Week-end Wrap – Political Economy – June 22, 2019

I am getting bored with Bernie Sanders. He’s going nowhere.

Presidential politics is a branding contest- in a country with 350 million people that’s all it ever can be. To destroy your brand by calling yourself a “democratic socialist” was the most destructive thing any politician has ever done (although calling all your opponent’s supporters “deplorables” could be right up there).

Bernie has the right message. He’s the wrong messenger.

This week’s links provide a microcosm of what many of us have been writing about for more than ten years now.

Bush and Obama, Paulson and Geithner, bailed out the rich. They had a recovery. The people in the lower 80% of the population could have been bailed out for far less. They weren’t, and they remain in recession. This choice adversely and disproportionately affected African-Americans.

America is a rich country. No American should have to fear getting sick or growing old. No American should fear hunger or lack shelter. Every American should have the right to a good education and a meaningful job paying a living wage. There should be a sacred compact between us that we will provide to each other these building blocks for a decent, good, and meaningful, life.

I think the Poor People’s Campaign gets it right when they talk about resources. People have been conditioned to freak out at the mention of money. I have said before, we have been taught this reflex to think of money as some primordial substance of the universe as if the bible began with “In the beginning God created the heaven and the earth and money.” So if you talked about redistributing money to create the society I described above, most of us would shut down: “It would cost too much. You’re trying to take money out of pocket. No way, Jose.” But talk resources, moving them around to create that society, the money reflex would not kick in. Most people would see it as no more than commonsense.

Still not a fan of MMT. It is a poorly constructed theory. Most of its assertions are wrong, trivial, or inconsistent. And it remains far more neoliberal, Joe Biden-esque, “Nothing will change,” than its proponents and popularizers are willing to admit.

The various examples of malevolence by corporations, the rich, and those in our government are simply further evidence that we are living in an end-stage kleptocracy and how unlikely we are to do what needs to be done to mitigate and/or prepare for climate change.

As an aside, I have already gotten very tired of this Presidential race. It is all about personalities. We should be caring less about them and more about the policies they represent and are willing to fight for. Biden is an Establishment holdover who is supposed to be preferable to Trump because he is a more palatable version of what is killing us. He’s for a return to the good old days that never existed, to days when he at least could be treated with civility by crass, overt racists. That Warren won’t come out for universal single payer healthcare is a red line for me. And her statement that she is capitalist to the bone is idiocy. It is pandering to the very forces she says she is so much against.

@edmondo,

I have to agree with you about Bernie’s use of “democratic socialism.” The problem with the term is that it is almost meaningless today. Many people use socialism to mean “anything the government does” and that includes many people who call themselves “socialists.” Then you have actual socialists who are probably still in the minority even among self-proclaimed socialists. I doubt that most American socialists actually want to replace capitalism with a different system, they just want a robust form of welfare capitalism.

Sanders is effectively just a New Deal liberal and he should have branded himself that way instead of using the confusing “democratic socialist” label. A lot of people are still scared off by the term socialism. Additionally, we have to remember that many Democrats are not really on the left in any serious way and wouldn’t vote for Bernie no matter what label he uses. I think too many Bernie fans overestimate how popular he is. There are many partisan Democrats who want no part of Sanders no matter what label he uses.

It takes more than brands and labels. “Democratic socialist” can work if you can get people to invest time and effort in coming to some understanding of how to make a better society work and place that understanding, that investment behind the label. It takes a lot of political organization in other words. If Sanders can get the political finance and purposeful campaign management in place to do the necessary political organizing, that would be a hopeful development and one that could begin to overcome a politics of celebrity personalities.

“Medicare-for-all” is a good slogan, but even though it might seem obvious, most people will not understand what is meant until it is explained and any explanation has to be addressed in a noisy, contested environment when many voices will be sowing confusion.

It is tough thing: it isn’t a personality the Sanders campaign is trying to put across, but a different kind of politics, one that is centered on propaganda that is not deliberately superficial and reactionary.

Thanks, Hugh. It was a serious question and you gave a serious answer.

I agree with you that MMT as a discipline seems not to want to talk directly about an obvious issue: that distribution of money plays a big part in economic outcomes. Part of this may be because distribution of money plays a big part in economic outcomes for reasons that are outside of the economic sphere. Concentrated money leads to regulatory capture and market distortions, for example.

