Glad you are getting the word out on Huffington Post.
Demand leakages make perfect sense now than I am schooled in MMT, but I’m afraid it’ll go over the heads of the unschooled.
I like to think in terms of the sectoral balances equation:
Government Deficit = Net Private Savings + Trade Deficit
With a US trade deficit of 4% GDP and a private savings rate of 3%-5% GDP, one can quickly see that the budget deficit needs to be 8% GDP just to tread water. More, if we want the economy to accelerate.
I don’t expect the masses to understand that, but it’s not clear why more economists don’t get it ?
“Government Deficit = Net Private Savings + Trade Deficit”
This ties in with central bank hoarding from the likes of China and other EM countries that have trade big surpluses with the U.S. For example with China, they have to do something with all those dollars they’ve been accumulating and for the most part they have been content to hold them in Tsy securities. They could also buy U.S. real estate and/or businesses, both of which they do to one degree or another. Alternatively, they could buy a lot more goods and services from the U.S., which I think would fuel domestic inflation as all those U.S. dollar chickens come home to roost. That would probably put more people back to work in the export sectors and push the fed closer to the end game of zero interest rate policy.
@WARREN MOSLER, If China were buying assets then that seems to be a potential problem (maybe only for the 1%?). This is why I haven’t understood the idea that our trade deficit with China is all to the good. However, the reason it doesn’t happen more is because we won’t let them. I think Sinopec was trying to buy Unocal a few years ago and there was an uproar.
I would like to see China spend it. I really think the productive capacity here is greatly underutilized. If we had more sales, I think we could increase production without tremendous inflation. And, even if we had some inflation, having everyone employed would be worth it. It would also ease tensions with China, which I think is all to the good.
I favor a tax cut over China spending more here
but that’s just me
“I would like to see China spend it.” You’re assuming they would spend it here. 😉 Land, maybe, something they don’t have to manage daily, or resource in the ground. The Chinese don’t have to buy our products. They got most American companies to hand over the manufacturing secrets during the first 1999-2004 contracts. They didn’t re-up, closed the factory door, opened up across the street, replicated our stuff, and are now selling it happily in Africa or undercutting to the same customer list that American companies gave them for direct shipping.
I’d rather they not spend it and we cut taxes instead
Steve Keen in a 2011 INET interview with Robert Johnson said that the Chinese decided 30 YEARS AGO to move American industrial production to China. It’s on INETeconomics’ youtube page. Seven-part series. Here you go, found it: “Steve Keen on Europe, China, and Brazil 6/7” Use that to find the link. Starts around 2:50 min.
glad they did! to bad we don’t know the policy response that serves our public purpose
Where else are they going to spend USD if not in the dollar zone? If they wish to spend or invest their USD holdings in some other currency zone, then they need to sell exchange them for that currency with someone who prefers USD either to save or spend in the dollar zone. Of course, they also have the option of buying gold or oil, for example, in markets accepting USD.
best they never spend a penny, like japan.
means we can have lower taxes here, improved real terms of trade, etc.
Where else are they going to spend USD if not in the dollar zone?
Basically the whole world (with only a few exceptions) is the “dollar zone”.
The whole world may be a dollar zone, but macroeconomically that is just changing the tags on ‘foreign held dollars’.
The tax cut vs ‘chinese spending it’ line requires a foreign to US flow to happen to stop it.
How many times the rest of the world swaps their dollars around shouldn’t really matter for US policy – particularly as they know most of the dollars are buried in central banks with no incentive to let them see the light of day ever again (much as they have in the past with gold).
The more the rest of the world sits on dollars in aggregate the lower US taxes can be as the US enjoys the rest of the world being really rather silly.
The Chinese are driving around in buses in Las Vegas buying foreclosed houses by the block. Got this from one of the 2500 remaining loan officers there, down from 45,000 in 2008.
Keep it up. The HP devotees I know think say taxes are too low now. They even like Obamacare’s 500B$ transfer to Hartford,CT. Seems to be the definition of progressive in 2012.
If I am earning more income than I need to consume and choose to invest my surplus earnings into a new business or asset of some kind that earns a revenue stream….. that wouldn’t be considered a demand leakage would it?
It’s an aggregate measure. It’s savings net of investment of the non-government sector, or as I like to call them ‘excess savings’.
Neo-classical theory says they clear automaticaly at an interest rate, but *at the same quantity*. Post Keynesian theory says that to clear naturally the excess has to be destroyed in a depression, along with lots of sound investment and assets. Therefore you need an active mechanism to clear them without a depression.
And the best way to clear them is to validate them with deficit spending.
Hence the ‘excess savings’ = ‘lower taxes’ line.
Spending on business investment does not generate excess savings at that point.
I think your question has been answered before somewhere in the comments on Warren’s blog.
If your saving surplus was spent by the business you invested in buying something – machines, paying for labor, building new things, than it wouldn’t be considered a demand leakage.
That’s pretty much what I thought. However, isn’t the same thing true for a tax advantaged savings account? If I invest in equities for retirement savings, doesn’t that money go to pay for ongoing operating expenses in those companies?
Only if its new shares. Otherwise you are just swapping your money with people who already have the shares, and that swapping sequence does not necessarily end in any more spending. Very often it will end up with somebody swapping out of shares into Treasuries – possibly new Treasuries.
Remember that the secondary market doesn’t directly fund the companies that are listed on it.
it is if you buy stock, and if ‘they’ spend it, that’s a demand add
The simple answer is that if “investment” means firm expenditure for capital goods or production, then it is spending, not saving, and doesn’t lead to demand leakage. If it is financial “investment” that just amounts to change in ownership of existing assets, then it is saving, and if the one selling the assets just purchases another financial asset that doesn’t involve primary investment that gets spent by a firm, then it is only a shift in ownership and composition of assets, and results in demand leakage.
In aggregate, spending is consumer spending, firm spending, govt deficits, and net exports. Savings means consumer saving, firm saving, govt surplus, and net imports. So all transactions have to be ordered in that light, and every transaction can be analyzed in terms of whether it goes to spending or not. If it doesn’t, then demand leakage.
A big issue is that with falling rate of profit and return on primary investment, “investment” funds get saved in some form of financial asset instead of being spent and an economy gets increasingly financialized in aggregate, resulting in “fictitious” gains rather than substantial growth. While substance deteriorate actually and thus depreciates nominally, fictions can simply disappear, resulting in nominal collapse.
Completely OT, and I apologize, Warren, but I need this answer from Tom Hickey. Please indulge me.
