Many months ago, we engaged in a discussion with one of our listeners, Nathan Tankus, on the subject of MMT and Chartalism. This is for us a difficult think, so Nathan gave us a hand with the following piece. It is still difficult for us, although you can see the evidence in support in recent history. Following the short piece is a back-and-forth, which we may reopen sometime soon.
But we need to get this out. Along with our second apology to Nathan
Chartalism has five main principles.
- The size of the government balance (government spending - government taxation) by itself, whether positive or negative, tells us nothing about whether effective demand is too high or too low.
- It is impossible for a nation to go bankrupt when it's liabilities are denominated in a currency it can print and it's exchange rate is floating.
- The government always spends by sending money to bank accounts; the sale and purchase of treasury bonds by government is used to control interest rates and is a holdover from the gold standard.
- People start to demand a particular asset when they need it to eliminate a liability (whether it's a tax, loan, tithe, fine or even racket money. I personally think that the state theory of money should be renamed the coercive theory of money).
- The only limit to a government deficit is increases in the inflation rate (I'm dynamicizing the explanation more then simple chartalist monographs do), not borrowing or tax revenue.
These principles imply that what should be considered by government policy when considering stimulating or shrinking demand is change in the rate of inflation, change in the rate of capacity utilization and the change in the rate of unemployment (measuring both against current capacity utilization and unemployment) . When employment (of capital and labor) is falling at a high rate, stimulating demand a certain level tends to slow the growth in unemployment, possibly turning it negative, while tending to having less impact on change in the rate of inflation (since producing more output will tend to decrease average costs at low levels of capacity utilization and increase profits more then increasing prices and keeping output production constant or falling further would). When unemployment is falling at a low rate and capacity utilization and inflation are growing at a low rate, stimulating demand will tend to increase the rate of growth of employment (again, of capital and labor) and increase the inflation rate to a lesser degree. because of this, Chartalists tend to support demand policies that reduce average private sector costs, raise productivity, increase the labor force and target increasing demand for labor (to full employment) above all else (which as you point out in one of your podcasts, will increase productivity further) so that increases in the rate of change of average prices (whether positive or negative) can be kept low.
Chartalists also think that government budgetary policies raise certain prices much more sharply then otherwise by purchasing x dollars-worth of private goods rather then x amount of a certain good at a certain price (in other words by using a quantity and not a price rule). This principle is the logic behind a job guarantee. Under a job guarantee, the government offers to purchase any labor offered at a certain set price (what would effectively become the minimum wage). The private sector can hire workers out of the job guarantee program simply by offering a slightly higher wage (and the worker accepting it). This adjustment means that government demand for unskilled labor falls by exactly the amount private sector demand rises for labor. in this way the nominal price of unskilled labor is anchored, which has a profoundly stabilizing effect on labor costs (the wage rate of those in the job guarantee will have to be periodically increased to keep labor costs stable and prevent deflation).
Chartalists also tend to be Minskyans, but since those ideas are not uniquely chartalist (and are shared with the demand side podcast/blog) i will not discuss them here. Ok, on to your responses
“Nathan: First, paying down private debt should be government policy (more specifically, reducing the ratio between debt and after-tax income).
Alan: Agreed. But that should be done by writing down the debt, destroying the bad loans, as a nod to historical practice and to generate a little bit of market discipline. Steve Keen estimated that excess private debt in the U.S. (including financial debt) amounts to about 125% of GDP. That's $17 trillion, more or less, in today's numbers. The chances of paying that down in any reasonable amount of time is negligible.”
Nathan:For the most part we don't disagree, however I think your comment has a bit of a false dichotomy. Principal and interest write downs are not currently being contemplated. A payroll tax holiday however, has positive rhetorical value on both sides of the political spectrum (reducing taxes considerably for the right and increasing worker's income plus making the tax code more progressive for the left) that if pushed would be difficult to resist. Under these circumstances a payroll tax holiday would be much better then no debt reduction policy at all.
“Alan: The first part of this is exactly my argument for jobs rather than payroll tax reductions. A job, say $25,000 plus benefits, creates a full spectrum of spending, from rents to groceries to durables to gasoline. A payroll tax holiday goes to somebody who already has a job and will likely not make changes to his spending on a large part of that spectrum. The marginal propensity to spend, you say, would be higher. I say it would be saved or used for debt reduction. In the main, of course. Taxes, of course, and particularly payroll taxes are direct transfers to another's income. The larger the payroll tax cut, the more would go to consumer spending? Maybe. This is a flat tax reduction. The more you make the more reduction you get, and we know that the propensity to save goes up with income.
A secondary effect of jobs is inflation. Job programs would by necessity go to public goods and services. The private sector would likely choke any Congressman who allowed jobs to be used to produce consumer goods. These public goods and services ought to be considered investment goods. As Minsky and Kalecki have shown, it is the proportion of the workforce employed in the investment goods sector that determines true inflation, a general price rise. Now I would say that if all that money the Fed is protecting in the financial sector got a whiff of inflation or the prospect of profit, then there could be the much-feared uncontrolled situation. But if that money is properly destroyed, then we have the Minsky starting point, where capitalists are chary about lending, and it is lending that creates money (in the current framework).”
Nathan: I don't think I was very clear. Let me try again. I don't think that the forms of stimulus with the highest multipliers are the best way to increase demand. In fact, I think picking the forms of stimulus that have the lowest multipliers but also work to reduce average private costs the most is the best policy. Those policies bring us closer to an equitable distribution of wealth and an optimal, more stable economy. A payroll tax [holiday?] reduces labor costs and the cost-of-living considerably and will help repair the net worth of households. From here it is easy to make the point that you have let Minsky's simplifying assumptions carry you astray. Minsky assumes constant labor costs and no other costs in his Kaleckian algebra within Stabilizing an Unstable Economy. This is obviously an unreasonable assumption, especially around a policy such as a payroll tax holiday. Public goods and services don't need to be sold as commodities to reduce inflation, they just need to reduce production costs, labor costs and transportation costs. Tax policy aimed at reducing the share of consumers that are rentiers and unproductive workers and the share of income that comes from capital gains (including unrealized capital gains in the measurement of income) will leave more room for wages to rise without inflation.
Your political argument is the best argument I think you have. Still, I have a few points. progressive policies won't be instituted without popular pressure (I have a paper I’m working on now that argues Minskyan thought, taken to it's conclusions, implies organized direct action is the only way to create a prosperous and relatively stable capitalist system. To be even more heretical I named it “Why capitalism needs anarchists”). During times of organized social movements people tend to become motivated and able to process a lot of complicated information in order to produce coherent and rational demands on government and industry. There is a reason that Martin Luther king and every other major civil rights leader and group forcefully supported a job guarantee of one sort or another (see this article written by a more race and environment oriented chartalist professor at UMKC: http://www.njfac.org/King-jobs.htm). It is because their constituents gained a deep understanding of the problems facing their communities and designed strategies to combat them at the local, state and federal level. The economic, social and political thought of the civil rights movement helped shape their leader's thought and those leaders had less choice then other political representatives in holding unpopular positions. I think you may be surprised by the intellectual strength of an organized social movement.