I can’t find the reference right now, but I remember Randy Wray saying pretty clearly that we need to tax the rich — not because we need the revenue, but in order to prevent them from using their power to wreck the economy for everyone else. But whether he says it or not, it’s a pretty clear conclusion that follows from MMT ideas.

One other point: you say that the US doesn’t really have fiat currency. What MMT would say (at least the way I understand MMT) is that the US has the power to issue fiat currency but chooses to constrain itself, acting, as you point out, like it is still on a gold standard. My understanding of MMT would say that those constraints are illusory.

As I understand MMT (I’ve never seen this expressed directly anywhere, but here goes:), the US Government issues money in three forms, all created out of thin air, all fiat. One is paper notes and coins (walking around money), the second is deposits at the Federal Reserve Bank (checking account money, commonly referred to as reserves) and the third is Treasury securities (savings account money). In practice, it is easy to swap any of these forms for the other kinds, with only a small discount if you’re swapping bonds–future money–for current money, so they are in that sense equivalent and have much the same economic effects.

The important point that MMT is trying to make is that those constraints ARE illusory, and that seeing through the illusion opens up possibilities for economic policy.

Hugh does an able enough job in presenting his disgust with MMT.

I want to like MMT, but I find I cannot. Neoclassical economics, which is the theoretic foundation for the rhetoric of mainstream economists, basically and deliberately ignores money and what the mainstream spins out as rhetoric — I am thinking about liberals like Krugman as well as Republican tools like Rogoff — is completely fallacious crap. MMT has some easy pickings in counterpoint: as Hugh says, in a credit system of payments, banks create money when they make loans in the form of deposits — duh. A monetary sovereign with a central bank it controls cannot be forced into bankruptcy over debts issued in a currency it controls. “Loanable funds” is a fallacious doctrine. Hand-wringing over the size of deficits in order to push policies of neoliberal austerity that push down wages and starve infrastructure investment creates a stupid public discourse that might be better framed by something like Lerner’s functional finance. So, one and a half cheers for MMT.

MMT, as far as I know, has no centralized College for Indoctrination, no official spokesperson, but it nevertheless has taken on the form of a dogma even while it is propagated by gadflies. Not a good look. And, not a path likely to lead to the further development of a coherent economic theory. It might prove to be effective political rhetoric for a populist rebellion (because the critique of neoliberalism makes some points) but as a guide to policy construction it looks like a blueprint for disaster to me.

Following posts on Naked Capitalism, I take it to be one of the conceits of current strains of MMT to be that printing money in the form of marketable sovereign debt securities (in U.S. terms, Treasury bills, notes and bonds of durations varying between three-months and thirty years) serves no purpose. In fairness, other older strains emphasize the importance of public debt as savings vehicles for private sectors and Minsky emphasized the stabilizing role of a large public debt. I see MMT becoming increasingly incoherent in its failure to explicate adequately money as a stabilizing hedge for both the payments system and business generally.

MMT is first and foremost a description of what money is (and, properly understood, has always been), how it is created, and how it functions in and motivates the economy.

On the most fundamental level, a “description” of what money “always has been” is impossible, because money by its nature is subject to intense strategic pressure from the political contest over the distribution of income, wealth and power. The institutional regime within which a particular money functions is evolving under the pressure created by gaming the system and attempts at reform; fairly radical changes of regime occur historically at regular intervals of crisis and reform. A theory of money that encompasses and enables an analysis of differing forms might be possible and is something to aspire to, but no description of a particular regime is going to suffice. A theory might further prescribe best practices and institutional arrangements. But, I find current MMT gadflies scorn understanding, say, why Treasury and Central Bank operations might be separated, even though they must be coordinated in practice — why the dance? It is a bit wonkish to even ask, but MMT makes big claims on the basis of supposedly understanding how money works operationally and there it is, how it works, and they cannot be bothered to think about it.

As for how money functions in and motivates the economy, consider what I said above about money as a hedge and consider further the central role of leverage in the incentive structures of business bureaucracies. This was certainly part of Minsky’s vision, but I do not see much of it in Randy Wray’s logorrhea. Incentive structures in the economy are all about how risk is distributed and money facilitates that contingent distribution. It can be hard for people to wrap their heads around, but that is not a valid excuse for lapsing into a rhetoric that recognizes only the quantity of money available to conduct transactions.

