This week, while the mainstream media covered their usual corporate crap, Bernie Sanders has signed on to the job guarantee / employer of last resort program championed by much of the Modern Monetary Theory (MMT) / Post-Keynesian School:
http://www.rapidshift.net/guaranteeing-a-job-and-a-living-wage-to-every-...
Democratic Party senator Cory Booker has rolled out a mere pilot, and it is unclear what proposal fellow senator Kirsten Gillibrand will roll out herself or endorse.
Jacob - this sounds interesting - but could you please give us a short version to introduce the subject? Then we can tackle the details having some overview of what it entails.
It is worth reading this article in its entirety.
The key insight of MMT is that sovereign governments that are the sole supplier of national currency can issue currency of any denomination, and in physical or non-physical forms. Consequently, these governments have an unlimited ability to pay for the things they wish to purchase and to fulfill promised future payments. These government also have an unlimited ability to provide funds to other sectors.
This isn't very 'modern'. In fact this theory has been around almost since time began, but whatever.
My question is this. Is there any limiting factor on the government's ability to create money? Because if there isn't, why is anyone working?
From the posted article:
A representative from Sanders’s office said they had not yet done a cost estimate for the plan or decided how it would be funded, saying they were still crafting the proposal.
...Aides to Sanders stress that the policy details remain in their initial stages.
The article also wandered all over hell's half-acre, starting off on this scheme, taking a detour through anti-gun activism, and ending up on unionizing poltical campaign workers. It was almost as if someone told the writer that this was the last article they were going to be able to write, and they decided they'd better not miss any points.
In any case, the chances of winning middle class votes by telling middle class voters that the government is going to take their money and give it to the deserving (and not so deserving) poor, are zero.
Well, if we imprison our heads in a zero-sum game, we are always going to worry about "how we are going to pay for it". Any currency issued for a large-scale government programme such as the one(s) proposed in the article will inevitably wind up in government coffers again through the increased economic activity that putting all these people to work will entail.
It is probably not being proposed that team A will be employed moving dirt from A to B and team B will be employed moving it back from B to A again. What is being proposed should add to the infrastructure base of the US. It could be social infrastructure like child care and health care, which allows others to go back to work again more quickly. It could be land reclamation which would result in the production of more food. It could be physical infrastructure which would make things move around faster, and hence increase the circulation of money along with those things and hence the GDP.
Although the neo-Keynsian approach in the article is focused on the idea of giving everyone a job, the old Keynsian approach of "priming the pump" was to increase currency circulation flow and hence the GDP, which it did.
The current American Keynsian approach is to finance the military, which inefficiently produces goods that are designed to be stored and then destroyed on use. This has always been used to stimulate the American economy since we do not know when. The ideas in the article could result in added value for the US economy, hence higher GDP and a higher long-term tax base. In this respect when Trudeau said "the deficit will look after itself" he was right.
This is exactly what we all need to be doing.
My question is this. Is there any limiting factor on the government's ability to create money?
From a few articles I have read in the last year or so, I think the limit is that creating money cannot do any more than run the productive capacity of the economy at 100%. Attempting to buy more goods and services than the economy can produce will fail, but up to that point, if there is any unused productive capacity, government created money can bring that capacity into production. That, at least, is my poor understanding of the theory.
Well, look at the "Bank of Canada Balance Sheet" according to Google, to give you some raw data to consider. What they are specifically responsible for is the actual cash which is in your pocket, and regulating the trillions in credits floating around the banks. It seems there is about $81 billion of that cash, which seems to be sufficient for our $2 trillion economy. (All figures extremely in Canadian dollars). This is a GDP/cash ratio of 24.7:1, which might imply that each cash dollar spins around 24.7 times in a year. However that cannot be true, as most of the financial transactions changing hands are based on credit. In the old days, currency was based on vaults of gold and foreign currency, and perhaps foreign government bonds. If you will notice there is next to nothing of that on the other side of the $81 billion.
The main thing on the other side of the $81 billion in currency is Canadian government debt. If you are wondering how currency can be based on debt denominated in the currency it is supposed to cover, join the club.
However, it seems to work, and in an odd way it kind of protects our currency from what is happening in other countries.
There will always be government debt, and we will always need currency, so it seems to have made quite a stable system, ironic as that may seem.
Credit card balances seem to be about the same as actual cash. Purchases on credit cards will be much more in a year, as people pay off some or all of their balance each month. Yet there is going to be a multiple of the credit card balances floating around the economy each year. The same goes for lines of credit, and other unsecured debts.
