Cullen Roche, along with TC and Beowulf, have a new initiative, to flesh out a quasi-MMT economic paradigm, and will likely start website dedicated to it. This paradigm seeks to incorporate all, if not most, MMT insights on monetary and banking operations into its thinking while doing away with the controversial JG component of MMT. They call this new MMT offshoot Monetary Realism, or MR. This sounds like a promising initiative, one that could only be good for both those who want to preserve market-based adjustments in the functioning of the macroeconomy, while seeking to spread the insights of sectoral balances approach in both private and public decision-making and policy-making; and for the main proponents of MMT. After all, If MMT proponents are correct, that better understanding and functioning according to the real world monetary reality will eventually lead us to accept the JG, then this is also helpful to MMT.
Cullen starts off some of their basic principles, at least as to how it would distinguish itself with mainstream MMT:
1. We side with Godley on the current account issue.
2. We view the state theory and the “taxes drive money” idea as incomplete.
3. We will focus more on productivity as a compliment to consumption as opposed to mainly looking at ways to increase aggregate demand.
4. We reject the JG as a central component of understanding the modern monetary system.
MR will focus on monetary and banking realities and operations, and focus less on the macroeconomy, to be clean in its analysis. For the mainstream MMT, meanwhile, I suggest it approach economic analysis with a clearer view of how specific policy proposals would affect grassroots-based businesses. It needs to start looking at the economy as comprised not just of large private sector institutions, but also of many small mom-and-pop size businesses. Consideration for small businesses and their concerns is something that is currently still weak in the current evolution of MMT(as I see it). For example how does government tweak its tax policy and deficit spending in a way that does not kill off a significant part of what makes a dynamic economy. To wit:
1. If inflation starts heating up, mainstream MMT with a 100% JG proposes to manage it by increasing taxes and decreasing spending. The goal would be to decrease private employment and bring a segment of workers back to the public JG. What types of taxes would be increased? Taxes of whom? For doing what activities? Will the higher tax burden be rolled out the same across the board, or segmented and differentiated, depending on size of business? I ask because, while increased taxes could affect large businesses the way MMT economists intend - by decreasing their employee rolls, it will entirely kill off the smallest businesses whose profits are now below the higher income threshold caused by higher taxes, and whose sales may now fall below break-even with the decreased government spending.
2. Will this tax be rolled out by sector, by geographic location, by nature of business activity? Would it take into consideration a business' place in the value chain? Or how many JG-skill level employees it has?
3. How would this economy-wide aggregate demand management account for small business who occasionally need to borrow funds? This type of system will likely discourage banks from extending any medium or long term loans to the smallest businesses who could easily be killed by a ramping up of JG and increase of taxes. Does MMT propose to take the banks' place, or do these smallest businesses become casualties in the name of greater employment and price stability?
4. Also, those businesses most highly affected by those occasions when government increases the JG sector would likely lose all their revolving credit lines precisely when government announces a ramping up of the JG. Is this a natural aim of the JG program, or is there a proposed mechanism whereby those businesses with existing obligations towards employees, suppliers, and customers will be provided a bridge loan by the government, at least to enable them to attend to their open client accounts until they can cleanly liquidate their business and everybody can go back to join the JG?
5. How does JG address greater than normal inventory and capital equipment liquidation every time a ramping of JG and private sector taxes kills off the businesses now below the marginal profitability? Will the government buy these excess, or will it let the market clean up the mess?
6. How does the JG account for the current long and interconnected supply chain processes among businesses? Ex. if the smallest car components makers are to close to accommodate the JG ramp up, does the government intend to turn those business operations into JG positions owned by the government so as to keep the supply lines from disrupting the entire auto industry? How about with large food conglomerates that source a lot of their raw inputs from small growers, who in turn source their own inputs from further small businesses? Do these processes become government-owned JG businesses during times of inflation? And paying the lower JG wage level?
7. How does this JG-led system account for JG people who wish to save up capital, so they can leave the JG to start their own business? So let's say a prospective entrepreneur saves up enough for startup capital, but when he tries to hire people, he can't hire them unless he promises to pay them more than he himself used to earn from the JG? Would the JG have incentive programs to encourage entrepreneurship, to make up for the higher startup costs effected by a permanent JG? Further, if a JG can give workers employable skills, what makes these same workers to still willingly leave that skill-enhancing JG job for a job in the private sector at all? Does the JG coerce these workers to leave the JG?
