The emphasis on "sustainable debt trajectories" is a problem. If you look at stock-flow consistent modelling, it is fairly difficult to generate an "unsustainable" debt trajectory within the context of a welfare state with floating FX. Sectors with increasing interest income will pay more taxes, and spend out of that income. You end up in a new steady state with faster nominal GDP growth, which acts to stabilise debt/GDP ratios.
In which case you haven't hit your inflation target, have you?
Look: it is clear that you can hit full employment and also place your debt on a sustainable trajectory if you are willing to let the price level go wherever it wants. The question is whether you are guaranteed to be able to hit all three targets: employment, prices, and sustainable debt. Lerner thought yes. Lots of other people think no. It is reasonably important to figure out what is driving the disagreement.
Thanks for commenting! A writing that relates well to this discussion is John Harvey's "Money Growth Does Not Cause Inflation!" It can be found at the following: http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
What exactly is "unsustainable debt trajectory" …?
And by extension, why not just target full employment and price stability and allow "debt trajectory" to float as needed? -> MMT -> a Currency Issuer has no solvency constraint.
My point earlier, which I will agree was not too well expressed, is that it is nearly impossible to define an "unsustainable" trajectory in a model that accounts for stock-flow norms. I will assert that you do not see these "unsustainable trajectories" in the real world when you having floating FX. (If you borrow in foreign currency, you can obviously "blow up".)
If I am correct about that assertion, policymakers are free to ignore the debt trajectory, and thus it drops out of the list of 3 target variables that matter. To take an extreme example: even though policymakers may be interested in average monthly temperatures, they cannot really take temperatures into account when setting monetary policy, as they have no means of controlling it.
To not argue by assertion, I would have to write a much longer article. Wynne Godley (plus somebody else?) covered the subject of "debt sustainability", I do not have the citation info right now (sorry).
with a permanent 0 rate policy the debt thing is moot even for the out of paradigmers.
so just adjust fiscal for full employment and optimize real standards of living.
and don't forget about the transition job as a superior price anchor than today's unemployment
and 'cost push' inflation is either a relative value shift or some kind of (foreign?) monopolist, so in either case you don't 'fight it' with tight fiscal/unemployment. You either live with it or take micro/supply side measures, like when Carter deregulated nat gas in 1978 that drowned opec in their own oil a few years later and broke that inflation.
I believe Beowulf/Carlos Mucha responded on your site about Lerner's own opinion on the issue, and the importance of a MAP-style policy (i.e. establishing property rights in market-up warrants to facilitate floating prices for individual firms within a system that controls aggregate-level price changes) to prevent a sellers-side inflation shock causing a wage-price spiral. I'd be very curious as to your thoughts on that proposal, as I believe William Vickrey from Columbia was also working a similar proposal before his death 3 days before accepting his Nobel Prize.
But outside of supply-side/sellers side shock situations, isn't the demand-side price-level stabilizing mechanism proposed by Mosler et al the fixed-wage Job Guarantee, which stabilizes the value of the dollar around the average productivity of an hour of average JG labor? This seems feasible to me (replacing gold-seigniorage at the Mint with labor-seigniorage at the local job office), particularly if the type of JG-eligible jobs were focused towards low-capital intensity jobs (i.e. manual labor heavy jobs).
Peter Cooper wrote a good (and short!) post about this, titled "currency value is not formed at the margin", which you might like:
First, note that japan has had 0 rates for some two decades with no credit expansion problem. In fact, they've tried to create one through 'extraordinary measures' and so far failed.
Third, what is an 'asset price inflation problem'? Seems asset prices make one time adjustments to changes in interest rates/valuations/multiples/etc. and then pretty much stay there?
Last, positive rates are a gov subsidy, 0 rates neutral, and negative rates are a tax. Which explains why hiking rates to 'fight inflation' generally makes it worse, and rate cuts don't get things going, as per via the interest income channels.
"and 'cost push' inflation is either a relative value shift or some kind of (foreign?) monopolist, so in either case you don't 'fight it' with tight fiscal/unemployment"
Unfortunately people in power, specially in Europe (Frankfurt/Berlin and Brussels) does not with this statement, and their monodimensional thinking is that deflation is the cure of all "evils".
