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August 11 - October 16, 2019
Maximization of a current account surplus imposes net real costs (given the caveats discussed above). Instead, it is best to pursue full employment at home, and let the current account and budget balances adjust. That is far better than the usual strategy, which is to pursue a trade surplus in order to get to full employment.
Pick employment not surplus
In the absence of true full employment, the actual minimum wage is always zero – because those who cannot find work cannot get the legislated minimum wage.
Minimum wage
A related argument concerns the exchange rate: if jobs are created that provide income to the poor, consumption will rise, including purchases of imports. This will worsen the trade deficit, depreciate the currency, and possibly lead to accelerating inflation through an exchange rate “pass through” effect (import prices rise as the currency depreciates, adding to inflation of the price level of the domestic consumer basket).
Interesting.rise of import when payrise
In other words, unemployment and poverty are viewed as the cost of maintaining not only low inflation, but also the value of the currency. (This is related to the “Phillips Curve” argument: we need lots of unemployed people to keep wages and inflation in check.)
Wow.unemployment and poverty.Low inflation and level of currency
To be clear, we would prefer implementation of a universal JG/ELR program that pays a living wage. But for practical reasons it might be necessary to start with something less and work toward that goal. In formulating a program, country-specific conditions must be taken into account,
Main
While our economy is often referred to as “market-driven”, it is actually driven by power.
Market driven power driven
With each recovery from a downturn, the rich capture a larger share of the subsequent growth. She has shown that no matter how you slice up the rich at the top of the income distribution – the top 10 percent, the top 1 percent, or the top few tenths of a percent of the top 1 percent, their share of the spoils from growth has increased in each subsequent recovery.
The Top percent. Wow
As Hyman Minsky argued back in the 1960s, if you want to reduce poverty you must include job creation as a central component of your War on Poverty. He (correctly) predicted that the Kennedy-Johnson War on Poverty would fail because it did not contain such a program. Further, he argued that once you’ve provided jobs to all who want to work, you need to gradually shift the distribution of income toward the bottom. You do that by holding down income growth at the top while gradually increasing pay at the bottom.
Reduce proverty
In terms of domestic policy options, the sovereign floating rate currency regime makes it possible to pursue full employment policy, for example through a direct job creation program. Even in the case of the developing country, however, a sovereign currency allows government to buy anything for sale in the domestic currency, including all unemployed labor. The program can be designed so as to minimize inflation pressure, but we do admit that excessive government spending can be inflationary.
Main
The other issue is the exchange rate, and a possible outcome of full employment is that imports might rise and put pressure on the exchange rate. Again, we conclude that some combination of floating exchange rate and/or capital controls usually will be required to resolve the “trilemma” problem: if government wants policy space for domestic programs, it needs to float the currency and/or to control capital flows.
Main
It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax. The private sector alone will never provide (never has provided) full employment on a continuous basis. JG/ELR is a logical and historical necessity to support the private sector. It is a complement to, not a substitute for, private sector employment.
Main
Think of it this way: inflation is the cost of preserving culture.
Main
To keep pace with productivity growth in manufacturing, each kindergarten teacher today would have to have hundreds of five-year-olds crowded into every classroom. It didn’t happen. (Well, with state and local government budget cuts, it still might!) To preserve “inefficiency” in the kindergarten classroom, we need inflation.
Good inflation
Keynes said that no one would hold money as a store of value in the absence of uncertainty. Holding wealth in a highly liquid form like money makes sense only if you are uncertain, and even scared, about the future. In a financial crisis, everyone runs to cash. It gives a very low return, but that is better than a huge loss!
Uncertainty and cash
we cannot predict commodities prices over the next century; prices could trend up. Further, over the past decade commodities markets have come to be dominated by speculative traders, leading to the biggest speculative bubble in human history. And that, itself, could help to fuel inflation since commodities go into production processes.
Traders and inflation
some inflation is probably a good thing. Keynes argued it helps to encourage investment, by increasing nominal returns and making it easier to service debt.
Inflation and investment encourage and service debt
hyperinflation is the Monetarist quantity theory of money: government prints up too much, causing prices to rise. Worse, as prices rise, the velocity of circulation increases; no one wants to hold onto currency very long as its purchasing power falls rapidly. Wages are demanded daily, so as to spend income each day because tomorrow it will purchase less.