Tom, I read one of your posts yesterday on another site that said MMTers met with the Chinese 15 years ago about MMT. Can you direct me to a source for that?
Don’t have the source handy since it was some time ago and I didn’t save it, but I vaguely remember it coming from Michael Hudson. Perhaps Warren can comment on it. He would certainly have the inside track on this.
yes, me, Randy Wray, Jan Kregel. Don’t recall the exact date.
Indeed, pools of saved money (savings pools) which in aggregate increase in size, are in fact a contributing cause to our economic conundrum, one which we should add to the balance sheet recession (aka, the excess consumer debt recession) for a more complete diagnosis of the cause for insufficient demand and resulting excess unemployment.
What you’ve highlighted Warren is key. To echo your thoughts: In aggregate, currency users are currently net savers of U.S. money. Saved money acts as a drain on the quantity of money being utilized in trade. If prices are relatively stable, decreasing the aggregate quantity of money to be utilized in trade means less can be purchased at those prices. Naturally demand decreases and unemployment follows (as will deflation should the reduction be severe enough).
Now, this isn’t to discourage savings, it is merely to recognize an empirically verifiable negative side effect of it. Some savings can merely be delayed spending, but quite often the money is perpetually delayed, a sort of permanent drain if you will (e.g., money parked in long term bonds, and so on). And the side effect of this drain on demand levels is not helpful when demand is too low already.
For years now, the quantity of consumer owned money intended for use in trade has been draining out of the U.S. domestic economy and pooling into the coffers of a number of different entities (e.g., foreign and domestic corporations, savings of the rich, etc.). As a result, there is a net loss of income to consumers, and with it, all the undesirable side effects we presently witness. Japan I would suggest is another example.
The question is what to do about it. The answer is simple: The Federal government has the responsibility to combat the negative side effect of savings/currency pools by implementing policies which maintain (or increase in our case) the incomes of consumers. As a currency creator, the U.S. government needs to generate fresh money to maintain the proper balance in the quantity of money being utilized in trade by being sure enough money is supplied to support current income levels (or in our case, generate enough money to increase those incomes). We can call this program the “tradeable-money maintenance program”.
The program can be implemented by periodic (or perhaps even continuous) injections of freshly generated money, which is input by any number of means–tax cuts (with the loss in government income compensated for by this freshly generated money so as to fund the deficit), government created infrastructure retooling jobs, all forms of R&D, stimulus checks–pick your antidote. The basic conceptual idea is; money going out of the economy has to be put back, and only the Federal government has the ability to put it back if the net savers are themselves unwilling.
Of course the fear is such a policy will cause inflation. However, inflation will not occur unless this policy is performed to irresponsible excess. You should be afraid of the immediate problem of insufficient income and not afraid of the inflation boogie man we can quite easily avoid by not consuming the antidote to excess. No one argues you shouldn’t consume wholesome foods because you might eat too much of them… You should eat wholesome foods, and you should not eat too much. Balance is what we need. We need the government creating some money given this economic environment, just not too much.
I appreciate you making the effort to write this article Warren. We need more like it in an effort to reach the media who can bring this to a broader audience. They should be sympathetic given their often liberal leanings. We just need to be good educators. Bringing understanding to the people is good leadership. Clear, easily understood language and sound arguments are the means toward the favorable end.
Good comments, thanks. My comments below to show how I would word things:
Indeed, pools of saved money (savings pools) which in aggregate increase in size, are in fact a contributing cause to our economic conundrum,
*opportunity to cut taxes, and/or increase gov spending, depending on your politics
one which we should add to the balance sheet recession (aka, the excess consumer debt recession)
*for all practical purposes, all recessions are all balance sheet recessions.
for a more complete diagnosis of the cause for insufficient demand and resulting excess unemployment.
*in any case, the response is politically attractive- cut taxes and/or increase spending
What you’ve highlighted Warren is key. To echo your thoughts: In aggregate, currency users are currently net savers of U.S. money.
*more specifically, they have net savings desires
Saved money acts as a drain on the quantity of money being utilized in trade.
*Unspent income = reduced sales, vs spent income
If prices are relatively stable, decreasing the aggregate quantity of money to be utilized in trade means less can be purchased at those prices.
*Decreased spending, for any reason, = reduced sales.
for example, you could borrow $1 million, and leave it in your bank for liquidity, and nothing would change in the economy, even with more ‘money’ as defined as bank deposits. Or, you could buy a computer via a credit card with ‘no money down’ and spending/aggregate demand would rise by that amount.
Naturally demand decreases and unemployment follows (as will deflation should the reduction be severe enough).
Now, this isn’t to discourage savings, it is merely to recognize an empirically verifiable negative side effect of it.
*it’s a positive for those of us who prefer lower taxes/increased govt services, etc. it’s gov that turns this positive into a negative via errant policy.
Some savings can merely be delayed spending, but quite often the money is perpetually delayed, a sort of permanent drain if you will (e.g., money parked in long term bonds, and so on). And the side effect of this drain on demand levels is not helpful when demand is too low already.
*yes, again given current policy which is not to make appropriate fiscal adjustments.
For years now, the quantity of consumer owned money intended for use in trade
*Unspent income
has been draining out of the U.S. domestic economy
*has remained unspent
and pooling into the coffers of a number of different entities (e.g., foreign and domestic corporations, savings of the rich, etc.). As a result, there is a net loss of income to consumers, and with it, all the undesirable side effects we presently witness. Japan I would suggest is another example.
*yes, and the euro zone, uk, etc. etc.
The question is what to do about it. The answer is simple: The Federal government has the responsibility
*opportunity.
to combat the negative side effect of savings/currency pools
*and serve public purpose
by implementing policies which maintain (or increase in our case) the incomes of consumers.
*and/or directly buy the output gap
As a currency creator, the U.S. government
*is not revenue constrained
needs to generate fresh money
*can cut taxes and/or spend at will
to maintain the proper balance in the quantity of money being utilized in trade by being sure enough money is supplied to support current income levels (or in our case, generate enough money to increase those incomes). We can call this program the “tradeable-money maintenance program”.
*or we can call it sustaining total spending/aggregate demand at full employment levels
The program can be implemented by periodic (or perhaps even continuous) injections of freshly generated money, which is input by any number of means–tax cuts (with the loss in government income compensated for by this freshly generated money so as to fund the deficit),
*Govt. spend by crediting accounts at the Fed, with said spending ‘accounted for’ rather than ‘compensated for’
government created infrastructure retooling jobs, all forms of R&D, stimulus checks–pick your antidote. The basic conceptual idea is; money going out of the economy has to be put back,
*unspent income requires another to spend more than his income, or the output doesn’t get sold
and only the Federal government has the ability to put it back if the net savers are themselves unwilling.