8. How will MMT address the possibility that JG entrenches big companies even more? If small businesses were to start up, the guaranteed JG wage could be used as a negotiating ploy by workers, and could lead to escalating wages, and the more people a startup needs, the higher its labour clearing price. Less startups would probably result. The Walmarts of the world, in the meantime, would probably start trying to justify that they are a JG supporting company that creates a lot of jobs for the JG, so the government better start paying their line workers.
9. The JG as proposed likely will encourage the mass expectation among workers that though they might work for JG now, tomorrow they'll work for private business, but maybe next month, economic changes will cause the government make them go back to the JG. How does the JG still encourage long-term planning among both workers and small business owners?
11 comments:
Rogue!
Great ideas. This is exactly the kind of thinking we want to promote.
Some of these questions apply for using fiscal policy as demand management, not just for MMT with the JG.
1. We have the TC rule and Beo's unemployment/payroll tax link. However, we need more work on fiscal rules, how they work, where they hit. It's a massive undertaking - you get the scope of it...
2. ditto.
3. this is a huge issue. I very much hate the fact we basically destroy small businesses at random with MP.
More later. And thanks so much for the relaxed and honest tone in everything. It's gettin' hot in these parts.
Thanks TC. Just trying to do my part to keep MMT sane and useful, as what you guys at MR are trying to. These are very specific issues that need to addressed to make JG workable, and acceptable to many. If these are addressed, then the JG can be implemented without blowing up in the face of its proponents. Better a sympathetic person asking them now, than MMTers getting red-faced answering why and how entrepreneurial activity died when JG was tried out.
For now, the current unemployment can be addressed with equal parts of bridge employment programs and other fiscal programs and perhaps some trade and capital accounts controls. No need for a permanently-fixed jobs program, unless it has been developed and refined where it can successfully replace capitalism as a system. Marx, during his time, thought he had developed a system that can address price stability, unemployment and productivity, but he wasn't specific enough to address how his system can motivate people enough to continually strive hard without continuous coercion. JG seems elegant, with its marrying of growth, employment and price stability into the theory, but I'm thinking we may throwing away practicality in the name of perfection. This is how goo dintentions fall in the face of all-out free market greed.
I can tell you, a relaxed tone does not always guarantee uniformly-relaxed feedback though.
This will be a little long winded but definitely relaxed :) My goal here is not to try to bite off the whole topic in one comment but to address the issues raised in questions 1 and 2.
As a baseline, let's look at the conventional non-MMT, non-JG thinking. In "normal" times, policy is geared towards maintaining some NAIRU level of unemployment as a buffer against inflation.
MMT uses the buffer stock concept to describe it. The stock of unemployed contributes to price stability by limiting the wage bargaining power at the low end of the labor pool.
If inflation starts heating up, conventional policy would use some combination of raising taxes, interest rates and/or spending cuts to reduce demand, driving workers back into the buffer stock of unemployed until inflation is under control. Once this is done, the buffer stock of unemployed resumes its normal role as price anchor.
Note that maintaining a stock of unemployed is not a guarantee against inflation in general nor is it the answer to inflation control in a boom. Aggregate spending has to be addressed directly and the buffer stock is just where workers land when this happens.
So far, a fairly vanilla description of things as they are currently. Viewed through the lens of MMT's buffer stock description but with no policy changes.
A minimalist description of a JG is to take the above scenario and replace "buffer stock of unemployed" with "buffer stock of JG workers" as follows:
In "normal" times, policy is geared towards maintaining some JG level of employment as a buffer against inflation.
MMT uses the buffer stock concept to describe it. The pool of JG workers contributes to price stability by limiting the wage bargaining power at the low end of the labor pool.
If inflation starts heating up, conventional policy would use some combination of raising taxes, interest rates and/or spending cuts to reduce demand, driving workers back into the buffer stock of JG workers until inflation is under control. Once this is done, the buffer stock of JG workers resumes its normal role as price anchor.
Note that maintaining a stock of JG workers is not a guarantee against in general nor is it the answer to inflation control in a boom. Aggregate spending has to be addressed directly and the buffer stock is just where workers land when this happens.