Hyperinflation and spending
if prices rise so much faster than the money supply, how can we conclude that the hyperinflation is caused by “too much money chasing too few goods”? To fit the facts of experience, the quantity theory was revised to say that in a high inflation environment, the old quantity theory presumption that velocity is stable (which is necessary to maintain a link between money and prices) no longer holds.
Hyperinflation
with the revised quantity theory, we can still claim that high and even hyperinflationary inflation result from too much money even though velocity is not stable (it rises as money growth lags behind inflation), and as Monetarists claim that government controls the money supply, hyperinflation must be due to government policy. Add to that the observation that in hyperinflation periods, the supply of government currency (paper notes) rises rapidly (with extra zeroes added).
coins usually circulated far above metallic value, at a nominal value proclaimed by the sovereign (this is termed “nominalism”; the sovereign set the nominal value through proclamation, just like today’s pennies that are worth a cent), and their value was not necessarily stable: governments devalued them by “crying down the coin” (announcing they’d be accepted at half the former value in payments to government). They also “debased” them by reducing metallic content, which did not necessarily change their nominal value at all. To be sure, there are cases of relatively stable coinage and prices
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Coin aand value
countries went on and off gold. When a crisis hit, they’d abandon gold. With recovery, they would go back on until the gold constraints forced them to go off when the economy crashed again. Rather than contributing to monetary stability, the gold standard destabilized the economy.
How gold treated
The point is that tying to gold or a foreign currency might successfully reduce inflation, but it constrains growth, and it is hard to get off the fixed exchange rate standard when stimulus is needed, except through a crisis.
Hard to get off except crisis
However, on a fixed exchange rate, or gold standard, or currency board, central bank and Treasury IOUs have to be converted to foreign currency (or gold), and for that reason a prudent government must limit its keystrokes. It can run out of foreign currency or gold.
Quite curious, isn’t it? Only countries with fixed exchange rates or other promises to deliver foreign currency or gold (such as debts in foreign currencies) seem to have hyperinflations and currency crises.
Fixed exchange rate and hyperinflation
it is not true that floating rate standards invariably lead to hyperinflations. If that were true, we’d have hyperinflation all the time. And it is not true that the ability to “print money” through keystrokes necessarily leads to hyperinflations. All sovereign governments that issue their own currency spend by keystrokes. Even if they promise to convert at a fixed exchange rate, they still spend by keystrokes. If keystrokes invariably cause hyperinflation, we’d have hyperinflation all the time. We don’t. Hyperinflations are unusual outcomes.
Main.hyperinflation
budget deficits grew rapidly from the high inflation that became hyperinflation as tax revenue could not keep pace with rising prices. Finally in 1924 Germany adopted a new currency, and while it was not legal tender, it was designated acceptable for tax payment. The hyperinflation ended. To say that Weimar’s hyperinflation simply resulted from government “printing money” is obviously far too simple.
Hyperinflation ended with new currency
Here is a country that was going through tremendous social and political upheaval, with unemployment reaching 80 percent of the workforce and a GDP that had fallen by 40 percent. This followed controversial land reform that subdivided farms and led to the collapse of food production. Government had to rely on food imports and IMF lending – another case of external debts. With food scarcity and government and the private sector competing for a much reduced supply, prices were pushed up.
Zimbabwe hyperinflation
There are probably multiple paths to hyperinflation, but there are common problems: social and political upheaval; civil war; collapse of productive capacity (that could be due to war); weak government; and foreign debt denominated in external currency or gold.
Possible paths
to tackle a problem of high inflation, policymakers should try to reduce indexing, stabilize production, reduce demand relative to supply, and quell social unrest. When high inflation has persisted for some time, it also helps to adopt a new currency and to default on external debts.
Tackle
There has been a debate about the inclusion of the JG/ELR proposal in the MMT approach. Some argue that MMT ought to remain purely descriptive, stripped of any policy recommendations. Others have argued that the JG/ELR program has been part of MMT from the very beginning.