The Job Guarantee, by failing to confront the contingency at the core of the employment relationship — “do as the boss says, or you are fired” — fails to resolve its own aims. All that Hugh said, follows. I know lots of people on the left want to wish away economic hierarchy, so maybe that is the appeal of ignoring the problematics, but it could well be a discrediting nightmare as policy, if not better thought thru. (I say this as some one who thinks poorly governed finance does indeed drive the creation of meaningless jobs and we ought to do something about it thru politics.)

(In the interests of full disclosure, Yves Smith banned me — more a symptom of her untreated mental illness than anything I wrote.)

Bruce, you say “Money is a fiction.” I find it much more useful to think of money as a promise. The stuff we call “money” whether it is a piece of paper or a piece of gold or other metal stamped in a certain way, or most likely these days just an entry in a computer database, is how we keep track of certain financial promises. When you accept money, you’re accepting someone’s (in conventional usage, that of a government or a bank) promise of some kind of future benefit worth x number of dollars.

Money promises, like any other promise, are created “out of thin air.” Or if you prefer, out of high hopes and good intentions. The value of money, like the value of any promise, depends on the willingness and ability of the promiser to fulfill the promise.

The US Government used to promise that you could either exchange its money for gold, or you could use it to pay your taxes. Now it only promises to accept it as a tax payment. That is a promise the Government can always keep, if it chooses.

Banks also create money promises (out of thin air) in the form of deposits. (A bank deposit is not a pile of dollars in a vault with your name on it, it is a promissory note from the bank payable in Government dollars.) Circumstances could prevent a bank from keeping its promises.

I’m not catching your drift on the non-equivalence of the forms of money (do you agree that all three forms are money?) The practical effect of issuing bonds instead of currency is the ability to influence interest rates. What else would I be missing?

I can’t take a T-bill to the supermarket and use it to buy groceries. The money in my pocket does not accrue interest.

Whether the US is on a full blown gold standard or a pseudo-gold standard, it is still not a fiat currency. Even on coinage, that was not supposed to be fiat either since the value of the metals used was supposed to be reflect the value of the token. That was where the platinum coin proposal came in because an exception to this rule was made for coins minted from platinum (and palladium). So a platinum coin could be made of any value: $1 trillion. $10 trillion, whatever. The Treasury could then deposit it at the Fed and effectively take back the federal government’s of money creation, or actually share it with the regional Feds.

Paper notes are, BTW, printed by the Fed and say Federal Reserve Note at the top of their face side. Treasury does minting of coins.

People use money because they find it useful to do so. I suppose government can force people to use money to pay taxes, but that has little or no connection with the value of what that money buys in the wider world. Where there intersection does occur is in government spending, and that has next to nothing to do with taxing, and everything to do with spending and Section 4 of the 14th Amendment.

Not real sure what reserves banks hold at the Fed has to do with anything, although parenthetically in the zero interest rate era after the financial meltdown, the Fed required banks to increase their reserves at the Fed. The kicker was the banks could borrow money at zero interest, deposit it as a reserve, and get interest paid on it. The banks made tens of billions from this arrangement which was really nothing more than another subsidy of the Fed to the banks.

Actually, the Treasury’s Bureau of Engraving and Printing produces the banknotes circulated by the Federal Reserve Banks and the office of the comptroller of the currency is a Treasury unit. It is an unusual division of responsibility, as I understand it — not really up on other country’s arrangements.

If there is any particular significance to this arrangement, I would think it is that providing sufficient currency is a set of largely “technical” problems under a well-managed fiat monetary regime. It isn’t a scarcity of currency per se that gives money value and a well-managed central bank will provide as much currency as is required by the banking/payment system to facilitate daily commerce.

At least half of what Hugh is saying is simply nonsense.

Yes, you can’t buy stuff with a Treasury bond. And this shows…what, exactly? Those bonds are effectively just dollars with an interest rate attached, to be paid out in spendable dollars after a certain amount of time.