*only the Federal gov can spend more than its income if no other agent will.
Of course the fear is such a policy will cause inflation. However, inflation
*from excess demand
will not occur unless this policy is performed to irresponsible excess. You should be afraid of the immediate problem of insufficient income and not afraid of the inflation boogie man we can quite easily avoid by not consuming the antidote to excess. No one argues you shouldn’t consume wholesome foods because you might eat too much of them… You should eat wholesome foods, and you should not eat too much. Balance is what we need. We need the government creating some money given this economic environment, just not too much.
*good analogy!
I appreciate you making the effort to write this article Warren. We need more like it in an effort to reach the media who can bring this to a broader audience. They should be sympathetic given their often liberal leanings. We just need to be good educators. Bringing understanding to the people is good leadership. Clear, easily understood language and sound arguments are the means toward the favorable end.
*Good post, just tweaking the language to further illustrate.
Good complimentary comments Warren. Whatever language, analogies, pedagogical tools we use, it is important we reach as many people as possible with clear, concise, easy to understand language. If we implement such in the elucidation of sound arguments, upon persuading the masses who vote, all of our lives will improve.
I realize I am probably preaching to the choir, but it is imperative for economists with good theory to lead in these times. Everything depends on a sound economy, from peace and stability, to our success as a nation in R&D, to general quality of life. I’m confident when I write this, I write this without exaggerating or being over-dramatic: Ecomonics is a necessary component to the foundation of civilization. To borrow an analogy with religious undertones, we might regard it as the corner stone. Without it, there is no modern life. There is war, competition for resources–the strong survive, the weak die. Tribalism, dog eat dog, pure competition, a world without much quality of life. We need economists to win these arguments. There is no reason you and your colleagues cannot succeed. And we don’t have to do it as glory seekers, individual promoters, or selfish brats who need approval through trophies, prizes, and recognition, but as people with honor concerned only for a world where collectively and individually, we all have the opportunity to thrive.
Just one example of what happens when governments don’t act consistent with sound economic theory:
You can watch the entire video, or skip ahead to 27:30 and watch the ensuing few minutes.
Congress cut this in 2006, and ironically they cut a similar project (which would have been even greater than the LHC which is the subsequently built European facility thought to be on the verge of the discovery of the Higgs Boson) during Clinton’s first term:
All because we thought we couldn’t afford it… This decision under the guise of responsible economic decisions set particle physics back decades and gave other nations the opportunity to make discoveries we had in our grasp. We need to win these arguments or our world will continue to change for the worse. It already quite conspicuously has, and it will only increase.
@Robert Rice,
Great points. Also, I believe Obama has sliced into Nasa’s budget in the same vain.
Not sure who Hobbs is. It wouldn’t surprise me if I was echoing someone else’s comments/concerns though. People often come to similar conclusions independently.
I appreciate your willingness to interact with your audience Warren. It’s a good quality. We need more gentlemen and fewer Shockleys:
@Robert Rice, “savings pools” is a good phrase. I think it sets the stage for debunking the whole saving/salvation meme that’s persuaded people of faith to go with the Republican brand. My own effort along that line has been to make the point that money is for spending; souls are for saving. That’s why it’s hard for a rich man to get into heaven.
@Neil Wilson, What I would argue is what’s available for trade and exchange isn’t the result of reduced or deferred consumption, but of the avoidance of excess production or accumulation going to waste. The alternative to grapes rotting on the vine is to turn them into wine and save them to drink in the winter. Production doesn’t respond to demand; production responds to the inventive nature of man.
Accumulation or saving is a very primitive impulse. Perhaps the default for people whose inventive skills are few.
Neil, I think that is trying to scale up micro to macro and overlooking the fallacies of composition involved in individuals rationally pursuing maximum utility. What is perfectly reasonable for individuals turns out to be rotten for the economy. Issues arising from saving are fundamentally related to the paradox of thrift.
So I attribute the problem to methodological individualism and related assumptions. The construction of the model leads to conclusions that are not representative of reality taken in aggregate. Methodological individualism is flawed because it ignores that society is a system make up of individuals in relationship and in systems analysis relations among elements are as significant as the elements. This is the basis of institutional economics, and MMT economists are institutionalists. Actually, the UMKC economics dept is known as institutionalist rather than MMT, MMT being a subset of the field emphasizing monetary institutions.
“How exactly do neo-classicals believe savings desires are frustrated by the economic system? And why do they get it wrong?”
Many people are still calculating static savings, in a dynamic-value world.
The unenlightened paradigm is to equate savings with accumulation of static assets. The enlightened view is to equate savings with accumulating dynamic, leveragable capabilities.
This argument began when the first agile barbarian showed up at the first fixed gate. Amazingly, the argument has NEVER concluded, despite overwhelming evidence insufficiently distributed.
Unfortunately, most economists study neither military science nor biology/chem/physics … or any other system science.
“demand leakages” is an interesting phrase, but a bit muddled. Are we looking at two nouns describing actions (demanding/requesting and leaking) in which the second implements the first, as a demand for information is “satisfied” by a leak, or are we looking at an imperative verb of which “leakages” are the object?
Regardless, my take is that the phrase actually refers to a symptom of a problem, not the problem itself, much as a fever, is a symptom of infection and of the need for an increased expenditure of energy to counter-act the invasion — i.e. the fever is both a symptom of disease and the effort to deal with it. If we look at “demand leakages” from that perspective, then “demand,” instead of being considered as an initiator of action that’s perhaps flawed, can be seen as akin to a dam whose leaks are evidence that, instead of concentrating the force of the flow to produce energy as it falls, has been undermined and merely serves to retard the flow. In other words, “demand leakages” are a symptom of an economy that’s been stopped up, or exists in a state of constipation, and is in need of an enema (stimulus) to get it going again. The dammed demand needs to be released, which probably means the leaks have to be stopped and the “savings pools” or backwaters drained.
Tax cuts won’t do that, but neither will increasing rates, because stagnant water can’t be captured. So, instead of draining the pools, perhaps we have to rely on the equivalent of evaporation to dry them up. Not sure what that would be.
Will the fear of inflation, of worthless coin becoming even more worthless, do it? How do we persuade the hoarders of coin that their obsession differs little from the fixation with how many angels can dance on the head of a pin?
