Feb 11, 2021
Welcome to episode 67 of Activist #MMT. Today I talk Sam Levey on the core assumptions of mainstream economics. Sam is a research scholar with the Global Institute for Sustainable Prosperity, a PhD candidate in economics at the University of Missouri Kansas City, or UMKC, and a co-founder of the online advocacy group, Deficit Owls. Sam starts by giving an update on his progress towards his PhD. After that, our conversation is all about the core assumptions of mainstream economics, which is currently neoclassical.
(Here's a link to part two.)
This is part one of the new two-part conversation, but it's also part of two of a larger four-part series about the relationship between mainstream economics and MMT. Parts one and four are with Dirk Ehnts and Asker Voldsgaard (here's part one, which contains a link to all four parts). Last week, I spoke with Dirk and Asker about their 2020 paper which is a response to a 2019 paper by Jeppe Druedahl. Jeppe's paper is a summary of the mainstream concern for the long-term fiscal sustainability of government spending, and its corresponding debt and interest on the debt. For more on the details of this particular argument, consider taking a listen to last week's episode.
Today, Sam and I use Jeppe's paper as a bouncing off point for discussing the core assumptions on which the above argument, and mainstream economics in general, is built. To very briefly summarize Jeppe's argument:
This conversation with Sam is focused on mainstream (which is currently neoclassical) economics, and more specifically, the fundamental assumptions that underlie it. As a jumping off point, I'm going to briefly review the paper I discussed last week with Asker Voldsgaard and Dirk Ehnts. They wrote a response to a 2019 paper by Danish economist Jeppe Druedahl. Jeppe's paper is called "A kinder egg on MMT" and is basically the mainstream argument against MMT regarding the long-term fiscal sustainability of government spending, and its consequential debt and interest on the debt.
In brief, under mainstream assumptions, if you model out government spending to infinity, which means at a minimum, 75 to 100 years, there are serious concerns. To such an extent, that there may be only two choices, both of which are genuine Economic Armageddon: hyperinflation or – despite the ability to issue its own currency – voluntarily default in order to avoid hyperinflation.
You should consider reading Jeppe's paper, as well as Asker and Dirk's response. You should also listen to the previous episode where we discuss both. In addition, this argument has been thoroughly addressed in several papers by Scott Fullwiler, the latest being the 2020 paper called "When the interest rate on the national debt is a policy choice (and "printing money" does not apply)." Links to three of these papers by Scott, from 2006, 2016, and 2020, plus those by Asker and Dirk, and Jeppe, can be found in the show notes.
As I understand it, when it comes to the particular concern of long-term fiscal sustainability, the core assumptions are:
- First and foremost, loanable funds: The idea that banks cannot issue loans by creating new money, but rather loan out other peoples money. In addition, the central government can borrow that money as if the government is just another private citizen or company.
- Loanable funds implies that financial crowding out is possible, which means that the non-government sector must compete for those loanable funds with the government.
- This further implies that, although the central bank can set the short-term interest rate that they wish to target (called the nominal rate), they have little to no control over long-term interest rates. These longer-term rates are called "real" interest rates, because they are set by so-called "real" forces in the market. Note the inherent ideology lurking behind that word "real."
- MMT says that there is only one way to spend which is by issuing currency. Taxation and bond sales may be necessary for other purposes, but when and for what is never directly related to the currency that is issued – and rarely-if-ever a one-to-one relationship. Mainstream calls issuing currency without selling bonds "printing money." It asserts that printing money is (A) not possible without also paying for it with the revenue from taxation or bond sales, either now or in the future. and (B) conversely, that it is indeed possible for the issuer to collect that revenue and then re-spend it at a later date. Again, MMT says this is not possible, as the only way for the issuer to spend is by... issuing. More specifically, this is done by expanding balance sheets at the central bank and Treasury, by making numbers bigger and smaller on accounting t-charts.
- Finally, mainstream also assumes perpetual or inevitable full employment, in addition to the god-like foresight to know what federal spending will be, not just next year, but 100 years into the future.
In addition to the mainstream argument regarding fiscal sustainability, Sam and I talk about many other different topics, including deductive versus inductive reasoning, quantitative versus qualitative research methods, the Great Depression versus the Great Vacation, and statistical over-fitting, We also discuss the contradictory view of how the central government is seen by mainstream as both a helpless dainty flower and, simultaneously, a potentially-catastrophically destructive force. We also answer a question by a patron of Activist #MMT, Alexander, regarding the mainstream response to sectoral balances in the context of loanable funds.
