MMT and Main Street vs Wall Street
Here’s a pretty good piece on MMT, by a “retired career PhD scientist” who has recently “become a serious student of macroeconomics and the role of government in our economy.” What I’d like to know is why this is so hard for PhD macroeconomists? Why can’t heterodox macroeconomists–who studied most of the same economics literature that Stephanie Bell, Scott Fullwiler, Eric Tymoigne, Bill Mitchell, Mat Forstater, Ed Nell, and I (and a handful of others)–get this? I realize that it is a bit easier for those who come straight out of financial markets–like Warren Mosler–to understand the details of monetary operations, or those like Charles Goodhart who saw the monetary ops first hand. But after a quarter of century of hundreds of published articles, thousands of blogs, and far too many conference presentations to count, why is this still so difficult for most PhD economists?
America’s Main Street Economy Vs the Wall Street, by Duane Catlett
There is no connection today between Wall Street (the financial industry) and the Main Street economy (jobs and disposable family income) as evidenced by the fact that the stock markets are at an all-time high but job growth remains stagnant. In this economy, those jobs that are being created tend to be lower paying with fewer benefits than the jobs that are being lost through Congressional budget cuts, and most destructive of all the wealth gap continues to accelerate.
The big question is “why this is happening and what must we do to reclaim the post-WWII position America held for four decades as the most prosperous country in the world?”
Politicians, analysts, and media pundits provide all kinds of rationale for high unemployment rates, low paying jobs, lack of adequate funding for our public institutions, and municipalities facing bankruptcy. Almost all of the reasons given to explain these observations, and especially the lack of good paying jobs, are wrong.
A new branch of economics called Modern Money Theory (MMT) emerged early in the 1990s that perfectly explains this divergence between financial markets and main street economy. It also foretold the euro zone crisis and the recent 2008 Great Recession. It additionally explains why the Fed’s Quantitative Easing (QE) program has been insignificant in stimulating the economy while continuing to accelerate the wealth gap.
MMT is actually not a theory and it has no political ideological basis. It is an objective study of modern (fiat) money and the way a sovereign country with its own fiat currency works. It has nothing to do with big government versus small government, and it has everything to do with our government functioning effectively as our forefathers intended using the mandated financial tools at their disposal.
33 Responses to “MMT and Main Street vs Wall Street”
"But, increases in bank reserves do not make it into the general economy until or unless banks give loans to credit worthy customers in the private sector of the economy."
Is the author correct to state this ? Its my understanding that QE works pretty much the same as OMOs. Much of the new money received by bond sellers will be added to bank reserves and if banks do not increase lending it will have no direct effect on the economy (including stock prices). However some sellers of bonds will want to spend some of the new money on goods and services and this will have a stimulative effect on the economy (including eventually increasing the demand for loans and allowing the new reserves to come into play as well).
Not bad. I don't think the author has quite figured out the dynamics of endogenous money yet, but that is one of the more complex aspects of MMT (in my personal opinion). It cannot be said or written enough that government is not on a household budget and has entirely different responsibilities when it comes to the monetary system.
I think I was born asking "what, why, and how," and I think that's the singular reason I grew up to become a scientist. After retiring I wanted to find out why a system that produced such prosperity in America for four decades after WWII had fallen apart. I have lived in two entirely different Americas, and it made no sense to me.
A friend and longtime colleague of mine, a PhD physicist, and I decided to study macroeconomics to see if we could figure it out. It took about three years of research and following the MMT pioneers (that's you guys) to finally answer the three questions I was born with. The epiphany came a couple of years ago, but the more complete understanding had to mature.
In answer to your question, "why is it so difficult for PhD economists," I believe the answer is that they have not found a compelling reason to try to understand MMT because of their investment in they career and not being invested in answering the huge question of "why" are things not working the way they were intended by our forefathers. Figure out how to make a compelling reason for your fellow economist to seek out "why they should do it" and we'll find the key to unlocking the power of MMT.
We've been trying to find that key ourselves!
I've been a fan of Joe Firestone because he also seems obsessed with trying to reach out to the mainstream society. We're continuously trying to figure out how to get past the "glazed eye" the minute we bring up the subject of what money really is and how it works.
Let's keep grinding away until we make it obvious that MMT is the answer to growing our economy and a more prosperous life for our citizens.