We rescued an old man from his falling-down house in which foot-long icicles hung from his ceiling. Not only did he have $17,000 in a savings account, but there was over $6000 in un-cashed Social Security checks and buckets of coin lying around the place — i.e. more than enough to have fixed the roof, fixed the toilet and reconnected the electric service. But, the old man had an excuse — he was 89 and brain-addled. What accounts for the hoarders of coin on Wall Street?
you’re making way too much out of it.
‘demand leakage’ is the traditional term for ‘unspent income’
nor is it a problem per se. It just means we can enjoy an off setting fiscal adjustment.
if anyone wants to work and not consume his output, that just means someone else gets to consume it.
think of unspent income as a charitable donation to the rest of us.
for an analogy, if you buy subway tokens and then just hold them and not ride the train, are you creating a problem for anyone,
or just making a donation?
‘demand leakage’ is the traditional term for ‘unspent income’
ONLY in economics jargon! $5 says 99% of the electorate has no idea what “demand leakage” means. Would be far better to discipline all users to say “unspent income” instead, or even to specify “unspent fiat currency”.
As you say, unspent fiat just allows an opportunity for others to leverage the under-utilized initiative.
That would be self-apparent to more people if stated in some way other than “demand leakage”.
Exactly. The concern is clarity, not historical precedence.
Educating isn’t meant as an exercise in linguistic hubris, it should be the efficient elucidation of knowledge to the audience. Now to be fair, I don’t think you are guilty of hubris Warren, only to point out often specialists turned educators have their priorities backwards. We need to prioritize clarity. Utter clarity.
I do believe MMT has a good message which could be better packaged to reach a much larger audience. “Unspent income” or “savings” or even “savings pools” might not sound as fancy as “demand leakage,” but it is one example of language which will be easier for the lay person to understand. If this was an isolated example, I would say little harm, little foul, but MMT employs a number of less than intuitive words, such as:
1. Horizontal and vertical money
2. Currency issuer and currency user (although these aren’t far off the mark)
Not to mention utilizing descriptions such as “taxes destroy money” or “spending creates money” which only confuse the audience by conflating theory with description when in fact “currency recycling” is what the government really engages in (in addition of course to creation). Nothing changes here with MMT and the underlying theory, it just describes things better and more clearly. There’s no reason to have the language so idiosyncratically specific in the context of non-specialists when we can use more intuitive alternatives.
To crystalize my point: Suppose you were teaching a child basic arithmetic. Suppose the equation you were focusing on is 10 + 10 = x. Now, most people will rattle off x = 20, as that is what they were taught, but this assumes we are using a base 10 system instead of say binary where the same problem equals 0100 (binary for 4). Are you going to get into bases and all that fun jazz when initially trying to reach a student? That would be silly, but this is how specialists often think because they are so often used to talking to other specialists. Being specific about the base is great for mathematicians, but totally unnecessary for the average audience.
The objective should be conceptual clarity. You can have the finest product in existence, and if you market it poorly, very few (relatively speaking) will know about it. I believe rebranding MMT with clearer language utilized in the context of the broader audience would vastly improve its reception. For example:
1. Currency issuers could be rebranded as currency creators. “Issuer” is not as conspicuous in meaning as “creator”.
2. Currency users could be… this one is tough, we might leave this one. It’s not bad though not great.
3. Horizontal money is just money created by banks which has a corresponding liability attached to it. For every dollar of assets created, there is a dollar of liability created. I’m not sure what to call this money other than “bank created money” and explain all this money has a corresponding liability attached to it.
4. Vertical money is just “free and clear” money, meaning its creation does not have a liability attached to it. There’s got to be a better description than the one chosen.
5. Again, although theoretically sound but descriptively inaccurate is “taxes destroy money” or “government spending creates money.” We should call the collection of taxes and the subsequent spending “currency recycling”.
There are probably other examples, but the main idea here is for us all to think about how to get this message out in front of the masses in the perfect environment to be doing so (economics is the number one focus in the world right now, and we’re four months before a major election; people are listening, especially to good arguments with clear language; people just want solutions) with crystal clarity.
I don’t use horizontal and vertical outside of academic discussion.
and more recently i’ve been saying all govt spending is printing dollars and taxing unprinting dollars
the term ‘recycling’ is out of paradigm/part of the problem
I prefer ‘excess savings’ because that’s what they are. They are excess and cause a paradox of thrift.
Now of course that’s the outcome. For there to be ‘excess savings’ there first has to be a desire to save that generates those excess savings without a compensating automatic mechanism in the system to frustrate those desires.
I get a lot of traction on blog posts referring to ‘excess savings’ that have to be dealt with actively by government action.
Roger, I agree in principle and also agree with R. R. about the terminology and presentation. I think that Neil’s approach of looking at stocks and flows in parallel systems involving information on one hand and “stuff” on the other is excellent,. The interpretation of the symbolic system relates the information to the actual events through mapping, which is what description is.
Systems analysis combines topology (continuity and connectivity) and cartology (correspondence of elements and relations of representational and represented systems in logical space). Dynamic systems behave similarly in a very general way, observing stock-flow consistency. This is recored and measured wrt economic in terms of units of account and accounting rules that establish the formation and transformation rules of the information system.
Theory is a generalized mapping of a complex information system that maps the a complex dynamic in terms of higher orders of abstraction, and theory also articulates direction of flow, which we call “causation.” This is where the testable hypotheses come it.
The challenge is to create two parallel information system, one for non-experts and another for experts and providing translation rules so that the two systems can be rigorous deconstructed.
Expert systems should avoid ordinary language because it is so rich as to be ambiguous and lead to confusion. That’s the reason for formalization, operational definitions and technical terms. But this looses non-experts. So some translation rules need to be provided for communication between systems.
A lot of the kerfuffle between MMT and MCT (monetary circuit theory) is over MMT’s simplification for general understanding. Some on the MCT side don’t seem to get this, and so their problem is communicating a complex system to the public in an understandable way.
Perhaps the biggest problem communicating to the public is that money is information rather than a thing of the same order as other stuff. Money functions more like a thought than a “thing,” just as do other symbols that contain information about things but are not themselves “things” of the same order. This is the fundamental mistake of the commodity theory of money, which this now being revealed through “digital currencies.” Obviously, people enculturated in the digital age will be easier to reach than those who not so enculturated.