In this view, a JG program is an incrementalist refinement to the existing capitalist system. It is not offered as a replacement or a challenge to it. It's also not offered as a general panacea with regard to inflation.
geerussell, thanks for the very relaxed comment:)
Yes, the current system does tend to have a buffer stock of unemployed when the government is trying to keep inflation low. My concern is that the JG system replaces this with a buffer stock of 'failed small businesses' when the government is trying to keep inflation low. This new buffer stock is more costly and wasteful to use as a buffer, unless we do away with all of them from the start (I'm sure MMT doesn't want to do away with entrepreneurship though) so….
My view is, it would be helpful to know how MMT addresses this issue with regards the permanent fixed waged JG program, or is its tax program geared only to large corporations that can afford to shed workers to the JG, when inflation gets too high, without having to completely close up shop? (This mechanism still has its own set of problems at implementation though)
Evaluate those questions without a JG.
An overheating economy requires some kind of government intervention to induce a contraction. This contraction would likely result in some failed businesses just as certainly as it will result in some lost jobs as demand contracts.
Does this contraction apply only to corporations that can afford to shed workers to unemployment without having to close up shop?
Will this contraction kill some small businesses?
It's not at all clear how the realities of dealing with an overheating economy constitute an objection to the JG if those realities are the same whether a JG exists or not.
Without a JG, escalating inflation will be killed by choking off demand from highly indebted enterprises, to discourage overbidding due to borrowing.
With a JG, escalating inflation will be killed by getting more people back to the JG. Because that's what the JG base case is for.
Without a JG, inflation will creep up from private sector taking on more risks and more debt.
With a JG, inflation creeps up from people with guaranteed fallback jobs asking higher wages and spending more.
Without a JG, the first businesses to fall off when government starts dampening inflation are the ones who took on most debt and can no longer service higher cost debt, regardless whether they create more jobs out of the process.
With a JG, the first businesses to fall off when government starts dampening inflation are those that employ the most number of basic skill level employees, regardless of whether they took on more debt.
The presence of jG is a game changer because it changes the mindset of everyone, from employees , business owners, to government policymakers. It changes focus from debt to number of privately-employed.
"Without a JG, escalating inflation will be killed by choking off demand from highly indebted enterprises, to discourage overbidding due to borrowing.
With a JG, escalating inflation will be killed by getting more people back to the JG. Because that's what the JG base case is for."
Imagine saying escalating inflation will be killed by getting more people back into unemployment. It sounds awkward because it's the fallout, not the tool used to fight inflation. The JG base case is to cope with the fallout of a contraction, the JG itself is not the inflation fighting tool.
"With a JG, inflation creeps up from people with guaranteed fallback jobs asking higher wages and spending more."
Inflation would require a sustained rise. If the fallback floor is fixed, it's not inflationary. Whether that floor is unemployment or a JG, it has to move in order to be inflationary. That's not to say it prevents inflation from other sources, only that it is not itself a source of it.
"With a JG, the first businesses to fall off when government starts dampening inflation are those that employ the most number of basic skill level employees, regardless of whether they took on more debt."
I think this goes back to means used to induce a contraction vs tools used to cope with the fallout of it. If a business is going to get slammed by government inflation dampening efforts, that hit comes from the means used to directly fight inflation.
Unemployment or a JG don't enter the picture at all until that damage has already been done and there are now displaced workers to be dealt with.
"Imagine saying escalating inflation will be killed by getting more people back into unemployment. It sounds awkward because it's the fallout, not the tool used to fight inflation. The JG base case is to cope with the fallout of a contraction, the JG itself is not the inflation fighting tool."
Imagine saying escalating inflation will be killed by killing the investment of the middle class people who got into private enterprise, because the government wants them and their employees to go back to the JG. The JG may not be the inflation fighting tool, but it is the justification used to to be able to literally tax small businesses to death whenever the need to get more of them back to the JG arises.
"Inflation would require a sustained rise. If the fallback floor is fixed, it's not inflationary. Whether that floor is unemployment or a JG, it has to move in order to be inflationary. That's not to say it prevents inflation from other sources, only that it is not itself a source of it."
I'm not saying here that the JG will be the cause of sustained inflation, it will be higher private sector wages when demand comes back, because labour will get much scarcer . I'm saying JG is the justification that will be used to to be able to literally tax small businesses to death whenever the need to get more of them back to the JG arises.
