As inflationary pressure builds and supply cannot be expanded, then progressive taxation is arguably a more socially appropriate response than immediately concluding that the floor wage is sete too high.

Paul said...

I don't even know why anyone bothers arguing over MMT. It's a religion and its followers are true believers. You can't argue with zealots so why bother?

Anonymous said...

"Palley's inflation objection only works if we assume that the output the unemployed are capable of producing if they are employed would not be equivalent in value to the claims on output (money) they would be given in return. Why believe that?"

This would be a wonderful thing, but if they were keeping old people company at retirement homes, that wouldn't be generating output for others to buy. Thus, you get inflation, no?

STF said...

Tom,

True, but I was granting that Palley was right about inflation and that the politics were such that voters didn't like having their real incomes fall. In that case, they'd similarly be against taxing themselves. If you line it all up as Palley did and grant him everything including his political perspective, you can still cut the JG wage to solve it all according to his own scenario.

STF said...

Gotta love the trolls that can't stand us but can't stop themselves from reading everything we write.

Leverage said...

"you set the JG wage too high"

So if you set the JG wage too low, below the survivability needs of a family what's the point?

Why the inflation created by poor people is the problem when the inflation produced by higher income middle class not to talk about really wealthy people is way higher?

Then you could ask from other point of view, which is the subjective argument for the preference of government created job programs? Why not just give people the purchasing power after all or increase other income channels and let it 'trickle down' (although I get JG should only come after everything else has been done)? Just send free checks to mail boxes because there is no guarantee these programs will be even more wasteful resource wise than just giving the people money to spend it into the economy.

Off course from a conservative or a libertarian point of view one could make much more criticisms, but I won't get even there because it's a totally different world view.

JG does not fix the underlying problems, is just a 'status quo automatic stabilizer'.

P.S: Here you have some honest critiques of a JG or conflicts that could rise.

Not necessarily that I disagree with a JG, but IMO it's missing the point.

paul said...

Thus, you get inflation, no?"

You skipped a few steps there.

Chewitup said...

Anon,
Output is goods and services. Keeping old people company is a service that is worth something.
Is collecting a check for sitting on a couch and watching TV worth anything? It would be nice to change the incentives of the unemployed who rely on the public sector to provide for them.
The incremental difference between an unemployment check and a JG check is hardly inflationary.

Clonal said...

The problem was very well described in Warren's interaction with the other economists. It was all about the JG upsetting the "rich and powerful" - that appeared to be the main objection.

Other than that, what came out very clearly was that to everybody other than Warren, "selfishness" was the prime motivation in what they saw in themselves and in others. This holds with the thesis of Yoram Bauman - Economists Are Grinches (Note that this is not the title of the published article, but rather the subliminal title of the NY Times web page associated with the article!)

STF said...

Leverage,

I don't disagree necessarily, but "the point" is that a low JG wage is still better than no JG for which the wage is 0. Argentina's jefes program had a below poverty level wage and it still was a popular program for recipients according to surveys. Suboptimal, for sure, but still better.

And Palley's got the dynamics wrong, as Warren points out. As my simulations show, it is precisely when the pvt sector gets nearest full capacity utilization that the JG is at its most disinflationary state. So, with a JG working as desired, inflation will be lower than without the JG in Palley's scenario.

And nobody's neglecting the politics. It's the economist's job to show how the program would work first, and we're still at that state. Every significant change in public policy has always been a difficult sell--take that as given. But if members of the profession considered by policymakers to be the "experts" on the issue don't even understand the program, it has no chance at all. And that's the stage we are at right now, as Palley vividly demonstrates.

Adam1 said...

@Scott,

"...that just means you set the JG wage too high."

Or maybe that you haven't taxed away a sufficient amount of economic rent captured at the higher end of the income scale - no?

STF said...

Hi Adam1,

Yes, true, and I would agree normally. But not in Palley's scenario in which the problem is the people you'd raise the taxes on in your example are precisely the ones that Palley says would get rid of the JG in that case. So, the point is to still have a JG without affecting them--again, assuming for the sake of argument that he's right (which I don't think he is). In that case, there are 2 things:

1. Reduce the JG wage, which is still better than no JG where unemployed get a wage of 0 (and nobody said that the reduced JG wage wouldn't necessarily be a good one, just not as high--but it could also be below poverty level for sure).

2. Recognize that at the full employment scenario Palley refers to, the JG is actually reducing inflation compared to without the JG, in which case Palley's wrong about how the middle/upper classes should be viewing the program in the first place (again, assuming his scenario). In that case, the core issue is helping people understand how the program's dynamics work, and the Palley's of the world aren't there.