This is the paper that addresses Brad's question about debt sustainability. It's the same paper I gave to Larry Summers in April, when he asked me to send him 40 pages on MMT. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986
Jose Guilherme said... same paper I gave to Larry Summers in April, when he asked me to send him 40 pages on MMT - Stephanie Kelton
It's great to have the guy who could well become the next Fed Chairman showing a keen interest on MMT. At a minimum that proves he's an open minded person, a rare yet invaluable characteristic these days.
MMT provides a correct description of how the system works. It demonstrates with the required theoretical rigour that the USA can never run out of money - and once this is recognized by TPTB the country will be able to realize its full potential.
That will mean a stronger, faster growing economy and likely full employment.
And also - alas - more capacity to practice hegemony abroad.
Who knows - perhaps a Summers-led, MMT-adopting Fed will provide the proverbial extra mile in the race to guarantee that the 21st century will indeed be an American one.
September 1, 2013 at 4:46 PM
More about Lerner than Mosler. Is there another way to break Lerner's argument as long as we believe in the accelerationist Phillips curve--as long as we believe that full employment also produces inflation outcomes equal to inflation expectations?
Phillips curve? See Bill Mitchell, Questions and Answers 3, Question 2 for a summary of the MMT answer. Bill's definitive treatment is found in Full Employment Abandoned, Part 1.
Professor DeLong is stuck in mainstream thinking and hasn't caught up with the trend yet.
And beowulf cites Lerner's later thinking in a comment to DeLong's post.
So it seems that Professor DeLong understands neither Lerner's mature thinking (MAP, with David Collander) nor the MMT position.
But it's a good question from someone newly becoming acquainted with PKE, Hyman Minsky, and MMT, and one that frequently comes up. So MMT proponents should know how to explain it.
"Brad DeLong — A Comment On A Talk By Warren Mosler..."
15 Comments -
The emphasis on "sustainable debt trajectories" is a problem. If you look at stock-flow consistent modelling, it is fairly difficult to generate an "unsustainable" debt trajectory within the context of a welfare state with floating FX. Sectors with increasing interest income will pay more taxes, and spend out of that income. You end up in a new steady state with faster nominal GDP growth, which acts to stabilise debt/GDP ratios.
August 31, 2013 at 3:33 PM
In which case you haven't hit your inflation target, have you?
Look: it is clear that you can hit full employment and also place your debt on a sustainable trajectory if you are willing to let the price level go wherever it wants. The question is whether you are guaranteed to be able to hit all three targets: employment, prices, and sustainable debt. Lerner thought yes. Lots of other people think no. It is reasonably important to figure out what is driving the disagreement.
Brad DeLong
August 31, 2013 at 4:20 PM
Dr. DeLong,
Thanks for commenting! A writing that relates well to this discussion is John Harvey's "Money Growth Does Not Cause Inflation!" It can be found at the following: http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
August 31, 2013 at 5:13 PM
Brad,
What exactly is "unsustainable debt trajectory" …?
And by extension, why not just target full employment and price stability and allow "debt trajectory" to float as needed? -> MMT -> a Currency Issuer has no solvency constraint.
What am I missing?
August 31, 2013 at 5:17 PM
My point earlier, which I will agree was not too well expressed, is that it is nearly impossible to define an "unsustainable" trajectory in a model that accounts for stock-flow norms. I will assert that you do not see these "unsustainable trajectories" in the real world when you having floating FX. (If you borrow in foreign currency, you can obviously "blow up".)
If I am correct about that assertion, policymakers are free to ignore the debt trajectory, and thus it drops out of the list of 3 target variables that matter. To take an extreme example: even though policymakers may be interested in average monthly temperatures, they cannot really take temperatures into account when setting monetary policy, as they have no means of controlling it.
To not argue by assertion, I would have to write a much longer article. Wynne Godley (plus somebody else?) covered the subject of "debt sustainability", I do not have the citation info right now (sorry).
