Friday, January 27, 2012

Some suggestions to improve MMT and the JG proposal

Cullen Roche, along with TC and Beowulf, have a new initiative, to flesh out a quasi-MMT economic paradigm, and will likely start website dedicated to it. This paradigm  seeks to incorporate all, if not most, MMT insights on monetary and banking operations into its thinking while doing away with the controversial JG component of MMT. They call this new MMT offshoot Monetary Realism, or MR. This sounds like a promising initiative, one that could only be good for both those who want to preserve market-based adjustments in the functioning of the macroeconomy, while seeking to spread the insights of sectoral balances approach in both private and public decision-making and policy-making;  and for the main proponents of MMT. After all, If MMT proponents are correct, that better understanding and functioning according to the real world monetary reality will eventually lead us to accept the JG, then this is also helpful to MMT. 

Cullen starts off some of their basic principles, at least as to how it would distinguish itself with mainstream MMT:
1. We side with Godley on the current account issue.
2. We view the state theory and the “taxes drive money” idea as incomplete.
3. We will focus more on productivity as a compliment to consumption as opposed to mainly looking at ways to increase aggregate demand.
4. We reject the JG as a central component of understanding the modern monetary system.
MR will focus on monetary and banking realities and operations, and focus less on the macroeconomy, to be clean in its analysis. For the mainstream MMT, meanwhile, I suggest it approach economic analysis with a clearer view of how specific policy proposals would affect grassroots-based businesses.  It needs to start looking at the economy as comprised not just of large private sector institutions, but also of many small mom-and-pop size businesses. Consideration for small businesses and their concerns is something that is currently still weak in the current evolution of MMT(as I see it). For example how does government tweak its tax policy and deficit spending in a way that does not kill off a significant part of what makes a dynamic economy. To wit:

1. If inflation starts heating up, mainstream MMT with a 100% JG proposes to manage it by increasing taxes and decreasing spending. The goal would be to decrease private employment and bring a segment of workers back to the public JG. What types of taxes would be increased? Taxes of whom? For doing what activities?  Will the higher tax burden be rolled out the same across the board, or segmented and differentiated, depending on size of business? I ask because, while increased taxes could affect large businesses the way MMT economists intend - by decreasing their employee rolls, it will entirely kill off the smallest businesses whose profits are now below the higher income threshold caused by higher taxes, and whose sales may now fall below break-even with the decreased government spending. 

2. Will this tax be rolled out by sector, by geographic location, by nature of business activity? Would it take into consideration a business' place in the value chain? Or how many JG-skill level employees it has? 

3. How would this economy-wide aggregate demand management account for small business who occasionally need to borrow funds? This type of system will likely discourage banks from extending any medium or long term loans to the smallest businesses who could easily be killed by a ramping up of JG and increase of taxes. Does MMT propose to take the banks' place, or do these smallest businesses become casualties in the name of greater employment and price stability?

4. Also, those businesses most highly affected by those occasions when government increases the JG sector would likely lose all their revolving credit lines precisely when government announces a ramping up of the JG. Is this a natural aim of the JG program, or is there a proposed mechanism whereby those businesses with existing obligations towards employees, suppliers, and customers will be provided a bridge loan by the government, at least to enable them to attend to their open client accounts until they can cleanly liquidate their business and everybody can go back to join the JG?

5. How does JG address greater than normal inventory and capital equipment liquidation every time a ramping of JG and private sector taxes kills off the businesses now below the marginal profitability? Will the government buy these excess, or will it let the market clean up the mess?

6. How does the JG account for the current long and interconnected supply chain processes among businesses? Ex. if the smallest car components makers are to close to accommodate the JG ramp up, does the government intend to turn those business operations into JG positions owned by the government so as to keep the supply lines from disrupting the entire auto industry? How about with large food conglomerates that source a lot of their raw inputs from small growers, who in turn source their own inputs from further small businesses? Do these processes become government-owned JG businesses during times of inflation? And paying the lower JG wage level?

7. How does this JG-led system account for JG people who wish to save up capital, so they can leave the JG to start their own business? So let's say a prospective entrepreneur saves up enough for startup capital, but when he tries to hire people, he can't hire them unless he promises to pay them more than he himself used to earn from the JG? Would the JG have incentive programs to encourage entrepreneurship, to make up for the higher startup costs effected by a permanent JG? Further, if a JG can give workers employable skills, what makes these same workers to still willingly leave that skill-enhancing JG job for a job in the private sector at all? Does the JG coerce these workers to leave the JG?

8. How will MMT address the possibility that JG entrenches big companies even more? If small businesses were to start up, the guaranteed JG wage could be used as a negotiating ploy by workers, and could lead to escalating wages, and the more people a startup needs, the higher its labour clearing price.  Less startups would probably result. The Walmarts of the world, in the meantime, would probably start trying to justify that they are a JG supporting company that creates a lot of jobs for the JG, so the government better start paying their line workers.

9. The JG as proposed likely will encourage the mass expectation among workers that though they might work for JG now, tomorrow they'll work for private business, but maybe next month, economic changes will cause the government make them go back to the JG. How does the JG still encourage long-term planning among both workers and small business owners?