Tom Hickey said...

STF: "I don't disagree [with Leverage] necessarily, but "the point" is that a low JG wage is still better than no JG for which the wage is 0."

I agree with Leverage that the JG is lipstick on a pig, and I also agree with Scott that it is a relatively simple solution that would be adopted immediately to remedy some of the worst effects of the status quo.

The only issues seem to be political. If it would be so difficult politically to pass a JG, imagine how much more difficult it would be politically to revisit the architecture of the system and redo it, which is what is needed if liberal democracy in which all are free is to be achieved. The JG does nothing about the bias in the system, but it does at least give everyone willing and able to offer an opportunity to participate in the economy and therefore society.

STF said...

Yes, Tom. And remember that "the point" I was making was in the context of the scenario set by Palley, which I assumed to be true for the sake of argument.

Detroit Dan said...

So much for Palley. His post was worthless, IMO...

Yuu Kim said...

"...it would be so difficult politically to pass a JG..."

i think it's difficult to pass if you call it a "JG" and if it's purely a government job that does not include a subsidy to industry.

i think if the government were to target certain industries for subsidies and then couple the money with a requirement to create a certain amount of jobs, then perhaps there would be less resistance to it.

so, i think the only JG that can pass would have to be a "stealth" JG...

oh, and by the way, the same goes for MMT. though i totally agree with the proposals that MMT'ers make, i do feel that, after the centuries of conditioning that the public has been subjected to, you just can't come out and tell people the reality of the monetary system and expect them to believe it.

so, again, you have to find a way of enacting your policies by stealth...

Tom Hickey said...

Yuu Kim, that may be, but it is political strategy tactics, rather than economic policy and policy justification based on sound theory that has withstood the test of debate and satisfactorily answered economic objections. The politics come after. But first you have to know where you are going (policy objectives) and why (economic and public policy rationale). Then the how questions arise.

paul said...

Yeah Tom…

…first we have to convince people that money doesn't grow from savings accounts, it actually does grow on trees (figuratively speaking).

That will take a while.

y said...

that Palley guy seems like a total asshole. Oh no, if we give people money they might be able to buy food! The horror!

Clonal said...

I did not realize that Warren was addressing Thomas Palley in the video. That figures - archetypal Grinch and an a**licker to boot.

PeterP said...

C'mon guys, criticism is healthy, and MMT should be able to handle this without nasty ad hominems.

Clonal said...

PeterP,

His criticisms are what showed his nature - so I do not think that the adjectives used are inappropriate. His entire argument had to do with not "upsetting the rich and powerful" hence one of the adjectives. The second had to do with his attitude towards feeding the poor and hungery. A Definitely Randian outlook, and not at all Christian. Hence the other adjective.

This also fits in very well with Yoram Bauman's study about economists. Maybe it was just about some schools of economic thought. I definitely do not see such an attitude among Marxist economists. It is possible that some other heterodox schools are just as venal as neo-liberal economists. Such attitudes are not what drove me to the PhD program - in fact it was the opposite desire to make poverty a thing of the past! But it seems that such idealistic thoughts are beaten out of graduate students - see Disciplined Minds
A Critical Look at Salaried Professionals and the Soul-battering System That Shapes Their Lives, by Jeff Schmidt

paul said...

C'mon guys, criticism is healthy, and MMT should be able to handle this without nasty ad hominems.

If ones criticism's are dishonest, do they merit respect?

The commenters here have a pretty good track record for at least attempting to make honest arguments.

Clonal said...

On going through the video one more time, I take back my criticism of Palley. It appears that he was being argumentative, and putting up hypothetical straw men (not even real ones!)

I think Warren answered the objections well. But I am of the opinion, that equilibrium analysis is unlikely to result in a correct analysis of the policy Warren was talking about. Dynamic modelling of the type Keen works with is probably a better way to analyze the effects of macroeconomic policy.

Anonymous said...

clonal, are you an econ grad student? what are you studying?

y said...

yeah, "a$$hole was way too strong a word to use. Insult retracted.

Clonal said...

Anon

Graduate School was many decades ago.

Senexx said...

I didn't understand the point of this post initially as I didn't know about the current Palley exchange.

If memory serves, you have to listen closely to what he says here to even hear it. I recall listening to it a couple times as Warren's response seems determined to address it.

In the end, every time I think I have found a criticism to MMT, it comes from only a rudimentary understanding of MMT and personally I don't think I have much more than a rudimentary understanding of MMT. So I'm often perplexed at the crude criticisms or critiques of MMT