Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Thanks to all of you who responded to my post titled “Why Modern Monetary Theory’s Employer of Last Resort is a bad idea.” Your responses were informative and thought provoking.
That post touched on one of the two primary differences between Monetary Sovereignty and what popularly (though perhaps erroneously) is known as Modern Monetary Theory (MMT).
Today, Cullen Roche published a very short and very good post about the Employer of Last Resort (ELR) discussion, and its role relative to MMT. While early founders of MMT believed ELR to be central to the basic concept, I suggest it is at best peripheral, and really more of a hypothetical departure.
MMT (and Monetary Sovereignty – MS) have the same center, the unlimited ability of a Monetarily Sovereign government to control its money supply and to pay any bill of any size, an ability monetarily non-sovereign governments do not have. The U.S. acquired this ability in August 15, 1971, when it went completely off any gold standard.
The center of MMT and MS is merely a factual description of the real workings of a monetary system. (Unfortunately, that “center” does not have its own, unique name, a situation that creates misleading arguments.)
From this factual description, you can create hypotheses about problems and solutions involving, for instance, full employment, inflation control, the income gap and economic growth. These problems and solutions are not mutually exclusive. They are so intertwined that each affects all the others creating classic “unanticipated results” scenarios.
It is human nature, when addressing any problem, to look first at the simplest, most direct solution:
Employment too low? Hire people (the ELR solution).
Inflation? Cut the deficit (the debt-hawk solution).
Income gap? Tax the rich (the Democrat solution).
Economic growth? Trade protectionism. (The populist solution)
Climbing straight over the peak of a mountain may be the simplest, most direct route, but not necessarily the best way to get to the other side. That simplest, the most direct solution can actually be counter-productive. In the previous post, I described why, though ELR is the (seemingly) simplest, most direct solution for unemployment (simply hire ‘em), it may not be the best solution. This is one area where MS differs from what is called MMT.
That all is discussed in the previous post and this is a prelude to what I really wanted to remind you about, in an attempt to draw a distinction between MMT and MS.
The other area of difference is the prevention and cure of inflation. Perhaps the most fundamental equation in all of economics is: Value (or Price) = Demand/Supply. Increase the Supply of money or decrease the Demand for money, and the Value of money goes down, i.e. you get inflation.
For adherents of MMT, inflation is a matter of money supply. Thus, inflation is to be prevented and cured by regulating the creation and destruction of dollars. MMT suggests that federal taxes be increased when excessive (above a target rate) inflation appears. In fact, according to MMT, that is a fundamental purpose of taxes – providing value to fiat money.
I agree and disagree. There is no question that removing dollars from the U.S. economy would help prevent/cure inflation, by giving greater value to the remaining dollars. Scarcity increases value. But, I have strong concerns about this approach.
While, in theory, tax increases can prevent inflation, in actual practice, tax changes would be inefficient and damaging. They are far too slow (When will they be collected?), far too political (Which taxes?) and not incremental (How much?). Perhaps most importantly, tax increases remove dollars from the economy, thereby leading to recessions.
Although the federal government has managed to control inflation, federal taxes have not been the controlling device. Interest rates have. That is, while MMT hypotheses have focused on supply, the Fed, in the real world, has focused on demand – successfully. Further, there is no historical relationship between high interest and low GDP growth. On the contrary, there is a slight relationship between high interest rates and high GDP growth.
In an April, 2011 post titled
How Monetary Sovereignty differs from Modern Monetary Theory — simplified, I described the difficulties with using taxes to give value to money, or more specifically, to combat inflation.
All of you who’ve not read that post, please do so. You will see that using taxes to prevent/cure inflation runs headlong into serious operational and political difficulties. The devil truly is in the details.
I’ll close with this thought: The “devil-in-the-details” problem seems endemic to economics, where far too many thought leaders have not had much personal experience with reality.
Those who believe changing taxes to fight inflation, do not understand political reality. Similarly, those whose experience finding, evaluating, hiring, training, directing, motivating, moving, rewarding, supervising and firing employees is limited or non-existent, see no operational or political difficulty with an ELR program.
They think of people as homogeneous “buffer stock.” They do not understand reality.
Having personally found, evaluated, hired, trained . . . etc., etc. thousands of employees during my 50+ years as an owner of several businesses, I have seen the details and met the devil. And he is one mean, unforgiving bugger.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports