Comments on Interfluidity

Steve Waldman's been trying to get his head around MMT. Here are his criticisms of it. My response is below.

While the flow of net private sector financial assets does strike me as an important and powerful tool for macroeconomic policy, it is not a uniquely effective tool. Changes in the relative price of financial assets (the object of conventional monetary policy) and in the distribution of financial assets can also powerfully affect behavior, and there are costs and benefits associated with each lever. What is the justification for focusing almost exclusively on managing the level of “net financial assets”?

This is the weakest of Steve's points, and reflect the fact he's in a PhD program and a Progressive. What evidence is there that changes in the relative price of financial assets is much influenced by the Fed, regardless of what it's "objectives" are? And, even if these relative prices are influenced by the Fed, what evidence is there that they are a potent macroeconomic tool. Does Japan not exist? Aren't we in the Year 2011? Does reality never get a chance at bat in the ivory tower?

I'll disregard the distribution question for obvious reasons.

It is unassailable true that a government cannot be forced into insolvency for want of capacity to pay in its own currency. But a government might find itself politically or institutionally unable to meet an obligation despite access to the printing press, and there might be a sharp run on government obligations even without the focal point of formal insolvency that usually occasions private sector runs. It strikes me as an open question the degree to which protection from formal insolvency protects government obligations from disruptive races to redeem. Point #7 below strikes me as stronger protection.

A government can always choose not to make an obligation, and indeed, Russia made this very choice in 1998. What protects a government from disruptive races to redeem is its ability to tax.

MMT-ers are right, I think, to argue that, for fiat-money issuers who borrow in their own currency, conventional government solvency criteria are false. They are right to argue that such governments have a great deal more latitude to issue money and debt than conventional theories suggest. But that shouldn’t be taken as license to defend carelessness in the distribution of new claims, or to treat expansions of money or debt as entirely cost-free. To be fair, this is a bit of a straw man.

To be accurate, this is entirely a straw man. Again, Japan? Reality? Tinkerbell? The difference between a dependent and independent variable?

So, I’ll to acknowledge TC’s objection as important and potentially valid, but defend my positing of an MMT “solvency” constraint, at least with scare quotes in place. I don’t think it’s reasonable for MMT-ers or anybody else to write off the possibility of sharp and unexpected changes in the value of a fiat currency. The possibility is dangerous enough that it should focus the mind in a precautionary way. If MMT policy advice is to be taken seriously, it must offer a some assurance of safety against that scenario. The absence of formal default hazard provides some assurance, but without Point #7 as a backstop, not enough.

It's called sensibly designed fiscal policy with good automatic stabalizers. Oh yeah, and an academic class who knows an asset from a liability, a stock from a flow, and a bit from an atom. A lot to ask, for certain.

On the one hand, I consider this point is one of MMT’s deepest insights, and its secret weapon. So long as a government’s taxing power is strong, so long as it is capable of persuading individuals to surrender highly valued real goods and services for the ability to escape liabilities imposed by fiat, exercise of that taxing power creates a floor beneath which the value of a currency, in real goods and services, cannot fall.

However, relying too overtly on taxation to give value to a currency strikes me as dangerous and potentially counterproductive. A government’s taxing power is limited and socially costly. Governments must maintain a patina of legitimacy so that people pay taxes “voluntarily” or else they must intrusively or even brutally force compliance. In a decent society, it’s perfectly possible that governments will find it politically impossible to tax at the level consistent with price stability goals.

Here, Steve's Progressive instincts cloud the remainder of his mind. The US is certainly a decent society. But I don't pay my taxes voluntarily and neither does anyone I know. If taxes were voluntary, I wouldn't pay them. Maybe Steve can share how much extra tax he gave in 2011 (since it's 4/22, the 1040 should still be fresh in his mind)?

A Government that cannot tax is no longer a government. When a government dissolves, then its fiat currency dissolves as well. This is called "hyperinflation" and it has nothing to do with a government's "solvency" and everything to do with its existence.

I think this is true, a deep and powerful way to think about public finance. Note that a government’s “political capacity to levy and and enforce payment of taxes” depends first and foremost on the quality of the real economy it superintends. The value that a government is capable of taxing if necessary to sustain the value of its obligations increases with the value produced overall.

Again, Steve's Progressive instincts cloud what remains of his judgement. A government's capacity to impose taxes has nothing to do with the quality of the real economy it oversees and everything to do with its sovereign power. The King of some remote village will be able to collect goats in tribute so long as he is the True King. etc. A soverign who oversees a more productive economy will certainly get a richer vig, but what does that have to do with anything?

The internet is a fractious place. Many MMT-ers are civil and patient, and devote enormous energy to carefully and respectfully explaining their views. There’s no way to police other peoples’ manners. Still, even by the standards of the blogosphere, MMT-ers have a reputation as an unusually prickly bunch. That might not be helpful in terms of gaining broader acceptance of the ideas.

What crap. It's like the Pope saying to Gallileo, "if you were only nicer about this whole earth revolving around the sun the Church would listen to you more". MMT is rejected because it is heretical.