Secured loans, especially mortgages, can work according to a "fractional reserve ratio". As people are scared to lose their homes, they tend to pay their mortgages. If the Banks can put up their equity to cover all or part of the mortgages, they may create money out of thin air to write the mortgage, but they must not use actual cash. They can electronically transfer the funds to the other account in exchange for an IOU. As the mortgage principal is paid off, the funds disappear. However the "fractional reserve ratio" is not as mighty as conspiracy theorists may want you to believe. Just the market value of the bank shares alone is double the mortgages out there. Just the "cash" in Canadian bank accounts is about triple the mortgages out there. Plus the Banks have pools of cash called "Loan Loss Reserves" to shield their current accounts and shareholders' and bondholders' equity from default.
What we are asking is that the government issue more currency through the central bank to finance a program such as Bernie Sanders proposes. As the currency has a multiplying effect because of circulation, we can ask the central bank to issue the government more debt, while at the same time printing more currency.
There are also tricks that the government could do which would increase GDP on the same amounts of money. For example make more businesses file GST monthly than quarterly, and make the big ones file twice a month. Pay out pensions twice a month rather than once. Pay bills faster. Go from bills to C.O.D.
So if we look at it in terms of circulation, what is being proposed in a "job for anyone" scheme or some kind of massive public works program (which will give us compound interest in terms of making the economy more efficient and hence raising GDP even more), we would likely see most of the money wind up back in government accounts (and yours and mine) pretty quickly as it is.
Or we can do nothing and watch the rich get richer and the poor get poorer.
Jacob - this sounds interesting - but could you please give us a short version to introduce the subject? Then we can tackle the details having some overview of what it entails.
https://www.jacobinmag.com/2017/02/federal-job-guarantee-universal-basic...
From progressive17:
Any currency issued for a large-scale government programme such as the one(s) proposed in the article will inevitably wind up in government coffers again through the increased economic activity that putting all these people to work will entail.
This, I think, is the MMT idea. Unfortunately it doesn't work that way. When you give someone a dollar, that dollar owes the bearer a dollar's worth of goods (or services). So what if the owner of that dollar decides to spend it on an iPhone manufactured in China, or clothing from India, or a BMW made in Germany?
How does that dollar work it's way back to the creating governments coffers? The answer is, it doesn't. It becomes money owed to the manufacturing country, which they can use to buy up the dollar-issuing government's country, piece by piece.
From Michael Moriarity:
I think the limit is that creating money cannot do any more than run the productive capacity of the economy at 100%.
I would think you'd run into horrendous inflation long before your economy got to 100%. However, it would be a sliding scale, meaning you could halt your money creation program before the inflation became too great. Problem is, those kind of things always lag, and by the time you realize you've gone too far, you're looking at a few years of high inflation before things cool down. That has been the story in the past.
progressive17 hits upon a point though, when describing military spending in the USA. It's not necessary for the USA government to 'create' money, they could use the money they already spend on the military.
For instance, they could create full-time $15 per-hour jobs for almost 17 million people out of their military budget, and still have $125 billion left over to bomb and kill with. Their military budget would still be larger than any other country on earth.
To me, that is where the left should be. Bringing home to the USA citizens the cost of their military, and what that money could be funding.
The dollar is useless in China, Germany, and India. It has to be exchanged for their own currency and return back to America that way. Or, indeed, they can use it to buy American goods. In addition, a very large percentage of the sale of those items stays in America due to tariffs and the wholesale and retail margins.
Zero-sum thinking always winds up to the lowest common denominator and the worst possible outcome. It is not a good frame of mind. Because of population growth, economies are characterized by growth as well.
People think that 2-dimensional snapshots tell the whole story, when we are in a 3-dimensional world moving through time.
China currently holds USD $1.17 trillion. That's a pretty fair whack of cash.
down from $3T as I understand
Certainly the government can invest in infrastructure projects, and in the process hire Canadians for those projects. But I'm not sure it's necessary to promise every Canadian a job thereby.
And I'm not saying "exclude the undeserving!" or whatever. But just because the government sees fit to build a recycling hub in this or that community doesn't really mean that every unemployed person in that community is ready or willing to take a job sorting blue box stuff.
That is, of course, not suggesting that the government can't invest in those sorts of things, and hire who they can. But as soon as every Canadian is "guaranteed" a job, by hook or by crook, it seems like someone who decides that they must follow a perfect vegan diet rather than just eating 80% less meat.