Moreover, most people are concrete thinker rather than abstract. They just don’t understand abstract concepts very well, and they don’t do nuance either. So the public has to be pitched at the freshman or sophomore level of high school, that is, way down on the reading scale and no math other than simple arithmetic.
or, the old how many shrinks does it take to change a light bulb…
Currency recycling is not outside of MMT paradigm… A currency creator can reuse the money it creates via fiscal policy. It doesn’t have to reuse it–it could do what MMT suggests and simply delete the money out of accounts without a corresponding deposit into government accounts. But there is no reason it cannot choose to reuse it. I mean look, reusing previously created money is in fact what happens currently. Tax money doesn’t just disappear, theyr’re deposited into a government account(s). I’m not sure why you would be averse to describing what happens currently as currency creators recycling the money it created via taxes and respending (with supplementary moments of money creation).
I think unfortunately until you and your colleagues are willing to recognize taxes do not equal money destruction, your views are going to largely continue to fall on deaf ears amongst the broader audience. Self-imposed hurdle.
have you read ‘the 7dif’ on this website?
The problem with the recycling analogy is that it suggests there is a fixed amount of stuff that has to be cycled around.
There isn’t a fixed amount of stuff – there is a dynamic amount of signalling information. It costs nothing to produce and nothing to destroy.
Seems that he is just saying that when one pays taxes, then the tax credit is applied to one’s liability to Tsy and a Tsy revenue account gets marked up, either the Tsy account at the Fed or a TTL account at a bank. In that way the Tsy add is an asset that cancels liabilities or adds to a surplus. Is that not the case?
Warren,
Indeed, I own your book, Wray’s “Understanding Modern Money”–I’ve read Kelton’s working paper on this from I believe ’99 (more than once), Fulwiller’s follow up paper from years later, etc.
Admittedly I feel a bit odd telling you and the other founders of MMT your judgment about what is and isn’t in paradigm is mistaken. MMT has got economics just about nailed, but on this particular descriptive point, I do believe you conflate what could be with what is–what’s theoretically sound with a description of current operations. Anyhow, I’m happy to have the conversation in more depth and am open-minded to your rebuttals, although I’ll let you decide whether this comment section of your site is the appropriate place for that or whether you’re even interested. Take my comments as concerned, friendly advice 😉 I want to see you and your colleagues succeed.
Where do you see the disconnect between descriptive, theoretical (causal), and prescriptive (policy change or institutional change)? Seems to me that the theory (causality) follows from the description, and the recommendation for policy shifts and institutional change are well-distinguished. But maybe not clearly enough in your mind?
You haven’t accurately characterized the distinction I’m referring to. No worries, but let’s try to be perfectly clear:
Currency issuers do not have to collect taxes to fund spending, not a single penny. This is the essence of MMT. In no way does the issuer need the users’ money. However, currency issuers might choose to collect previously created money and reuse it for its spending. This implies nothing about an issuer’s ability to issue more, it just describes what’s actually happening. Hence, the distinction I’m drawing is between sound theory and accurate description. MMT’s conclusions are correct–taxes do not have to fund spending. However, that’s a policy choice, not an intrinsic reality of the system. An issuer can choose to reuse previously created money through fiscal policy.
In a sentence; MMT is sound theoretically, unsound on this particular point descriptively. Removing the descriptive inaccuracy will enhance MMTs ability to reach the masses and not change a thing about the theoretical underpinnings.
understood, thanks!
ok, one take away is that the dollars govt. spends don’t ‘come from’ anywhere. the fed just credits your bank’s account at the fed.
this matters in regard to the fundamental dynamic at work which is taxes function to create unemployment- people looking to sell real goods and services in return for the needed funds- and not to ‘raise revenue’ per se.
right now we have Congress thinking they need our dollars to ‘get the money to spend’ or else they are ‘forced to borrow from the likes of china’ etc. and therefore we could be the next Greece, etc.
100% agreed–Congress is mistaken. Many believe the Federal government is a currency user, which couldn’t be further from the truth.
You and/or your colleagues recognition of the effect taxes and government spending have on aggregate demand is very important. Taxes reduce demand whereas government spending will lead to its increase. That seems to be the important point: fiscal policy affects demand levels. The collected revenues aren’t needed to fund the government (although they can nevertheless still be used to fund it, as a policy choice; this is what’s happening currently, i.e. currency recycling).
By the way, you may not hear this very often, but thank you for your and the other MMTers contributions over many, many years in developing this theory. It reminds me a lot of the neo-Darwinian synthesis which tied distinct ideas in biology together, i.e. bringing together natural selection, inheritance, and genetics:
MMT is a similar synthesis with its own novel contributions.
thanks!
Neil,
Currency recycling implies no such thing. If someone reuses something previously created, how does this imply more of that something cannot be created? That we are stuck with some fixed amount? We reuse materials, and we produce more. Reusing in no way presupposes producing more is impossible as evidenced by our actual recycling program.
For example, we recycle paper. Are you suggesting we couldn’t produce an indefinite amount of paper? Trees can be replanted. I suppose at some point we could use up all the carbon, but come on, for all practical purposes, my point is made.
Don’t let your own dogma get in the way. The world needs your “A” game.
The implication from recycling is always that we *shouldn’t* produce any more if we can avoid it and that it is wasteful to just throw things away.
And the other implication from recycling is that there is a process required to get it ready for reuse.
None of that applies to money – which is pure information.
When I work with Objects in a computer program I create and delete them at will. That there is a garbage collector managing the memory for me, handling the accounting and reusing memory space is irrelevant to the logic of the program I’m running.
In fact we created garbage collectors so we didn’t have to worry about that nonsense any more and could concentrate on the important stuff.
Treasury and the central bank are the monetary system’s garbage collector.
I didn’t call you any names Neil. And besides, ad hominem has a very specific meaning in logic (one most people don’t use correctly). I did not answer your argument with an attack on you, which is what an ad hominem of the sort you’re referring to technically is. I answered your argument with an argument. I just added that it’s important for you to not hold your position as unfalsifiable (as dogma). I say the same as much to myself as to you. And the world does need your “A” game (*our* A game), especially right now. “A” game includes being open-minded and honest. Not saying you’re being dishonest… Just sayin it’s important to not be dogmatic. Anyhow…
Look, I’m not sure of any analogy that doesn’t fail at some point to, in every possible manner, perfectly reflect that which it is intended to help elucidate. But analogies don’t have to perfectly reflect every aspect, just the intended aspect. Recycling may have a value judgment attached to it when associated with materials and the responsible usage thereof, but I don’t think most people would associate that value judgment with the operational aspect of recycling when used with regard to money. Recycling is intended as an operational description, and I think that would be fairly conspicuous to a general audience. Money is input into the currency user sector by the currency issuer, extracted back out via taxes, and reinput again in spending. Recycling seems like a very good, easy to follow, intuitive description. Sure, money doesn’t have to go through a preparation process or anything like materials (although it does need to cancel a tax liability before it’s reused), but then again, no analogy is perfect.