Money is created when Congress decrees it into existence as part of a budget. The Treasury then gets this money from the Fed. This spending is then ‘paid for’ by selling bonds, which banks are legally obligated to purchase, and which they do with money *already* added to their accounts. The currency is fiat.

If you actually bothered to read anything the ‘MMT cult’ has written, you would know plenty of people don’t actually much like the current convoluted system. Some would like to get the US government out of the bond business altogether, and/or bring the Fed fully into the Treasury.

While banks are required to maintain reserve balances at the Federal Reserve, I do not know of any particular requirement that they hold Treasuries. According to the Table 2 OFS (Ownership of Federal Securities) of the June 2019 Treasury Bulletin covering December 2018:

(in billions of dollars)

Total Public Debt 21,974.10
Federal Reserve and Government accounts 8,095.00
of which Public Issues Held By Federal Reserve Banks 2,594.65

Total Privately Held 13,879.10

Depository Institutions 770.7
US Savings Bonds 155.7
Private Pension Funds 636.3
State and Local Government Pensions 282.9
Insurance Companies 229.2
Mutual Funds 2,059.40
State and Local Governments 688.5
Foreign and International 6,262.10
Other Investors 2,794.30

That is banks hold $770.7 billion in Treasuries out of $13.879 trillion held by the public.

https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/current.html

As I said, I lost interest in MMT 5 or 6 years ago. It was cult-like then. It is cult-like now. It reminds me of my occasional conversations with Trump supporters. Conclusion first, facts (bent, twisted, and discarded as needed to fit that conclusion) second. If you go through the main tenets of MMT and expose their weaknesses, you don’t get a counter argument. You get a rant. The fault is not with MMT. It is with you for your lack of faith in it. For me, MMT and its adherents are just sad, pathetic, tiresome. It is so been there, done that, years ago, and nothing has changed since. MMT is a deadend. If we want to get to the society and economy we want to have, we need to look elsewhere.

Depends on what you mean by money.

“There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve). M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions). M2 is defined as M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares.”

https://www.federalreserve.gov/faqs/money_12845.htm

From the Fed’s H-6, for Dec. 2018, the M1 was $3.7528 trillion (of which $1.6267 trillion was currency) and the M2 was $14.3694 trillion.

https://www.federalreserve.gov/releases/h6/current/default.htm

The M2 comes closest to approximating the value of the publicly held national debt, but there are zillions of qualifiers that make the similarity almost accidental. Once we move past currency there is a welter of monetary instruments, as exampled by the M1 and M2. But there are others still. If the stock market has a big run some week and increases in value by a trillion dollars, this increase is measured by neither money supply measure. And it is certainly not the result of debt, especially government debt, but it can be sold, swapped, or used as collateral. Also just saying debt or circulation says nothing about where “money” goes. Does it go overseas? To the rich? The world is complicated and the one thing that is clear is that debt does not equal “money” in circulation. It may be some part of it, but it is not the whole. And if mostly goes to the rich or overseas, how does that help most of us?

I agree a resource based approach is the way to go. Re Sanders student debt proposal, I can’t help thinking of Frederick Soddy’s distinction between wealth and virtual wealth. Virtual (rentier) wealth can do a lot of damage to real wealth in the real economy, but on the other hand, you can get rid of a lot of virtual wealth without affecting the real economy very much.

‘wilful ignorance and stupidity’, from, er, Bill Mitchell? http://bilbo.economicoutlook.net/blog/?p=31715

Seriously, how many 70 year olds have a mortgage with 20 years left on it?

Probably more than you think but yeah, not the best example. How about crushing medical debt? I bet a not insubstantial number of 70-year-olds have crushing medical expenses that have wiped out their savings and put them in debt.

I’m not saying don’t cancel the student loan debt, I’m saying why not go for the whole Megillah and have a debt jubilee? Seriously, why stop at student loan debt? Michael Hudson agrees.

Hugh, why don’t you explain to us how canceling student loan debt works since you’re quite the financial genius. Use T-Accounts in your analysis please in balancing the ledger.

And Hugh, a lot of people have hurt their hand and a lot of people have drowned in fact. Maybe it’s because no one belongs in that boat period for any reason , be it student loan debt or crushing medical expenses or mortgages and credit card debt that will never be paid.