For as long as the program as proposed goes against people’s EXISTING risk-return mindset, and discourages free initiative, it's not ready to be at the forefront for reform.

discussions below and at MNE, where my position and Tom Hickey's eventually converge, more also at NEP.

Friday, January 20, 2012

Increasing NGDP to increase income

Scott Sumner today writes:
Of course wages are not flexible, but if NGDP was raised sharply then aggregate nominal wages would not rise as fast, allowing more jobs for Murdock making pick-up trucks, and more income to buy those pick-up trucks.  This is what “Say’s Law” is really trying to “say.”  If we can produce more stuff, society will be rich enough to buy that extra stuff.  No matter how much we produce, there is always some price level where we are rich enough to buy all the stuff.
I have questions about this assertion:
You're advocating NGDP, and you believe this income to buy trucks. But how does  income without wages?

If NGDP, thus cost of living, why won't people demand wages?

If NGDP , how does this actually lead to income? Does NGDP entail government sending checks to everyone? QE, does not cut it as a mechanism that income, as it just exchanges income earning assets with non-income earning cash.

If you believe in neutrality of money, why would you believe that - if you NGDP,  which costs, and thus wages - it leads to sellers and income?  Income for whom? And sellers do not automatically become buyers of same nominal amount.

And if money were indeed neutral, what is the point of NGDP?  Money neutrality just means everything will pari passu.  (Of course, we know that money is not neutral, NGDP via QE actually price of financial assets, making savers strive to save more.)

Wednesday, January 18, 2012

Why do we believe that S=I ?

The latest endless, debate, among, mainstreameconomists is on S=I.  This equation is so controversial right now, it's already comedic.  Anyway, why do we have this equation anyway, S=I?  

Savings in an economy can comprise of actual investments, and unspent income. Any unspent income does not contribute towards the GDP, so it can't be part of C+I+G+X-M. Any unspent income will actually lead to lower GDP in the next time period.

If I means income spent on capital investment, and savings includes unspent income, why will S=I?  Savings a.k.a unspent income doesn't lead to more capital investment because, even if deposited in banks, it doesn't lead to more lending for investment. After all, banks don't need deposits prior to lending. It's lending that creates deposits. Also, savers don't normally save to put to investments later on. Many just want to have a cash buffer for consumption, if they foresee not having enough coming from income in the coming time periods.

So why keep S=I? Investment may include inventory, which may have remained unsold by businesses during the current time period. But unsold inventory usually isn't a result of businesses wanting to spend more of their income on more unsold inventory. They're usually a consequence of buyers deciding not to buy. So an increase in household savings does not necessarily mean an increase in business savings. It may actually mean a decrease in savings by businesses because businesses may now have to liquidate those unsold inventory at a huge loss, and not necessarily by selling to households at discounted prices. i.e., increased savings for households. Some unsold inventory may simply go to waste, the scrap heap, meaning, decreased savings for business (they'd used previous income to purchase the inventory) and decreased business income for the current time period. 

So why keep S=I? It assumes the economy is in equilibrium, where all savings goes towards investment, which it never is and never does. Nowadays, I can constitute not just of S, but increasingly, of B (Borrowing). This B doesn't come from S because again,  banks don't need deposits prior to lending. It's lending that creates deposits. 

Any unspent income, not put into actual capital investment, for all intents and purposes, has now exited the economy (unless it's used to pay off their B, which doesn't really contribute to GDP, but can be considered as decreasing banks' I).

Friday, January 13, 2012

Questions about the job guarantee-driven economy

In the last 2 years, I have been discovering this new economic paradigm called MMT. I have come to realize that it is the best system to accurately depict the current realities of the monetary system, and is very comprehensive in explaining and anticipating the economic effects of certain financial, central banking, economic policies. Recently, however, I'm beginning to discover that it seeks to change the current economic order, and proposes an entirely new economic system to what we have now. It looks alien to me, and I'm open about the possibility that I'm not seeing the entirety of what is actually being proposed (Because if I have it right, it looks very statist to me, and I completely veer way from MMT here).

This comment by Mosler at pragcap is where I'm currently getting my view  of what they propose. They propose a society where everybody is guaranteed a job as a base case. It will be a basic job at a basic wage. Because everybody in the base case will have this JG job, its wage level functions as the price anchor for all other prices in the economy (not just a price floor). I.e., if everybody in the economy has a job paying ex. $8/hour, this anchors the level of aggregate demand. Demand cannot go below what this base wage allows, but it also cannot go too high because, in this base case, everybody is just earning $8/hour.

Now, in case 2, wherein a sample of the population would like to have a better job than what is being offered by the JG, and to earn more than the base wage, this sample decides to start private enterprises. To entice workers to their private endeavour, they start offering JG workers a higher wage. If their business is indeed a worthwhile endeavour, it earns these adventurers a profit, while still paying their workers a higher wage than a JG. If it's not profitable, they simply close up shop and everybody goes back to the JG.