The bottom line: money recycling (aka fiscal policy as it currently operates) certainly doesn’t suggest any limitation on creating more money as you’d previously argued. I think it conveys the reuse of previously created money by currency issuers in a simple to understand manner.
Well, sure, but we’re all doing the same thing when we’re trying to frame our presentation. We have to speculate on what people will generally accept, react negatively to, you get the idea.
I think you’re point is one worth acknowledging–perhaps mere speculation on what people will receive or won’t receive isn’t sufficient to proper framing. We could always collect empirical data like a marketing company through surveys/polls to find out just what their reaction will be, but that is certainly more involved than our conversation allows for.
Anyhow, we’re ultimately on the same team, so I’d like to say I appreciate your contributions to the discussion. And I apologize if I offended you earlier. It wasn’t my intent. A lot of smart people here, and I certainly regard you as one.
Glad you are getting the word out on Huffington Post.
Demand leakages make perfect sense now than I am schooled in MMT, but I’m afraid it’ll go over the heads of the unschooled.
I like to think in terms of the sectoral balances equation:
Government Deficit = Net Private Savings + Trade Deficit
With a US trade deficit of 4% GDP and a private savings rate of 3%-5% GDP, one can quickly see that the budget deficit needs to be 8% GDP just to tread water. More, if we want the economy to accelerate.
I don’t expect the masses to understand that, but it’s not clear why more economists don’t get it ?
@Dan Lynch,
“Government Deficit = Net Private Savings + Trade Deficit”
This ties in with central bank hoarding from the likes of China and other EM countries that have trade big surpluses with the U.S. For example with China, they have to do something with all those dollars they’ve been accumulating and for the most part they have been content to hold them in Tsy securities. They could also buy U.S. real estate and/or businesses, both of which they do to one degree or another. Alternatively, they could buy a lot more goods and services from the U.S., which I think would fuel domestic inflation as all those U.S. dollar chickens come home to roost. That would probably put more people back to work in the export sectors and push the fed closer to the end game of zero interest rate policy.
i’d rather a tax cut than china spend it
@WARREN MOSLER,
I absolutely, positively agree!
@WARREN MOSLER, If China were buying assets then that seems to be a potential problem (maybe only for the 1%?). This is why I haven’t understood the idea that our trade deficit with China is all to the good. However, the reason it doesn’t happen more is because we won’t let them. I think Sinopec was trying to buy Unocal a few years ago and there was an uproar.
I would like to see China spend it. I really think the productive capacity here is greatly underutilized. If we had more sales, I think we could increase production without tremendous inflation. And, even if we had some inflation, having everyone employed would be worth it. It would also ease tensions with China, which I think is all to the good.
I favor a tax cut over China spending more here
but that’s just me
@WARREN MOSLER,
yes, but it must be a tax cut without matching spending cut!
😉
@SteveK9,
“I would like to see China spend it.” You’re assuming they would spend it here. 😉 Land, maybe, something they don’t have to manage daily, or resource in the ground. The Chinese don’t have to buy our products. They got most American companies to hand over the manufacturing secrets during the first 1999-2004 contracts. They didn’t re-up, closed the factory door, opened up across the street, replicated our stuff, and are now selling it happily in Africa or undercutting to the same customer list that American companies gave them for direct shipping.
I’d rather they not spend it and we cut taxes instead
@SteveK9,
Steve Keen in a 2011 INET interview with Robert Johnson said that the Chinese decided 30 YEARS AGO to move American industrial production to China. It’s on INETeconomics’ youtube page. Seven-part series. Here you go, found it: “Steve Keen on Europe, China, and Brazil 6/7” Use that to find the link. Starts around 2:50 min.
glad they did! to bad we don’t know the policy response that serves our public purpose
@MFW,
MRW:”You’re assuming they would spend it here”
Where else are they going to spend USD if not in the dollar zone? If they wish to spend or invest their USD holdings in some other currency zone, then they need to sell exchange them for that currency with someone who prefers USD either to save or spend in the dollar zone. Of course, they also have the option of buying gold or oil, for example, in markets accepting USD.
best they never spend a penny, like japan.
means we can have lower taxes here, improved real terms of trade, etc.
@WARREN MOSLER,
Where else are they going to spend USD if not in the dollar zone?
Basically the whole world (with only a few exceptions) is the “dollar zone”.
The whole world may be a dollar zone, but macroeconomically that is just changing the tags on ‘foreign held dollars’.
The tax cut vs ‘chinese spending it’ line requires a foreign to US flow to happen to stop it.
How many times the rest of the world swaps their dollars around shouldn’t really matter for US policy – particularly as they know most of the dollars are buried in central banks with no incentive to let them see the light of day ever again (much as they have in the past with gold).
The more the rest of the world sits on dollars in aggregate the lower US taxes can be as the US enjoys the rest of the world being really rather silly.
Hope President Obama is reading this. …
@Ed Rombach,
The Chinese are driving around in buses in Las Vegas buying foreclosed houses by the block. Got this from one of the 2500 remaining loan officers there, down from 45,000 in 2008.
@MRW,
Like I say, they have to do something with their dollar hoard.
hope they don’t dig them up and take them home…
if you met them personally it might help understand.
not a pretty sight…
How do you say “tea party” in Japanese?
http://finance.yahoo.com/news/japans-azumi-government-could-run-033130248.html
Keep it up. The HP devotees I know think say taxes are too low now. They even like Obamacare’s 500B$ transfer to Hartford,CT. Seems to be the definition of progressive in 2012.
they even support regressive taxes
🙁
The biggest demand leakage of the lot: looks as though U.S. states did not spend stimulus money. See:
http://johnbtaylorsblog.blogspot.co.uk/2012/03/in-blog-post-yesterday-paul-krugman.html
@Ralph Musgrave,
Then was the stimulus money used for payroll, pensions, etc.?
@chewitup,
Looks like it was used to repay debt – which is a great way of creating jobs (ho, ho).
that too!
If I am earning more income than I need to consume and choose to invest my surplus earnings into a new business or asset of some kind that earns a revenue stream….. that wouldn’t be considered a demand leakage would it?
@Ed Rombach,
It’s an aggregate measure. It’s savings net of investment of the non-government sector, or as I like to call them ‘excess savings’.
Neo-classical theory says they clear automaticaly at an interest rate, but *at the same quantity*. Post Keynesian theory says that to clear naturally the excess has to be destroyed in a depression, along with lots of sound investment and assets. Therefore you need an active mechanism to clear them without a depression.