Finally, we talk about how and why mainstream economics considers money to be "special." Basically, in the mainstream view, money is a scarce, physical thing – in other words, no different than any other commodity. This means that the only way for someone in the non-government sector (citizens and businesses) to get new money, is for it to be wrested from the hands of another citizen or business. Under the theory of loanable funds, even government spending comes from the non-government sector, and so must also be ripped from the hands of someone in the economy. Hence, a zero sum game and crowding out.
scarce! But even if not scarce, the assumption of full employment SIMULATES scarcity!
MMT recognizes that all kinds of money, including reserves, cash, bonds, and other treasuries, is not scarce but another type of IOU. As Sam told me, "finance itself is not scarce, It's a coordination mechanism." This insight and reality changes the battle from, "from whose hands will we take the money?" To "Who will we put in charge of this coordination?" As MMT recognizes, the latter has always been the case. The former is predicated on the assumption that our money can and will never be coordinated by the government. As Neil Wilson said to Phil Armstrong on their recent Gower Initiative interview (to paraphrase): "the plane works just fine, we just seriously need a new crew." Sam takes this further by saying that we need a new process with which to choose that crew. However, even if we do get a new process, even if we do get money out of our politics, and even if we do get a new and good crew, none of it matters if money is truly scarce and special, such as under loanable funds. If money is scarce, then we as a society and citizens, and the government that is supposed to represent us, will never be in charge of coordinating our money.
As a final note, I also talk about the mainstream assumptions of the neutrality of money in episode 57, which is part two with Asad Zaman, and historical time in last week's episode with Dirk and Asker.
And now onto my conversation with Sam Levey.
Resources
- My primary source for preparing for this interview was Steve Keen's 2011 book, Debunking Ecoonmics, second edition.
- Every episode and snippet on Activist #MMT with Sam.
- I discuss the neutrality of money in part two with Asad Zaman, on episode 57.
- Michael Kalecki's 1943 paper, Political Aspects of Full Employment (Sam considers this papers one of his favorites)
- Yale economics professor, Truman F Bewley
- 1998 book by Alan Blinder, Elie R.D. Canetti, David E. Lebow, and Jeremy B. Rudd, Asking About Prices: A New Approach to Understanding Price Stickiness
- Sherlock Holmes is the master of deduction (the difference between deductive and inductive reasoning)
- Eric Grauchwe's 2018 book, Winter War: Hoover, Roosevelt, and the First Clash Over the New Deal
- Here's Sam's response to my statements regarding S=I: "So, they way Keynes defines *actual* S and I, they are always equal at all times no matter what. Usually if you’re talking about the possibility that they might not be equal at some time, then you’re talking about *desired* or *planned* S and I. Keynes has a 1937 paper that goes into this issue, which is still important for PKE I think. "The Ex Ante Theory of the Rate of Interest."
Full context of question by Activist #MMT patron, Alexander
Dear Sam, I wonder if you could explain what is the neoclassical equivalent of the sectoral balance view in national accounting. And how it is different from the heterodox perspective. Today I've shared a post about EU interest Payments in % of GDP "Public-debt-to GDP can be a misleading metric in assessing debt sustainability; it does not account for interest payments!" (https://twitter.com/heimbergecon/status/1330806100992651264) I got this reply from a banking consultant: "This is a terrible argument because it ignores both the impact on investment appetite of the destruction of the time value of money, and the misallocating to the public sector of a disproportionate share of available funds, starving the private sector and disrupting the yield/safety/liquidity equation." … My answer: Dear Bob Lyddon, there is no tradeoff between funds spent into the public or into the private sector. This is because the public sector, the government creates those funds as it spends. This at least is true if the government has a sovereign currency, a central bank and a treasury. As shown in the Sectoral Balance View of National Accounts: (S – I) + (T – G) + (-CAB) = 0 Meaning: The private domestic financial balance (household savings minus private investment, S - I) plus the government financial balance (gov. tax revenue minus gov. spending, T - G) plus the current account balance (- net exports + net external income flows, CAB) equals zero Meaning: The public sector deficit must be the income of the other two sectors. This is an accounting identity. It is true by definition! With external trade in balance, the government deficit must be the private sector income! Asking the government to reduce its deficit equals asking the private sector to reduce its total income!