He begins by implying that the comments didn’t persuade him that MMT is any different than the Keynesian Theory he learned 30 years ago, There were, however, many good comments from people who are fairly knowledgeable about MMT, and pointed to many distinctions between MMT and Keynesianism. Since he says he wasn’t persuaded by them, but doesn’t engage them directly in this second post, my first reaction to itt is to conjecture that he’s not open to recognizing that MMT is different, but has a vested interest in saying that there is nothing new there. If he were really open to changing his view, then I think he would have directly exchanged with the MMT commenters to see if they had answers to his specific criticisms of their replies. Instead he just went on to provide a discussion of MMT vs. his own views in a framework of his own choosing that doesn’t engage MMT basics.
In his first post he recognizes that in Keynes:
“. . . . there were three channels to raise the economy back towards its potential:
1.Government spending and tax cuts;
2.Expansionary monetary policy; and
3.Devaluing the dollar to increase net exports.
and then adds:
”. . . a fourth channel that can move the economy to full employment by reducing the average workweek or work year: work sharing.”
Dean says that MMT economists advocate focusing on the first channel and “disparage” using the other two, while not recognizing the fourth at all. Dean goes on to discuss his views compared to what he thinks is the MMT position on the “four” channels beginning with the monetary channel.
Like MMT Says: Monetary Policy Would Be Ineffective
He replies to criticisms saying that the monetary policy channel would be ineffective in creating recovery by saying that he was only claiming that the Fed can do more than it has so far done, and not that monetary policy could produce full employment. He offers a number of arguments and measures the Fed could take. I won’t go into the details here, but the bottom line seems to be that he thinks the Fed could add $20 Billion to aggregate demand mostly through mortgage refinancing arrangements.
My own bottom line is that what he outlines might work, but only proves the MMT point that monetary policy can do very little to help solve our present economic problems. We have about a 28 million person U6 employment problem, which could take as much as $1.2 Trillion in carefully formulated deficit spending. So, adding $20 Billion in aggregate demand to the economy makes very little contribution compared to the scale of the problem. It’s the proverbial drop in the bucket and justifies the lack of emphasis MMT places on this channel. In short, just as MMT says, Monetary Policy would be ineffective, taking into account the scale of the problem. Using it should at best be an afterthought.
Dean says further:
”I can see no reason why we would not want the Fed to push the monetary channel as far as possible. There is no obvious downside and considerable potential benefit.”
From the MMT point of view, there is a downside to emphasizing monetary policy. That is, it’s a blunt instrument, with a very small impact, which isn’t targeted on effective demand, and one result of it is to pay much more in interest to bond holders than would otherwise be the case. Many MMT writers believe that such interest is unnecessary and represents risk-free welfare to wealthy investors and foreign nations. The interest paid doesn’t deprive the Government of money, because there is no solvency consideration, given MMT assumptions. However, the distribution of wealth is more unequal than it’s been in a very long time, and since there’s no need to issue bonds and pay interest, and exacerbate this inequality, why continue the practice of welfare for the rich?
Expanding US Exports at the Expense of Decreasing Real Wealth?
Dean next goes back to the idea that a more expansionary (higher interest) monetary policy would lead to a decline in the value of the dollar and that would carry the further benefit of expanding US exports. But I think this chain of causation is very questionable. Why would the Chinese, Japanese, Eurozone and Oil trading partners allow us to depreciate the dollar so we could import relatively less from them. and export more of our own products? For years, their policies have been diametrically opposed to this. So why would they back off in the face of a more expansionary monetary policy by the Fed?
Dean says he doesn’t understand the MMT objections to devaluing the dollar in order to balance trade better and says specifically:
”Certainly the United States can run large trade deficits for periods of time, but this does have real consequences. If we assume that other countries will not subsidize our consumption indefinitely, then we will at some point have to adjust to a world in which we have some semblance of balanced trade.
I don’t see how we can think that going from large deficits (e.g. the 6 percent of GDP we ran in 2006) to balanced trade can be painless. Industries do not just spring up overnight. The process of adjustment will inevitably mean some inflation and reduction in living standards, as the goods that we used to get cheaply from abroad will be replaced by higher priced domestically produced goods.”
Well, try this Dean. The MMT argument is that as long as other nations are willing to send us more real wealth in return for dollars, than we send them, then that is a net benefit for American consumers. Certainly, our willingness to accommodate their desire to exchange exports for dollars has caused real damage to US industries, and the erosion of skills and capabilities among workers and has also cost the jobs of Americans.
All these are big negatives. But they exist, in large part because our self-destructive theories about our economy and the role of fiscal policy stand in the way of using the Government’s fiscal power to enable full employment on all manner of projects that would help us rebuild our nation, its skills, its educational system, its energy foundations, its environment, its infrastructure, its health care system, and also to help us act collectively solve the other problems that beset us.
In other words, the big negatives that are related to our positive current account balance with the rest of the world (colloquially known as our trade deficit) are costs that we don’t have to bear, according to MMT, to get the benefits of imports. We could employ Americans fully, our people could be developing new skills and experiences, our wealth in facilities and social conditions we all share could be vastly increased, if the Government used its capability to help us fulfill the opportunities the current account balances give us to turn to other things that badly need doing, rather than making televisions, toys, clothes, and all the other things we no longer make. MMT says that the Government’s deficit will equal private sector savings plus the current account balance. So, if both are high that makes room for large Government deficits, and, in fact, actually demands them, since if we try to reduce them the end result will be less real wealth coming from imports and less nominal wealth accumulated from savings.
As for the idea that the current situation is temporary and that the day will come when the current account balance is smaller or even negative so that we export more than we import, MMT certainly recognizes that sooner or later that will happen. But MMT economists don’t think that kind of change will happen overnight or will necessarily be a really painful adjustment. Why should it be?
Our trading partners have vested interests in exporting to us. They also have large holdings of nominal wealth denominated in USD. They won’t want to see that wealth devalued suddenly. They will continue to prop up the dollar, and will gradually adjust the trade balance situation.
That adjustment will involve their consuming more of their own real wealth. It will result in our own businesses becoming more competitive with their goods and services on offer here, and abroad, so it will drive up production here and create more private sector jobs here, which is what would happen anyway if we followed deliberate policies at this point to devalue our currency to decrease imports and make our exports more attractive.
Summing up, there are advantages in our having a positive account balance that’s very large and there are other advantages in having one that’s smaller or negative. I think the position of MMT is let’s enjoy other nations sending us real wealth in return for electronic credits for as long as this situation lasts, and let’s make good use of the opportunities it gives up to do all the things we need to do to solve problems here at home. And when the world turns and other nations want to consume more of their real wealth and send less to us, then let us vigorously respond by shifting our capabilities to producing real goods and services that we need and want to have available to us domestically. Everything should all work out well in the end, as long as don’t, in either trade situation, waste the lives of our own human beings who want to live rewarding lives through work and attachments to their families, communities, and America itself, by keeping them unemployed, barefoot, anxious, and servile so that a very few people can continue to enjoy domination over the economic and political system we share.
I’ll continue my critical review of Dean’e second post in twi more upcoming installments.
(Cross-posted from Correntewire.com