Now suppose you now have a case of a booming economy, where more and more private enterprises are being set up, and more JG workers are being enticed into the private sector. This economy will now experience inflation, as higher general wages lead to more demand, thereby bidding up general prices. In this economy being proposed, the government can dampen inflation by simply increasing taxes. The taxes will leave everybody with less  income (or as MMT calls it, net financial assets) with which they can use to bid up prices.  Problem solved. The opposite effect can be achieved when the economy is once again in the doldrums and demand is lagging. If taxes are cut, people will be able to spend once again, leading to a recovering aggregate demand.

Very elegant. I do have some questions though to help me understand the viability of this proposal.

1. In the base case, where everybody has a JG, how are workers allocated to specific jobs? And how are jobs determined in this society. In this base case, there is no market to decide what will be a valuable output, just government administrators. How do these administrators determine what jobs need to be done in this economy, and who will be matched with each job?

2. In case 2, where private initiative is assumed to arise because there are people who want to earn better than what the JG is offering, what takes the place of businesses that cannot be started because they cannot attract workers away from the JG? For example, let's take examples of labour-intensive industries, such as mining, shipping, all sorts of logistics endeavours, where you need lots of couriers, delivery men, packers, encoders, dispatchers, etc. These jobs, as currently in our economy, are viable because a private business can be profitable hiring them while making some profit providing the service. If these labour-intensive businesses were to be started in the JG scenario, the minimum hurdle to hire them would be the JG wage plus a premium to join a risky private endeavour. Because these are labour-intensive endeavours, the wage level would likely be at that price where they can attract the last needed person into the business. For example, a 10-man company can hire 10 people at $10/hour.  But a company that needs 100 people will probably only be able to hire 15 at that level. At $15/hour, it can hire 25 people. At $20/hour, it can probably hire 50 people. If it takes $30/hour to hire the necessary 100 people, companies in the low margin industries will probably find it hard to hire the necessary workforce in sufficient enough numbers to make their endeavours viable. So if these private endeavours are no longer being set up by the private sector, what takes their place? Does government end up doing what private sector will not do anymore? If that is the case, how will government, going forward, know that what it is doing, and HOW it is doing it, is the best way to provide the service? What will motivate it to improve going forward? How does it even know that there is a better way?

3. In the case of a booming economy, where government has to stamp down on aggregate demand to control inflation, which taxes does it increase? Whose? Is it the income tax of all workers? Or income tax of the businesses so more of them just close up shop and return workers to the JG? More importantly, who in government is making these decisions? How does he get to make these decisions? What metric will he use? And what qualifications will this bureaucrat need to have to qualify him to make these decisions? 

4. The JG wage, being the price anchor, is sacred as per the proposed system, so the economy has to be modulated strictly with the tax system. How will this type of system affect private initiative? If everybody is guaranteed a basic wage by the government, controlling inflation will likely focus on those earning highest rather those on the JG. Therefore, everytime there is inflation, private businesses will have to expect that their taxes will be increased as a control mechanism. If many are already cost-strained because of the increased hurdle to entice people to private enterprise, wouldn't having taxes that can suddenly move violently be the final nail in the coffin to discourage businessmen? This would be most especially be painful to the smaller businesses that would likely have razor-thin margins. If they have to close up shop, what happens to the economy if many of these small scale businesses are necessary components of the over-all supply and value chain? For example, if foresters have to close up shop, what happens to paper companies? If paper companies close, what happens to newspaper publishers? To contract-heavy industries? Will they have to make do with shorter contracts? If these businesses borrowed funds from banks, what happens then if the new taxes forces them to close? What happens to their payment obligations to other parties, their various suppliers? Wouldn't this system lead to more financial instability?

5.  What happens if basic services cannot be provided by the private sector anymore? Will they be nationalized? Where do we draw the line? If all major endeavours are already nationalized, why would anyone think that it pays to start a private business? If people know that their endeavour could one day be taken over by government to control inflation, why bother? If this were to become the new base case, how would government increase private hiring by cutting taxes? Sure it could increase aggregate demand, but if people are already dependent on government and on the JG, why would cutting taxes suddenly give them the idea of doing something different?

more discussion over at MNE.
topic continued from this post, and continued to this post

Friday, January 6, 2012

Past post links

In lieu of a new post, today I'll post links to previous ones, with a sprinkling of posts from others.

1.The current, mainstream, economist, debates about Ricardian equivalence will be better served if they acquaint themselves first with net financial assets.

2. Once they do, perhaps they can get their minds around the enigma of social security sustainability.

3. Finance and opacity. (at Interfluidity)

4. If you believe some people, MMT is what caused the problems in Greece, Zimbabwe, Japan, Venezuela, Soviet Union, China, ancient Rome, and everywhere else east of the Atlantic. (originally from here and here)

5. My own preferred recovery solutions mix.

6. The solutions mix in basketball allegory.

7. New year's last year, I had the following questions. Due to the miracle of extend and pretend, the questions remain for this year.

On a lighter note, here's China's likely message to the rest of the world: Dont rely on us to get your own economies high (courtesy Chemical Bros)