Which gets right back to the problem of people saying the government should guarantee "jobs" instead of prosperity, or even the lack of poverty.
..i'm wondering how can you offer everyone a job without changing an economic and political sytem that dosen't operate that way.
From progressive17:
down from $3T as I understand
I think your figure is China's total foreign exchange reserves espressed in USD. That doesn't mean all of those holdings are USA assests. Your figure would include exchange reserves from all countries China trades with.
China's USA holdings were higher though. I found those holdings were USD$1.7 trillion back in 2010. So they have dropped by some USD$500 billion or so.
Interestingly, the USA has been trying to bail themselves out by precisely the method the MMT people suggest. That is, the use of 'quantative easing', which is basically having one branch of the government loan money to another branch.
It's a bit like saying;
I am going to create twenty dollars, and put that into my left hand pocket. I'll then have twenty dollars in my left hand pocket, and none in my right.
Then I'm going to loan the twenty dollars from my left hand pocket to my right hand pocket.
Then I will have forty dollars, because I'll have the twenty in my right hand pocket, plus I'll have the twenty dollar IOU the right hand pocket owes my left hand pocket.
Repeat ad infinitum
The US carried on that policy for 6 years, putting something like 4 trillion dollars into the economy. No one knows for sure what the long-term effects could be. The short term effects are taking money from savers, often senior citizens with their retirement funds, and giving it to borrowers by way of lower interest rates.
Well, if we imprison our heads in a zero-sum game, we are always going to worry about "how we are going to pay for it". Any currency issued for a large-scale government programme such as the one(s) proposed in the article will inevitably wind up in government coffers again through the increased economic activity that putting all these people to work will entail.
It is probably not being proposed that team A will be employed moving dirt from A to B and team B will be employed moving it back from B to A again. What is being proposed should add to the infrastructure base of the US. It could be social infrastructure like child care and health care, which allows others to go back to work again more quickly. It could be land reclamation which would result in the production of more food. It could be physical infrastructure which would make things move around faster, and hence increase the circulation of money along with those things and hence the GDP.
The traditional, Bastard Keynesian approach is simply about boosting GDP (most notably consumption), not about boosting workers' real wages and discretionary incomes. I think the Post-Keynesian / MMT program is supply-side economics but bottom-up, because this is labour supply.
Even though I don't agree with the right-wing article I'm about to present, I do wonder if the conservative proposal to replace welfare with this (except disability, social security, etc.) has as much a negative impact as a conservative proposal to replace welfare with basic income:
https://www.forbes.com/sites/jeffreydorfman/2018/05/01/job-guarantee-a-l...
I guess the keys really would be unionization and automatic inflation adjustments, as unlike with basic income these are checks against any downward pressure on wages.
The key insight of MMT is that sovereign governments that are the sole supplier of national currency can issue currency of any denomination, and in physical or non-physical forms. Consequently, these governments have an unlimited ability to pay for the things they wish to purchase and to fulfill promised future payments. These government also have an unlimited ability to provide funds to other sectors.
This isn't very 'modern'. In fact this theory has been around almost since time began, but whatever.
My question is this. Is there any limiting factor on the government's ability to create money? Because if there isn't, why is anyone working?
From the posted article:
A representative from Sanders’s office said they had not yet done a cost estimate for the plan or decided how it would be funded, saying they were still crafting the proposal.
...Aides to Sanders stress that the policy details remain in their initial stages.
The article also wandered all over hell's half-acre, starting off on this scheme, taking a detour through anti-gun activism, and ending up on unionizing poltical campaign workers. It was almost as if someone told the writer that this was the last article they were going to be able to write, and they decided they'd better not miss any points.
In any case, the chances of winning middle class votes by telling middle class voters that the government is going to take their money and give it to the deserving (and not so deserving) poor, are zero.
My question is this. Is there any limiting factor on the government's ability to create money? Because if there isn't, why is anyone working?
Section 1--I will give the orthodox capitalist thought that dominates our world. Its all about fear of inflation --- the central bank start printing money sending into real economy. This causes inflation because more fiat is floating around but production grows more slowly. You get workers demanding increased wages and the wage inflation spirial starts. To cool down the economy the central bank will raise interest rates making your borrowing more expensive to control inflation.
BUT
All that said since 2008 we have been going through an experiment of huge proportions. World wide the central backs have bought around 16 trillion in assets. Bonds, stocks, and some even i believe invested private equity projects. This quantitive easing.