And the best way to clear them is to validate them with deficit spending.
Hence the ‘excess savings’ = ‘lower taxes’ line.
Spending on business investment does not generate excess savings at that point.
non govt borrowing to spend is a reduction in savings desires
@Ed Rombach,
I think your question has been answered before somewhere in the comments on Warren’s blog.
If your saving surplus was spent by the business you invested in buying something – machines, paying for labor, building new things, than it wouldn’t be considered a demand leakage.
@RyanVMarkov,
That’s pretty much what I thought. However, isn’t the same thing true for a tax advantaged savings account? If I invest in equities for retirement savings, doesn’t that money go to pay for ongoing operating expenses in those companies?
maybe if it’s a new issue, so depends
@Ed Rombach,
Only if its new shares. Otherwise you are just swapping your money with people who already have the shares, and that swapping sequence does not necessarily end in any more spending. Very often it will end up with somebody swapping out of shares into Treasuries – possibly new Treasuries.
Remember that the secondary market doesn’t directly fund the companies that are listed on it.
it is if you buy stock, and if ‘they’ spend it, that’s a demand add
@Ed Rombach,
The simple answer is that if “investment” means firm expenditure for capital goods or production, then it is spending, not saving, and doesn’t lead to demand leakage. If it is financial “investment” that just amounts to change in ownership of existing assets, then it is saving, and if the one selling the assets just purchases another financial asset that doesn’t involve primary investment that gets spent by a firm, then it is only a shift in ownership and composition of assets, and results in demand leakage.
In aggregate, spending is consumer spending, firm spending, govt deficits, and net exports. Savings means consumer saving, firm saving, govt surplus, and net imports. So all transactions have to be ordered in that light, and every transaction can be analyzed in terms of whether it goes to spending or not. If it doesn’t, then demand leakage.
A big issue is that with falling rate of profit and return on primary investment, “investment” funds get saved in some form of financial asset instead of being spent and an economy gets increasingly financialized in aggregate, resulting in “fictitious” gains rather than substantial growth. While substance deteriorate actually and thus depreciates nominally, fictions can simply disappear, resulting in nominal collapse.
@Tom Hickey,
Completely OT, and I apologize, Warren, but I need this answer from Tom Hickey. Please indulge me.
Tom, I read one of your posts yesterday on another site that said MMTers met with the Chinese 15 years ago about MMT. Can you direct me to a source for that?
Thank you.
@MRW,
Don’t have the source handy since it was some time ago and I didn’t save it, but I vaguely remember it coming from Michael Hudson. Perhaps Warren can comment on it. He would certainly have the inside track on this.
yes, me, Randy Wray, Jan Kregel. Don’t recall the exact date.
Indeed, pools of saved money (savings pools) which in aggregate increase in size, are in fact a contributing cause to our economic conundrum, one which we should add to the balance sheet recession (aka, the excess consumer debt recession) for a more complete diagnosis of the cause for insufficient demand and resulting excess unemployment.
What you’ve highlighted Warren is key. To echo your thoughts: In aggregate, currency users are currently net savers of U.S. money. Saved money acts as a drain on the quantity of money being utilized in trade. If prices are relatively stable, decreasing the aggregate quantity of money to be utilized in trade means less can be purchased at those prices. Naturally demand decreases and unemployment follows (as will deflation should the reduction be severe enough).
Now, this isn’t to discourage savings, it is merely to recognize an empirically verifiable negative side effect of it. Some savings can merely be delayed spending, but quite often the money is perpetually delayed, a sort of permanent drain if you will (e.g., money parked in long term bonds, and so on). And the side effect of this drain on demand levels is not helpful when demand is too low already.
For years now, the quantity of consumer owned money intended for use in trade has been draining out of the U.S. domestic economy and pooling into the coffers of a number of different entities (e.g., foreign and domestic corporations, savings of the rich, etc.). As a result, there is a net loss of income to consumers, and with it, all the undesirable side effects we presently witness. Japan I would suggest is another example.
The question is what to do about it. The answer is simple: The Federal government has the responsibility to combat the negative side effect of savings/currency pools by implementing policies which maintain (or increase in our case) the incomes of consumers. As a currency creator, the U.S. government needs to generate fresh money to maintain the proper balance in the quantity of money being utilized in trade by being sure enough money is supplied to support current income levels (or in our case, generate enough money to increase those incomes). We can call this program the “tradeable-money maintenance program”.
The program can be implemented by periodic (or perhaps even continuous) injections of freshly generated money, which is input by any number of means–tax cuts (with the loss in government income compensated for by this freshly generated money so as to fund the deficit), government created infrastructure retooling jobs, all forms of R&D, stimulus checks–pick your antidote. The basic conceptual idea is; money going out of the economy has to be put back, and only the Federal government has the ability to put it back if the net savers are themselves unwilling.
Of course the fear is such a policy will cause inflation. However, inflation will not occur unless this policy is performed to irresponsible excess. You should be afraid of the immediate problem of insufficient income and not afraid of the inflation boogie man we can quite easily avoid by not consuming the antidote to excess. No one argues you shouldn’t consume wholesome foods because you might eat too much of them… You should eat wholesome foods, and you should not eat too much. Balance is what we need. We need the government creating some money given this economic environment, just not too much.
I appreciate you making the effort to write this article Warren. We need more like it in an effort to reach the media who can bring this to a broader audience. They should be sympathetic given their often liberal leanings. We just need to be good educators. Bringing understanding to the people is good leadership. Clear, easily understood language and sound arguments are the means toward the favorable end.
Good comments, thanks. My comments below to show how I would word things:
Indeed, pools of saved money (savings pools) which in aggregate increase in size, are in fact a contributing cause to our economic conundrum,
*opportunity to cut taxes, and/or increase gov spending, depending on your politics
one which we should add to the balance sheet recession (aka, the excess consumer debt recession)
*for all practical purposes, all recessions are all balance sheet recessions.
for a more complete diagnosis of the cause for insufficient demand and resulting excess unemployment.
*in any case, the response is politically attractive- cut taxes and/or increase spending
What you’ve highlighted Warren is key. To echo your thoughts: In aggregate, currency users are currently net savers of U.S. money.
*more specifically, they have net savings desires
Saved money acts as a drain on the quantity of money being utilized in trade.
*Unspent income = reduced sales, vs spent income
If prices are relatively stable, decreasing the aggregate quantity of money to be utilized in trade means less can be purchased at those prices.
