Sunday, January 8, 2012

Two dimensional thinking in a three dimensional world

On 22 December, PeterC abandoned MMT.

I assume everything was still all pure unadulterated MMT four days earlier when JKH commented:

MMT recognizes the inflation constraint as the legitimate constraint under a fiat system.

JKH continues: "This might take the form of MMT type policy responses in the face of undesirable inflation measure behavior". The "MMT type policy response" to inflation would I think be to increase taxes in order to "destroy" money. (I would say, in order to "take money out of circulation". Certainly, increasing taxes could do that, if you could get anybody to increase taxes, and if the budget was already balanced. But the word "destroy" is an insult to taxpayers.)

I have suggested linking individual and business tax rates to taxpayer indebtedness. This would be like the Fed raising interest rates to fight inflation, except it would be borrower-specific. If you didn't borrow a lot, your taxes would be lower. If you did borrow a lot, your taxes would be higher. But if you made "extra" payments on your debt, your taxes would come down. In other words, our policy would fight inflation by encouraging us to pay down our own debt.

(In today's depressed and heavily indebted economy, the above suggestion may sound like a bad idea. But I do not offer it as a solution to our present problems. I recommend it as normal policy for normal times. In normal times, such policy would prevent the kind of economic troubles that we find ourselves in today. It would prevent the heavy indebtedness, and prevent the financial crisis, and prevent the threat of debt-deflation. It would prevent the monetary causes of recessions and depressions and Dark Ages.)

I am not opposed to using tax policy for constructive purposes.

"MMT recognizes the inflation constraint as the legitimate constraint under a fiat system."

JKH's statement is my focus here. Because it means that MMT is willing to sacrifice GDP growth (and thus jobs) for the sake of price stability. Just like existing policy.

Oh, maybe the Fed picks a spot on the Phillips curve where unemployment is too high and inflation too low to suit MMT. MMT would pick a different spot on the curve, with more inflation and less unemployment.

I find other people's economics frustrating. The differences between Fed policy and MMT proposals are the differences of Flatlanders struggling for position on a line. Move the line, I say. Move the line. The solution is not to pick a different spot on the Phillips curve. The solution is to shift the Phillips curve back to where it was when our economy was good.


Clonal said...


The core MMT economists, and by that I mean the UMKC economists, Bill Mitchell, and Warren Mosler would likely take issue with you on that.

In their paradigm, inflation targeting would only occur at full employment - i.e. the JG buffer stock drops close to zero -- hence the whole kerfuffle in the MMT world about the JG/JIG/BIG

As we have discussed before, growth is primarily necessary to pay interest to the bankers (while keeping a reasonable wealth distribution) and to account for a rising population. The only other reason for desiring economic growth is to reduce income disparity, and to raise the standards of living of the ENTIRE community (I would go even further, and turn the whole trickle down hypothesis on its head. If you raise the standard of living of the bottom part of society, everybody is better off, or at worst more equal)

The Arthurian said...

Clonal: "....would likely take issue with you on that."

That would be fine. I understand that the "core" people likely have the best understanding of MMT, and that the "average" MMT guy might not claim to have all the ducks in a row. But you'll do, Clonal. :)

However, I'm not sure I get your point. JHK seems to think that "MMT recognizes the inflation constraint". I'm sure MMT is *obligated* to recognize the inflation constraint, to fend off Austrian attacks or what-have-you. I don't know enough MMT to know at what point "the inflation constraint" would kick in. I do expect that it would be a higher inflation-rate than current policy allows, in order to achieve a lower rate of unemployment... That's the Phillips Curve flatland trade-off.

If what you say is true, and "inflation targeting would only occur at full employment" then there is essentially no upper limit to the MMT-acceptable rate of inflation. (See, I don't think the "core" people would say that. But maybe they would...)

Clonal said...


My understanding (and I could stand to be corrected on this) is that "demand push" inflation, or in other words inflation caused by "too much money" can only occur close to full employment. That is the only type of inflation that can be targeted by monetary and fiscal policy. Other types of inflation can occur, caused by other factors. That inflation cannot be tackled by monetary policy, and has to be combatted by other means - e.g. inflation due supply chain interruptions.

This would also match with our Milton Friedman analysis -- money supply had little to do with inflation.

The Arthurian said...

Clonal: "My understanding (and I could stand to be corrected on this) is that 'demand push' inflation, or in other words inflation caused by 'too much money' can only occur close to full employment. That is the only type of inflation that can be targeted by monetary and fiscal policy."

And yet inflation was targeted by monetary policy repeatedly during the 1960s and 1970s and into the 1980s. And all the while unemployment was trending upward.

Anna Schwartz still argues that inflation results from "An increase in the supply of money". I reject that view.

I argue that inflation was already cost-push by the mid-1960s, and that the factor cost of money was the driving force behind cost-push inflation. I argue that the reason anti-inflation policy was unusually ineffective in the 1970s is that policy was fighting cost-push inflation with demand-pull methods.

Still today, no one acknowledges that the inflation of those years (and since) was cost-push, with price increases driven by rising rates and the cost of interest on accumulating debt. And there is Anna Schwartz and her antebellum view.

Policymakers continued to reduce inflation since that time by accepting the Phillips tradeoff of higher unemployment, as you know.

So while you and I may agree that "inflation caused by 'too much money' can only occur close to full employment," policymakers do not seem to care. They do not identify an inflation that might be caused by excessive reliance on credit.. And Bernanke has said the Fed will increase interest rates at the first sign of inflation.

Apart from all that, disagreement over the "best" trade-off of inflation and unemployment implies no improvement in the "misery index" and no change in the position of the pattern on the Phillips curve graph. Shift the pattern toward the origin, and you can reduce both inflation and unemployment. But shifting the pattern requires a different solution than is envisioned by those who call for lower unemployment and higher inflation as the alternative of choice.

Clonal said...


I agree with your position, and I believe that the core MMT economists would agree with it as well.