August 31, 2013 at 5:55 PM
with a permanent 0 rate policy the debt thing is moot even for the out of paradigmers.
so just adjust fiscal for full employment and optimize real standards of living.
and don't forget about the transition job as a superior price anchor than today's unemployment
and 'cost push' inflation is either a relative value shift or some kind of (foreign?) monopolist, so in either case you don't 'fight it' with tight fiscal/unemployment. You either live with it or take micro/supply side measures, like when Carter deregulated nat gas in 1978 that drowned opec in their own oil a few years later and broke that inflation.
www.moslereconomics.com
August 31, 2013 at 6:25 PM
Brad,
I believe Beowulf/Carlos Mucha responded on your site about Lerner's own opinion on the issue, and the importance of a MAP-style policy (i.e. establishing property rights in market-up warrants to facilitate floating prices for individual firms within a system that controls aggregate-level price changes) to prevent a sellers-side inflation shock causing a wage-price spiral. I'd be very curious as to your thoughts on that proposal, as I believe William Vickrey from Columbia was also working a similar proposal before his death 3 days before accepting his Nobel Prize.
But outside of supply-side/sellers side shock situations, isn't the demand-side price-level stabilizing mechanism proposed by Mosler et al the fixed-wage Job Guarantee, which stabilizes the value of the dollar around the average productivity of an hour of average JG labor? This seems feasible to me (replacing gold-seigniorage at the Mint with labor-seigniorage at the local job office), particularly if the type of JG-eligible jobs were focused towards low-capital intensity jobs (i.e. manual labor heavy jobs).
Peter Cooper wrote a good (and short!) post about this, titled "currency value is not formed at the margin", which you might like:
http://heteconomist.com/currency-value-is-not-formed-at-the-margin/
Resp,
Rohan
August 31, 2013 at 6:30 PM
"with a permanent 0 rate policy the debt thing is moot even for the out of paradigmers."
How do you control credit expansion and asset price inflation with a permanent zero rate policy?
August 31, 2013 at 6:55 PM
y,
First, note that japan has had 0 rates for some two decades with no credit expansion problem. In fact, they've tried to create one through 'extraordinary measures' and so far failed.
Second, check out my 1998 paper here:
http://www.moslereconomics.com/mandatory-readings/the-natural-rate-of-interest-is-zero/
Third, what is an 'asset price inflation problem'? Seems asset prices make one time adjustments to changes in interest rates/valuations/multiples/etc. and then pretty much stay there?
Last, positive rates are a gov subsidy, 0 rates neutral, and negative rates are a tax. Which explains why hiking rates to 'fight inflation' generally makes it worse, and rate cuts don't get things going, as per via the interest income channels.
Best
warren
August 31, 2013 at 7:06 PM
overhead accounting cost for denominating public fiat?
"positive rates are a gov subsidy, 0 rates neutral, and negative rates are a tax"
Jeez, Warren, thanks for cutting through the fog of economics once again. Demystifying the ideology seems to be your specialty.
Kudos.
August 31, 2013 at 11:04 PM
JK,
Agreed. To put your point in Keynes’s words: “Look after unemployment and the budget will look after itself”.
I.e. if you look in detail at what lies behind the phrase “sustainable debt trajectory” you just find a load of hogwash.
September 1, 2013 at 5:30 AM
"and 'cost push' inflation is either a relative value shift or some kind of (foreign?) monopolist, so in either case you don't 'fight it' with tight fiscal/unemployment"
Unfortunately people in power, specially in Europe (Frankfurt/Berlin and Brussels) does not with this statement, and their monodimensional thinking is that deflation is the cure of all "evils".
September 1, 2013 at 10:02 AM
This is the paper that addresses Brad's question about debt sustainability. It's the same paper I gave to Larry Summers in April, when he asked me to send him 40 pages on MMT. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986
September 1, 2013 at 11:22 AM
This comment has been removed by the author.
September 1, 2013 at 4:41 PM
Jose Guilherme said...
same paper I gave to Larry Summers in April, when he asked me to send him 40 pages on MMT - Stephanie Kelton
It's great to have the guy who could well become the next Fed Chairman showing a keen interest on MMT. At a minimum that proves he's an open minded person, a rare yet invaluable characteristic these days.
MMT provides a correct description of how the system works. It demonstrates with the required theoretical rigour that the USA can never run out of money - and once this is recognized by TPTB the country will be able to realize its full potential.
That will mean a stronger, faster growing economy and likely full employment.
And also - alas - more capacity to practice hegemony abroad.
Who knows - perhaps a Summers-led, MMT-adopting Fed will provide the proverbial extra mile in the race to guarantee that the 21st century will indeed be an American one.
September 1, 2013 at 4:46 PM