Lies and inconsistencies

So I was digging through the history of comments that econo-blogger Noah Smith has made about MMT. He is a very spirited debater with strong opinions, for sure. You can see how his writing style has changed depending on the context, for example here and here. His writing has both improved and matured over time.

I admire Noah as a blogger, writer, and economist. He isn’t afraid to voice his opinions and yet approaches questions with an open mind. I usually find his analysis both fair and accurate. He has valuable training and knowledge as an economist. His expertise is reflected in the insights of his writing, which he still manages to make accessible to noobs like me.

But his comments with regard to MMT have left me confused. Based on his objections, it’s not clear to me whether he understands the MMT position.

MMT, in my view, is all about our conception of finance and the importance of both financial and political relationships in these systems. The major parts of such systems in the modern world are governments and banking.

I attribute my learning of MMT concepts in large part to Ellis Winningham, who explained, through various tweets and essays, the evolution of banking and financial systems and the role governments play in this system.

An important part of the evolution of modern banking was moving from a gold standard to a government currency standard. In particular, I remember Ellis discussing the history of Bretton-Woods, from its conception after World War II up until it’s dissolution with the Nixon shock when the U.S. government stopped redeeming dollars for gold.

I don’t hear voices besides MMT thoroughly discuss the implications of using a government currency standard as the backbone of modern banking and economic systems.

I like to think I am open to criticisms of MMT, though I may require some effort on my part to understand. If Noah has made a concise explanation of MMT’s failings, I wasn’t able to find it. Perhaps the MMT conceptualization of finance is so incongruent with his perspective that it makes it difficult to bridge the gap. If I didn’t give an idea much credit I wouldn’t invest a lot of effort in explaining its failings.

Noah has discussed a connection between MMT and an economic idea called the “fiscal theory of the price level”. This seems to be his attempt to relate MMT to economic concepts he’s familiar with. I’ve tried to wrap my head around that economic idea, and there appears to be a connection to MMT arguments about inflationary constraints, but I don’t know if it gives the full picture.

If anything, the weakness I see in MMT is that it doesn’t go far enough in exploring every entity’s potential as an asset issuer. MMT focuses on monetary sovereigns, nation states who issue currency used for circulation and also collect taxes. But many other entities issue assets in similar contexts. Banks issue assets in the form of balances, and acquire contractual money collection powers similar to taxes(loan payment obligations). Smaller local political entities both tax and issue bonds(which aren’t used for exchange, but modern fintech could easily change that).

I agree with the MMT’s emphasis on currency issuing, tax collecting, market regulating, internationally recognized, nation-states. They standardize the framework of property ownership, legal rights, and market rules on which the entire system is based. Instead of merely being “too big to fail”(we can’t afford the consequences if they mess up), they are large enough and universal enough to be resilient to failures, provided they have good political design. It was nation-state governments that stepped in and backed the financial system when bankers had created an unstable mess.

Nation-states have public political processes that respond to all sorts of social forces that occur in the real world. If you can only respond to financial signals, you’re not going to be as resilient as these institutions with many channels of public accountability. Sometimes finance fails to capture and communicate the information that really matters, or coordinate effective responses based on that information.

Even if we simplistically treat all asset issuing entities the same, that doesn’t necessarily justify the characterization of government debt as either future public costs or inflation. Noah recognizes this possibility only in the context of perpetual low or zero interest rates; in such conditions “servicing the debt” is affordable, and government could spend ad infinity if they can “convince people to buy bonds”.

Brian Anderson has written a lot about thinking of government bonds as financial equity, similar to a share of stock, which is a comparison I have often made in my own mind. A company can create a lot of value which backs the exchange of the issued asset. The share of stock is a claim to the value of the company, and may also include voting powers. In the case of government bonds, the claim of value is separated from a governance claim.

Governments have militaries, legal authorities, and institutional street cred. How much would a business pay for the authority to collect an income tax of all citizens? When people stress out about government solvency, don’t they realize that taxation power can’t be liquidated, but is still incredibly valuable?

Increased market cap is good for a business, but increased government debt is horrible. What makes these two things different?

The title of this post is “lies and inconsistencies”. I chose that title based on contradictions I see in how the mainstream tells its stories of finance. It assumes operation within a legal political system, but doesn’t recognize the financial powers and responsibilities afforded the entities that serve as the foundation of that system.

Mainstream econ and finance don’t recognize all the assumptions they are making, both good and bad. That’s where you get the lies and inconsistencies.

Writers like Noah or Krugman avoid the worst of the hysteria, and are always willing to look at real numbers and make well reasoned arguments, which I admire, but numbers mean nothing unless the concepts are well-conceived and put in proper context. An honest assessment of that context should recognize that public treasury liabilities are so fundamentally different from a bank loan that merely calling them “debt” is disingenuous.

For example, bonds are what the market uses for a stable store of value when the market is volatile or investors are risk adverse. This is because governments are the foundation of a stable marketplace. Value in the private sector depends significantly on the public framework. Private entities and local polities could potentially survive a shake-up a the nation-state level, but they would need something else to replace the important functions served. That replacement would likely be much less effective, dramatically increasing costs for everyone involved.

When government fails to do it’s job effectively, the private sector lacks good opportunities, or ends up eating itself, ironically making bonds a good investment. Once government gets its act together people shed the public assets they were hoarding that represent financial claims against the foundations of our economic system.

If government never gets its act together, that foundation will get shredded and the financial liabilities will be PART OF the forces used to tear up that foundation. But you won’t see what’s really going on on some spreadsheet. It will be seen in real world panic, confusion, or possibly revolution.

Noah still uses the phrase “print money” which means he doesn’t get that government deficit spending is fundamentally an investment in public wealth.

I don’t like the large amounts of outstanding government bonds, but see it as a systemic problem with the circulation of currency and wealth inequality, not something we should address with misguided attempts to balance federal budgets.

Government needs to stop creating a system where private entities can too easily hoard future tax credits, and where there is value in financial advantage over, and subjugation of, our fellow citizens. Finally, our rewards for public efforts need to be accessible to everyone, especially in “hard economic times”. We can’t let only a few people unduly benefit from our public economic framework and expect it remain resilient and sustainable. Meanwhile, perfectly capable individuals lack good ways to earn money and contribute to both public and private prosperity. Instead, businesses compete for sales, rents, and attention. MMT has answers for all of this.

Noah is a great economics blogger on a lot of topics, and all things considered, he has a pretty reasonable position on government “debt”, but I think he still is missing some key concepts. He certainly doesn’t need to hear anything more about accounting identities and such, I think what he’s missing is entirely at a conceptual level.