In my paper ‘Confidence Crashes and Animal Spirits’ I provide an internally coherent theory that explains why involuntary unemployment exists. In a recent X exchange, I have engaged with proponents of Modern Monetary Theory. Here is my attempt to make sense of a paper Soft Currency Economics by one of the founders of MMT: Warren Mosler.
The following is an expansion of what I said in a recent X post. The paper has four main claims:
Mainstream economists get the mechanics of monetary-debt management wrong.
To explain government debt it provides a household analogy of a parent distributing ‘business cards’.
Savings and investment are equilibrated by income – not by interest rates.
Full employment can and should be maintained by a government employment scheme.
On Topic 1: We are largely in agreement: – although mainstream economists are not as naïve as you intimate. However, the mechanics of money management you describe have not been in place since April of 2008 when the Fed began to pay interest on reserves. Since that date, reserves and T-bills have become very close substitutes.
You say that debt IS money. I agree that debt and money are essentially the same object. And since April of 2008, it’s not a bad approximation to say that its ‘as if’ interest bearing money now functions as a medium of exchange. But note that mainstream macroeconomics have dropped money entirely form their theoretical models and instead, they model monetary policy as the choice of an interest rate rule.
In modern mainstream models, the mechanics of how the Fed Funds rate is set, does not influence output, employment, GDP, consumption, capital or investment. I don’t see any problem with that. I would guess that you probably do. But since you have not articulated a complete model in which the channels by which money (as opposed to spending) affect the economy are fully spelled out, I cannot know if that proposition is central to your claims. You appear to be assuming Ricardian equivalence + money=debt.
On Topic 2: Your household analogy is profoundly misleading. Birth and death matters and the consequences of excessive debt/money finance ARE borne by future generations. It’s ironic that you use the household analogy in your article since one of the main critiques of the representative agent (RA) model is that governments do NOT face the same constraints as households. In that model it doesn’t matter whether government purchases are funded by debt or taxes; the representative agent recognizes that government will need to tax at some date in the future. (Thats Ricardian equivalence). This is profoundly wrong and, IMO, it’s not even a good approximation.
Neoclassical macroeconomists have long used a second model – the overlapping generations OLG model – that captures the idea that debt is a burden on future generations. That model, correctly in my view, asserts that there is a limit to debt financing. The OLG model can be, and has been, incorporated into mainstream modeling although not as much as it should be. One of its main defenders is Larry Kotlikoff who participated in the panel discussion that I organized on MMT and that you participated in.
On Topic 3: This is a restatement of the Hicks-Hansen interpretation of the General Theory. What that interpretation lacked was an explanation of the concept of involuntary unemployment that was consistent with mainstream microeconomics. This is the problem that Patinkin struggled with in Money Interest and Prices. You make no attempt to address that issue yet you use the concept of ‘full employment’ as if it were observable and you assert that it it should be a goal of policy. In a section entitled: “How the Government Spends and Borrows As Much As It Does Without Causing Hyperinflation” you provide a textbook interpretation of Keynes but you fail to grapple with any of the conundrums raised by that interpretation and that economists have been struggling with for ninety years.
If you are to make policy pronouncements, as you do, it is important that you document the full implications of your ideas. What determines the price level? What is meant by full employment and how would I know it if I see it? What determines the rate of inflation. What is the dynamic path by which the economy adjusts following a change in the Fed Funds rate? The New Keynesians have at least tried to answer these questions – although I believe that their answers are wrong. But to explain WHY they are wrong it is important to propose a complete alternative theory. “Soft Currency Economics” does not do that. I have done that in my own work. See, for example, Prosperity for All, Oxford University Press 2017.
In Topic 4 you propose that government provide jobs for the unemployed. You have a great deal more trust in the ability of government to solve a problem than I do. Stephen Moore misattributes the following quote to Milton Friedman, (although it is likely much older)
“At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.”
In my book ‘Prosperity for All’ I argue for the design of an institution, similar to the Fed, that manages the value of an index fund. That idea is backed up by empirical work which shows that animal spirits, manifested in the stock market, cause recessions.
I have a lot of sympathy for the idea that sometimes there may be — what Keynes called — involuntary unemployment. This paper did not add to my understanding. The bottom line: Soft Currency Economics is a restatement of some ideas from Keynes’ General Theory. It adds little, or nothing to the policy debate. What is right in the paper is not new. What is new in the paper is not right.