Buying assets >>>>> cash is put into the economy >>>>> economic grow
Thats theory but you ask why does this not cause inflation. We have capitalist explaination, the money is in the fininacial economy. Assets classes like bonds, stocks, art, housing the playthings of the rich are going up in price but nothing or little is reaching the real economy.
This is as refered as quantative easing for the rich.
What your refering to quantative easing for the masses. See Section 1 above.
I have been an economy watcher for a long time this idea quantative easing for rich or poor was considered taboo 20 years. Maybe we will accept QE for the masses like we accepted QE for the rich in 10 years.
I think we are making this much harder then we should be. Its all a question political will and production.
All the stuff we produce has a price on national basis. Add it up you have total GDP = National income. How you spend that national income is a political question. Taxes are just skimming NI away. You decide through your political choice how much is skimmed and what services delivered through government how much delivered throuht profit sector. Its just that easy.
From SeekingAPolitic...
Maybe we will accept QE for the masses like we accepted QE for the rich in 10 years.
Actually there isn't any difference between QE for the rich, and QE for the masses. A dollar is a dollar is a dollar, as the saying goes, and a dollar dumped into the economy, no matter how it's done, increases the money supply by a dollar.
As soon as that dollar is spent, it's out there in anyone's pocket. Then it circulates. generating a dollars worth of economic activity. If the economy is operating very much below optimum, that money doesn't generate a lot of inflation. It's a bit like peeing into a bucket with a hole in it. Not much happens. However, when the economy begins to grow, and gets closer to maximum output levels, inflation does begin. The only problem is, all of these things have a lag time, and you can end up with serious inflation if you misguess where you should cut off the QE.
What's really more interesting is the phenomenon of negative interest rates. Try and explain that by capitalist theory...
Negative interest rates would only be attractive if deflation were greater.
GDP is a "snapshot". It is consumer spending + government spending + business spending + exports - imports. Wages and taxes are no part of this. Wages go into the next cycle of consumer spending, for the most part. Taxes go into the next cycle of government spending. Business spending may be wages (and hence taxes) for new hires, which would then go into consumer/government spending in the next cycle. Operating ratios out of all of this spending could go into more business investment in the next cycle. Dividends paid could go into consumer spending, etc.
The efficiency of a dollar is how many times it can spin around the economy, ratcheting up the GDP by that dollar at each snapshot. From what I have observed, that efficiency is down considerably since the 2008 financial crash.
A national job guarantee has opened radical horizons for the Left. We should fight for it — but the devil is in the details.
For us older lefties, Senator Bernie Sanders’s identification with “democratic socialism” began as a mystery. There seemed to be little that distinguished his current platform from those of liberals past, such as Franklin D. Roosevelt or Lyndon B. Johnson — no hint of socialism’s traditional connotation of “nationalizing the means of production.” But now his advocacy of a job guarantee has opened more radical horizons....
A national job guarantee has opened radical horizons for the Left. We should fight for it — but the devil is in the details.
For us older lefties, Senator Bernie Sanders’s identification with “democratic socialism” began as a mystery. There seemed to be little that distinguished his current platform from those of liberals past, such as Franklin D. Roosevelt or Lyndon B. Johnson — no hint of socialism’s traditional connotation of “nationalizing the means of production.” But now his advocacy of a job guarantee has opened more radical horizons....
While I support the Public Employer of Last Resort / Job Guarantee program (and have for a long time), I have reservations regarding MMT as a theory itself.
Basically, MMT advocates going "into the red" and staying there. Deficits are not supposed to matter. Demand is expanded by expanding the money supply, and is reduced through taxation.
Whenever left-reformists have tried to nationalize, they have always done so by issuing debt in order to buy out the private enterprise. They have never thought of tax-to-nationalize: taxing businesses upfront and using the proceeds for nationalizing later. Later on, of course, as the notorious anti-socialist Margaret Thatcher herself noted, they "run out of people's money."
Before someone mentions Venezuela, I would like to state that it is not the first left-reformist government that has nationalized things by issuing debt.
Is MMT reconcilable with tax-to-nationalize? Am I missing something?
progressive17 wrote:
GDP is a "snapshot". It is consumer spending + government spending + business spending + exports - imports. Wages and taxes are no part of this.
Wikipedia on GDP:
The second way of estimating GDP is to use "the sum of primary incomes distributed by resident producer units"...
...This method measures GDP by adding incomes that firms pay households for factors of production they hire - wages for labour, interest for capital, rent for land and profits for entrepreneurship.
So at least one method of calculating GDP includes wages.
