Modern Monetary Theory (MMT), which claims that a country issuing debt denominated in its own currency can finance a large amount of government spending by issuing debt or printing money without worrying much about a debt crisis or high inflation rates, has grown in popularity on the political left in recent years. But it has failed to gain much support in the economics profession. That is largely due, in my view, to problems with the theory. But the poor defense routinely offered by its more prominent advocates also contributes. James K. Galbraith’s recent article serves to illustrate.
“As anyone who has ever been responsible for legislative oversight of central bankers knows,” Galbraith begins, “they do not like to have their authority challenged. Most of all, they will defend their mystique – that magical aura that hovers over their words, shrouding a slushy mix of banality and baloney in a mist of power and jargon.” Their negative reactions to MMT can be dismissed, he implies, as self-serving efforts to maintain control. After all, MMT represents what central bankers fear: a “popular, accessible, and democratic” theory.
Standard economic theory maintains that, in the absence of externalities, private investment works pretty well. Entrepreneurs tend to acquire the capital necessary to take on valuable projects because they stand to gain when those projects succeed and lose when those projects fail. Public investment, in contrast, is not subject to the same profit-and-loss mechanism. The relevant public sector decision makers have a hard time knowing whether a project is worth pursuing and have little incentive to act in accordance with that information when it is available.
If the resources required to take on various projects are scarce, we usually want the private sector to choose how those resources will be used. Private entrepreneurs will tend to ensure that resources are used to produce the most valuable goods and services in the least costly ways. Handing these investment decisions over to politicians is likely to result in less desirable projects. The more desirable projects that private entrepreneurs would have taken on will be “crowded out” by public sector investment.
Economists often make a distinction between fiscal policy and monetary policy. Fiscal policy involves the use of taxing, spending, and borrowing power. It allocates resources across specific industries and economic actors. Fiscal policy has traditionally been the responsibility of Congress and the Treasury.
Monetary policy involves adjusting the money supply, setting administered interest rates, or exhibiting influence on money demand or non-administered interest rates. It intends to provide monetary stability for the economy and liquidity to financial markets. Monetary policy has traditionally been the responsibility of the Federal Reserve.
To get through the current crisis, Jared Bernstein argues, we must look to Keynes. It is an old argument, reapplied to our current context. The old argument is straightforward: the free market cannot fix itself. It follows, then, that we should not expect the economy to automatically recover once the pandemic outbreak is over. A more effective approach, Bernstein and others following in the tradition of Keynes maintain, would see the market managed by the savvy hand of the state.
Yet, how precisely the state should manage the economy is unclear. And the idea that capitalism is “not to be overthrown but to be ‘wisely managed’” is a dangerous one.
As Friedrich A. Hayek explained in a famous 1945 essay on The Use of Knowledge in Society, governments are unable to acquire the requisite knowledge to allocate resources effectively. The knowledge required is decentralized–of a particular time and place. Indeed, it is often tacit, meaning it cannot even be articulated by those possessing it.
Argentina has defaulted on its sovereign debt again. And the government is currently going through difficult negotiations with its creditors. Joseph Stiglitz, Edmund Phelps, and Carmen Reinhart, along with many reputable economist co-signers, have asked creditors to negotiate in “good faith.” What they are really asking, however, is for creditors to accept the offer Argentina puts on the table.
To date, Argentina has refused to share any cost of the default and asked creditors to wait until the next government takes office for bond payments to resume. That is an unreasonable ask.
As hard as the economic restrictions are in the U.S. due to the pandemic outbreak, other countries are facing even more severe measures. While the U.S. has issued stay-at-home orders, for example, other countries have opted for more extreme quarantines. Want to go for a short walk to stretch your legs, get some vitamin D, and some fresh air? Better head to the grocery store. Otherwise, you may find yourself with a big fine–or, even worse, in jail. In some cities you need a special permit to walk the streets.
Continue reading at AIER.
A recent article in The Economist raises an important issue with respect to the coronavirus outbreak. A big government may well be needed to fight the pandemic, but how will it shrink back once the pandemic crisis is over? “The state must act decisively. But history suggests that after crises the state does not give up all the ground it has taken.”
In Crisis and Leviathan, Robert Higgs explains how crisis after crisis, the U.S. government increases in either size or regulatory reach. When a crisis occurs, there is a demand for the government to “do something.” Responding to this demand, governments increase their size and regulatory outreach. However, once the crisis is over, spending and regulation do not go back to their initial levels. The result is an increase in government size and regulatory reach from one crisis to the next.
Estoy en Ecuador por el aniversario de los 20 años de dolarización. El IEEP y la Sociedad Bastiat de Guayquil y con el apoyo del American Economic Institute for Economic Research (AIER) entre otros instituto han organizado una serie de eventos. El IEEP, Fundando por Dora “Dorita” de Ampuero fue uno de los institutos claves en promover y defender la dolarización en Ecuador, así como explicar la misma a la sociedad luego de llevar adelante dicha reforma monetaria.
El listado de expositores fue bastante interesante. Ademas de la presencia de Lawrence W. Reed (Presidente de la histórica FEE) y profesores universitarios locales, también estuvieron presentes Carlos E. Gonzales para habla de la experiencia Panameña y Manuel Hinds, “Padre” de la dolarización en El Salvador. Tuvimos la oportunidad de interactuar con varios medios locales, institutos, y hasta con miembros de la Cámara de Comercio de Guayaquil. Entiendo que la experiencia puede ser “acotada” y no representativa de todo Ecuador, no obstante comparto algunas impresiones de este evento.Sigue leyendo
Argentina is in trouble again. Even after a substantial aid package from the International Monetary Fund (IMF), it is struggling to service its sovereign debt. One should not be surprised: when you keep employing the same policies, you are likely to end up with similar outcomes. This, however, is not the lesson Harvard economist Ken Rogoff draws from Argentina’s experience. Instead, he calls for even more aid flows to Argentina.
Rogoff is right to criticize President Macri’s decision to cut the fiscal deficit gradually, rather than attacking the issue more forcefully early on. That strategy ultimately required Macri to seek help from the IMF. But he is wrong to characterize the Macri tax cuts and liberalization efforts as “Big Bang reforms.” The tax cut was marginal at best. And, while capital controls were lifted under Macri, more comprehensive measures of economic freedom show no significant improvements.
John Papola lo hizo de nuevo. Hace ya cerca de 10 años, Papola produjo una popular serie de "rap videos" capturando un ficticio (pero bastante preciso) debate entre Keynes y Hayek. Ahora, junto al American Institute of Economic Researach (AIER), Papola nos trae un "rap video" donde los contendientes son Mises y Marx.
El debate está contextualizado en torno al debate sobre el socialismo en Estados Unidos. Aquí el video, que parece ya estar ganando popularidad. El video posee subtítulos.
En el video los he visto a Edward Stringhan y Jeffrey Tucker. A quien más (y en que momento del video) encuentran?
Aquí los videos de Hayek vs Keynes.
La página web de "The March of History: Mises vs Marx".