Thanks so much for all you are doing to make help make it that happen.
rob I’d state it somewhat differently from Duane, but he’s on right track. Put it this way: reserves are like a bank checking acct at the Fed, used to clear accounts with other banks and with US govt. (Also to meet cash withdrawals at ATM machines.) They never really get lent to nonbanks, nor do they “get out”. While US banks do have reqd reserve ratios, they are not binding since banks make loans, create deposits and then some weeks later seek reserves as necessary. They borrow from other banks or from the Fed. (With trillions of reserves now, banks have all they will need for the next 100,000 years or so, anyway.)
"why is it so difficult for PhD economists,"
I can only speak from my own experiences of earning an MBA from the U Chicago Booth School. I didn't receive an education, I received an indoctrination. Start with the answer – all government is eveil – and work backwards. Free markets (actually uncontrolled markets) are believed to always deliver the best of all possible outcomes. So put on the ideological blinders and disavow any information that conflicts with your neat little world view.
I still get calls every year from U Chicago asking for money. I decline, stating clearly that I don't make donations to religious institutions.
Nice response to UofChicago! My colleague Bill Black calls it “theoclassical” econ.
however my dismay is the reaction of heterodox economists, who supposedly do not start from those assumptions, but still manage to reach the same conclusions as the theocrats. For some of them, I suspect that it is because they really want to soak the rich (so do I) with taxes, so they link that to “paying for” all the goodies that liberals want for poor folk. As I’ve argued that is dishonest but also it is a loser in American politics.
Thanks for commenting, Duane and keep up the good work.
In a fiat money system commercial banks have no control over the aggregate level of reserves (unless they withdrew the money to hold it as banknotes in their vaults). Only the central bank controls the level of reserves. Certainly, individual bank can reduce or increase the amount of reserves they hold at the central bank, but this means that another commercial bank must accordingly increase or lower its reserves, meaning that the aggregate level of reserves remans the same.
Another point, even if QE money is not spend or lend, it does affect the households by influencing expectations and of course asset prices. The very moment that new QE money is created pruchasing power gets redistributed, for example from savers to debtors, from the holders of asset to the potential purchasers of assets and so forth. This in turn affects the whole incentive structure of the economy. Money is never neutral!
Dear Mr Catlett, you mention that MMT predicted the great recession and the Euro crisis. I would be very interested get some literature references to these predictions. Thanks a lot.
I'm still one of the indoctrinated who haven't seen the light yet.
I still believe that freedom is preferable to coercion and that the main reason for our high standard of living today is not state intervention and central planning, but free entreprise.
Actually Tejas that is wrong. the CB can set the reqd reserve ratio but bank activity determines aggregate quantity of reserves. You are reading outdated econ textbooks.
Ahh, you’ve bought into Uncle Ben’s expectation fairy.
Money is not neutral. Excess reserves, however, are not “money” on any normal definition. They are deposit accts at the Fed, not included in M1 or M2, and there is no plausible theory about why they should affect any behavior–except the belief in fairies.
tejas: yes, whatever that invisible handwave is supposed to mean. Enterprise free of rules, laws, oversight, morality? Just what should our Undertakers be free to do? I’d say Goldman is very free to defraud us and screw the economy out of rents. Free enough for you?
As an historian of economics, my take on why PhD fail to understand MMT is because they cannot understand any theory which isn't reducible to individual maximization decision making which consider only preferences (which are original to the individual), endowments and prices. Furthermore, they must exclude historical and social context. For this reason Keynesian economics eventually was brought back to being just micro economics (CGE). All the other factors, I think, really come back to their vision and the philosophical preconceptions upon which the whole system of thought is based.
While I want freedom as well, one has to understand that government is the monopoly supplier of net dollars to the economy. Free markets are a user of those dollars, so markets and government are mutually exclusive.
Our well being is tied to our ability to trade our production and expertise – and that should not be limited by a shortage of dollars, which I believe we have now. Lastly, by the government properly supplying those dollars, in a way the keeps unemployment low is the best distribution mechanism.
Charley: I think that is right, at least for a huge segment of professional economists
Matt: Yep. Talking about “free mkts” when govt is monopoly supplier, and where most important “markets” are oligopolized, is pretty darned silly.
Here is a blogpost that deals with euro crisis predictions:
Randal: I am with you regarding markets, especially banking. When I use the term, I simply mean average folks freedom to choose what they want to do, start a business etc…. The fact that that freedom is restricted by a shortage of dollars that keeps unemployment high, or a banking oligopoly is unjust – and is what has been happening for some time now.
"However some sellers of bonds will want to spend some of the new money on goods and services"
I don't think anyone wants to spend more simply because their savings were transformed from interest-bearing form for to non-interest bearing form. Spending would kind of defy whole point of saving. And bonds can be easily sold for money so ownership of bonds don't hinder anyones abilty to spend if they wanted to.