"Unemployment or a JG don't enter the picture at all until that damage has already been done and there are now displaced workers to be dealt with."
So you're telling me that with a JG in place, the means to control inflation won't be to get private sector employees back into the JG? This is the reverse of what I understand MMT is proposing. I would have preferred that the means to control inflation be to lower the JG wage, or to do away with it during inflation, so that no one can use it to bid up private sector wages.
"Imagine saying escalating inflation will be killed by killing the investment of the middle class people who got into private enterprise, because the government wants them and their employees to go back to the JG. The JG may not be the inflation fighting tool, but it is the justification used to to be able to literally tax small businesses to death whenever the need to get more of them back to the JG arises."
Any statement about killing escalating inflation in an overheated economy is inherently a statement about killing the investment of private enterprise. That's what a contraction is and the government induces a contraction to fight inflation. This is all entirely agnostic as to the fate of the workers displaced in the process.
Whether those workers end up on a floor of unemployment or a floor of a JG job, the justification for the actions which put them there was the presence of escalating inflation in an overheated economy.
"This is the reverse of what I understand MMT is proposing. I would have preferred that the means to control inflation be to lower the JG wage, or to do away with it during inflation, so that no one can use it to bid up private sector wages."
It's not just that MMT doesn't propose using the JG as a means to control inflation in an overheated economy, there's no logical way to use it as such.
In an overheated economy, the buffer stock is exhausted as the hot economy draws workers away from unemployment/JG and into private sector jobs. A government could no more fight inflation by cutting the JG wage than it could fight inflation by cutting unemployment benefits in an overheated economy.
In a normal economy, all wages find their level relative to the floor. If the floor moves from unemployed to JG wage, there is a one-off adjustment but the new floor is fixed and there is no continuous bidding up of wages.
"Any statement about killing escalating inflation in an overheated economy is inherently a statement about killing the investment of private enterprise. That's what a contraction is and the government induces a contraction to fight inflation. This is all entirely agnostic as to the fate of the workers displaced in the process."
As I said, the JG is a game changer because it changes everyone's mindset, from employees , business owners, to government policymakers. It changes focus from debt to number of privately-employed. With a JG, the first businesses to fall off when government starts dampening inflation are those that employ the most number of basic skill level employees, regardless of whether they took on more debt. Also, because a JG entails all private sector hiring start at wages above this level, JG's highest effect will be among those whose skills end up matching the JG the most, drivers, couriers, dispatchers, seamen, waiters…I'm speculating we'll see less shipping and logistics companies, and much higher prices charged by those fewer companies left standing. Imagine how much worse their cost structure gets when the government starts clamping down on inflation. Though government bureaucrats may be agnostic as to the fate of workers, not all businesses are created the same. There are those that will probably never get started in the private sector with a permanent JG in place.
"A government could no more fight inflation by cutting the JG wage than it could fight inflation by cutting unemployment benefits in an overheated economy."
Then the next step to fighting inflation should be to cease with its open-ended offer for all labour demand.
"In a normal economy, all wages find their level relative to the floor. If the floor moves from unemployed to JG wage, there is a one-off adjustment but the new floor is fixed and there is no continuous bidding up of wages."
There will be bidding up whenever the private sector comes up with a business model that needs more of the JG-skill level employees. The more workers needed, the higher the clearing level to get the required amount. There are those that will probably never get started in the private sector with a permanent JG in place.
Over at MNE, Tom mentions of places like Iowa, where small business have been permanently wiped out by large businesses. Tom's comment shows that there could be places where I can agree that a permanent JG could be helpful. These could be places where the private sector would normally not invest in because it wouldn't be profitable. But there are other places where a permanent JG could eventually become counter-productive. These are the places where private sector activity tends to congregate. That's why when you propose the JG, it's important to make nuances, and signify how it rolls out by sector and geographic location. It's can't be a one size fits all for the entire country.
Tom replies: "I think that the MMT economists basically agree with that. The JG should be involved with public goods or in areas that the private sector could enter but no one is willing or else it's not really profitable to do so. Actually, some of these latter areas, e..g, where initial investment is high and breakeven either far in the future or uncertain, could be transferred to the private sector later. Again, where a JG might become counter-productive would be a signal that it may be time to privatize that program."
Convergence of positions! I feel the concept getting sounder from where I'm looking at it.
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