Main. Job guarantee program
the income of the worker is the most important source of the demand for final output of consumer goods. So operating the economy at full employment and with a relatively stable wage in our buffer stock jobs program will help to stabilize not only consumption spending and household income, but it also helps to stabilize wages and therefore prices.
Income and economy
functional finance approach that argues that government should use its budget to achieve what it perceives to be in the public purpose. Importantly, government should promote full employment with price stability. We analyzed in depth one program that could be used to achieve that goal: the job guarantee or employer of last resort program.
Main
MMT has argued from the very beginning, the set-up of the EMU was fatally flawed.2 At the very least, monetary integration “put the cart before the horse” – adopting the Euro before the EMU area achieved fiscal integration under a fiscal authority with sufficient sovereignty to protect the member nations.
EU flawed monetary system
When individual nations like Greece or Italy joined the EMU, they adopted a “foreign” currency – the Euro – but retained responsibility for their nation’s fiscal policy.
eu
while the whole idea behind unification was to prevent un-neighborly behavior that had led to two World Wars within Europe, the construction of the EMU was guaranteed to promote it. The EMU rewarded self-interested behavior by any member willing to pursue it, and Germany reaped most of the rewards.
Eu . Emu
The EMU can be saved. But saving it will require that the ECB do something that goes against its DNA. The EMU was set up with its restrictions precisely to ensure that there would never be a rescue by the ECB. The separation of Euro-wide monetary policy (interest rate setting) from fiscal finances was to be inviolable.
Save the eu
The traditional view is that the solution to rotten economic growth is to stimulate investment spending. If you are a Keynesian, that raises Aggregate Demand through the multiplier, increasing employment and growth. If you are a neoclassical economist, more investment means more productive capacity, increasing Aggregate Supply and directly raising economic growth.
Keynesian and neoclassical
How do you stimulate investment? Well, both sides agree that tax cuts to business will do it, but if your government is broke, you cannot use fiscal policy. To avoid the nastiness of deficits, you can just use Monetary policy: lower interest rates to stimulate investment. But the Fed has now been running rates at just about zero for well over half a decade; Japan has been doing it for over two decades. There’s still virtually no investment, rotten growth, few jobs created, and relative stagnation. It doesn’t work.
Lower interest rate doesnt stimulate investment
In any event, lower interest rates do not necessarily induce investment. Why not? Here’s Keynes’s answer: firms produce what they think they can sell, and unless they think their sales will be higher through a long series of tomorrows they are not going to increase productive capacity by investing. Tax cuts will not get them to invest more, unless there is some magic fairy dust that makes them believe tax cuts will increase sales into the long distant future.
Lower interest
more investment cannot be a solution to insufficient demand – raising investment would increase aggregate supply (capacity) by more than it would increase aggregate demand (through the multiplier).
Demand is the key
The problems are slow growth and jobless growth. Even if we could get GDP growth up a notch or two, that would not create enough jobs, and for the reasons discussed above, there’s nothing to sustain GDP growth at the 4 to 6 percent rate that would be sufficient to create investment opportunities to act on the supply side and consumption spending to act on the demand side.
Create jobs not GDP
The recipe for restoring prosperity is to create jobs and raise wages at the bottom so that sales to consumers will grow.
Job guarantee
China will eventually be in a position where floating would not only be desired, but would become necessary. China will become too wealthy, too developed, to avoid floating. She will stop net accumulating foreign currency reserves, and will probably begin to run current account deficits. She will gradually relax capital controls. She might never go full-bore Western-style “free market”, but she will find it to her advantage to float in order to preserve domestic policy space. If she did not, she could look forward to a quasi-colonial status, subordinate to the reserve currency issuer. China
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China
Full employment of domestic resources is even more important for the developing nation than it is for the rich, developed nation, and yet what we find is precisely the reverse: unemployment is much higher in the developing nation because the government thinks it cannot afford to offer jobs.
Developing countries have lower employment coz the gov think they cant afford
We need a new meme for money. The meme cannot begin from markets, from free exchange, from individual choice. We need a social metaphor, a public interest alternative to the private maximization calculus. We need to focus on the positive role played by government and its use of money to serve us well.
New meme