That goes for a few in our department as well. I think instead if we asked them to follow the necessary conclusions from their own theoretical models, they would also come to the same conclusion regarding taxes (knowing as well they understand state money), and I'm referring specifically to businesses as going concerns and hence surrounding the issue of market governance.
Wouldn't it be fair to say reserves aren't really money at all? The uses for reserves are so limited it seems they don't have what we generally think of as "money-ness" and the only reason for their existetnce is to satisfy accounting rules imposed by government. If the accounting required banks to have x number of Pete Rose baseball cards for each liability would it make a difference?
I am a (B.S.) chemist and learned about MMT a few years ago. It answered a lot (and I do mean A LOT) of questions I had always had about the national debt, etc. As for a "free market", I believe that we should go back to Charlton Heston's Moses (in the C. B. DeMills classic) statement, "There is no freedom without the law!"
In a truly "free" market, I would be free to steal anyone else's money (hey, it's a free market, right?) and anyone else would be free to help themselves to my possessions provided that they could get away with it. Governments have seen the need for standards of business conduct at least all the way back to Hamurabi's code.
I have a sister-in-law who is (was) a banker. She does not understand MMT. The strange thing is, she can not explain away any of the assertions I make when I bring up the points. Thus, we have top bank execs who seem to not realize how money is created and where excess money goes.
One last note to the naysayers: how in hell do you expect to grow an economy (without serious deflation of prices) without having more money put into the system than is taken out?
Thank goodness MMT is clarifying that changes in the supply of reserves have no economic effect by themselves. One question in my mind is whether the other side of the exchange comprising reserve operations has an indirect impact on the real economy to the extent it usually involves a change in the demand for short-term securities like Treasuries held by banks. That change in demand (not supply) would seem to have the potential to skew the yield curve and the yield curve skew ought to change banks' willingness to take maturity risk, buying longer-term bonds funded with shorter-term deposits. Such a willingness on the part of banks lets them meet the normally conflicting liquidity preferences of both longer-term borrowers and depositors — which should in turn have an effect on the size of capital budgets for investment in projects at firms. But even if these considerations at the margins of classical theory avoid the larger errors that MMT criticizes (and I'm not sure they do) — look at how indirect these demand-side effects are!
Many thanks. However, these predictions were voiced by many economists of all kinds of schools of thought and much earlier. You can find these concerns already in the early 1990s when some 200 German economists petitioned for postponement of euro introduction.
Dear Prof Wray, in my view you are seriously confusing freedom with lawlessness. There is no freedom in fraud. There is no freedom to defraud anybody. Fraud is coecercion by definition, no matter if it is a private person or company or the state that is exercising the coercion/fraud.
When we as a CB increase excess aggregate reserves we offer commercial banks a price they cannot refuse, either for their assets or for holding the money on offer (i.e. we remunerate them for holding the excess reserves). By doing this we drive up the prices of the assets sold to us (and all other substitute assets). Thus, increasing aggregate (excess) reserves certainly affects real behavior of economic agents in exactly the manner that I outlined in an earlier post.
Tejas: you are rewriting history. Other than Goodhart, Godley, and those who were developing MMT there were very few voices against EMU with a coherent argument. I was there. Virtually all my Italian economist friends supported the experiment. They’ve since changed their minds. An exception was Claudio Sardoni, with whom I co-authored a critique
“Lawlessness” and “fraud” are defined and enforced and prosecuted by….government!
Tejas: seems you are just quoting me now. That is exactly what I said and indeed the words I used (a price they cannot refuse). So you are just trying to quibble in order to quibble. And so what. The Fed increased price of longer maturity treasuries by a few basis points (by the NYFed’s own calculations) and that has had what affect on anything except bank sales of treasuries to the Fed. Zip Nada. Exactly as I said.
According to Fed and BoE estimates they increased long-term rates by 100 to 150bps – this is not nothing or "zip nada" as you put it. Also, these purchases have significantly increased stock market valuations and the valuation of other assets – including in the emerging markets. Reserves are money and they are not neutral, not even close.
Tejas: you seem to be awfully confused. NYFed estimated that long term rates were REDUCED (not increased) but not by anything close to 100bps. And Reserves are not “money” by any usual definition of the term. They are entries on the central bank’s balance sheet. They stay put. They do not get loaned out. Excess reserves at most cause overnight rates to fall to the support rate. Otherwise they have no impact. You claim to work at a commercial bank but I guess you are not in any operations section. Ask the reserve mngmt people and the loan officers at your bank.