*Decreased spending, for any reason, = reduced sales.
for example, you could borrow $1 million, and leave it in your bank for liquidity, and nothing would change in the economy, even with more ‘money’ as defined as bank deposits. Or, you could buy a computer via a credit card with ‘no money down’ and spending/aggregate demand would rise by that amount.
Naturally demand decreases and unemployment follows (as will deflation should the reduction be severe enough).
Now, this isn’t to discourage savings, it is merely to recognize an empirically verifiable negative side effect of it.
*it’s a positive for those of us who prefer lower taxes/increased govt services, etc. it’s gov that turns this positive into a negative via errant policy.
Some savings can merely be delayed spending, but quite often the money is perpetually delayed, a sort of permanent drain if you will (e.g., money parked in long term bonds, and so on). And the side effect of this drain on demand levels is not helpful when demand is too low already.
*yes, again given current policy which is not to make appropriate fiscal adjustments.
For years now, the quantity of consumer owned money intended for use in trade
*Unspent income
has been draining out of the U.S. domestic economy
*has remained unspent
and pooling into the coffers of a number of different entities (e.g., foreign and domestic corporations, savings of the rich, etc.). As a result, there is a net loss of income to consumers, and with it, all the undesirable side effects we presently witness. Japan I would suggest is another example.
*yes, and the euro zone, uk, etc. etc.
The question is what to do about it. The answer is simple: The Federal government has the responsibility
*opportunity.
to combat the negative side effect of savings/currency pools
*and serve public purpose
by implementing policies which maintain (or increase in our case) the incomes of consumers.
*and/or directly buy the output gap
As a currency creator, the U.S. government
*is not revenue constrained
needs to generate fresh money
*can cut taxes and/or spend at will
to maintain the proper balance in the quantity of money being utilized in trade by being sure enough money is supplied to support current income levels (or in our case, generate enough money to increase those incomes). We can call this program the “tradeable-money maintenance program”.
*or we can call it sustaining total spending/aggregate demand at full employment levels
The program can be implemented by periodic (or perhaps even continuous) injections of freshly generated money, which is input by any number of means–tax cuts (with the loss in government income compensated for by this freshly generated money so as to fund the deficit),
*Govt. spend by crediting accounts at the Fed, with said spending ‘accounted for’ rather than ‘compensated for’
government created infrastructure retooling jobs, all forms of R&D, stimulus checks–pick your antidote. The basic conceptual idea is; money going out of the economy has to be put back,
*unspent income requires another to spend more than his income, or the output doesn’t get sold
and only the Federal government has the ability to put it back if the net savers are themselves unwilling.
*only the Federal gov can spend more than its income if no other agent will.
Of course the fear is such a policy will cause inflation. However, inflation
*from excess demand
will not occur unless this policy is performed to irresponsible excess. You should be afraid of the immediate problem of insufficient income and not afraid of the inflation boogie man we can quite easily avoid by not consuming the antidote to excess. No one argues you shouldn’t consume wholesome foods because you might eat too much of them… You should eat wholesome foods, and you should not eat too much. Balance is what we need. We need the government creating some money given this economic environment, just not too much.
*good analogy!
I appreciate you making the effort to write this article Warren. We need more like it in an effort to reach the media who can bring this to a broader audience. They should be sympathetic given their often liberal leanings. We just need to be good educators. Bringing understanding to the people is good leadership. Clear, easily understood language and sound arguments are the means toward the favorable end.
*Good post, just tweaking the language to further illustrate.
@WARREN MOSLER,
Good complimentary comments Warren. Whatever language, analogies, pedagogical tools we use, it is important we reach as many people as possible with clear, concise, easy to understand language. If we implement such in the elucidation of sound arguments, upon persuading the masses who vote, all of our lives will improve.
I realize I am probably preaching to the choir, but it is imperative for economists with good theory to lead in these times. Everything depends on a sound economy, from peace and stability, to our success as a nation in R&D, to general quality of life. I’m confident when I write this, I write this without exaggerating or being over-dramatic: Ecomonics is a necessary component to the foundation of civilization. To borrow an analogy with religious undertones, we might regard it as the corner stone. Without it, there is no modern life. There is war, competition for resources–the strong survive, the weak die. Tribalism, dog eat dog, pure competition, a world without much quality of life. We need economists to win these arguments. There is no reason you and your colleagues cannot succeed. And we don’t have to do it as glory seekers, individual promoters, or selfish brats who need approval through trophies, prizes, and recognition, but as people with honor concerned only for a world where collectively and individually, we all have the opportunity to thrive.
Just one example of what happens when governments don’t act consistent with sound economic theory:
http://video.pbs.org/video/1334523763
You can watch the entire video, or skip ahead to 27:30 and watch the ensuing few minutes.
Congress cut this in 2006, and ironically they cut a similar project (which would have been even greater than the LHC which is the subsequently built European facility thought to be on the verge of the discovery of the Higgs Boson) during Clinton’s first term:
http://en.wikipedia.org/wiki/Superconducting_Super_Collider#Cancellation
All because we thought we couldn’t afford it… This decision under the guise of responsible economic decisions set particle physics back decades and gave other nations the opportunity to make discoveries we had in our grasp. We need to win these arguments or our world will continue to change for the worse. It already quite conspicuously has, and it will only increase.
@Robert Rice,
Great points. Also, I believe Obama has sliced into Nasa’s budget in the same vain.
Agreed. (and you’ve been reading Hobbs? 😉
@Warren Mosler,
Not sure who Hobbs is. It wouldn’t surprise me if I was echoing someone else’s comments/concerns though. People often come to similar conclusions independently.
I appreciate your willingness to interact with your audience Warren. It’s a good quality. We need more gentlemen and fewer Shockleys:
http://www.pbs.org/transistor/album1/shockley/index.html
@Robert Rice, “savings pools” is a good phrase. I think it sets the stage for debunking the whole saving/salvation meme that’s persuaded people of faith to go with the Republican brand. My own effort along that line has been to make the point that money is for spending; souls are for saving. That’s why it’s hard for a rich man to get into heaven.
watch for giant needles with 20′ diameter eyes.
@Monica Smith, Exactly. How does one “save” fiat? Like a lot of dynamic values and/or tools, it’s best used, not left idle.
Reminds me of the biblical parable of the Prodigal Sum (or was it “son”?). 🙂
@roger erickson,
Not to mention that an increase in aggregate saving is a response to uncertainty that increases uncertainty (which of course, requires more saving).
and lower taxes for a given size govt
😉
Warren,
How exactly do neo-classicals believe savings desires are frustrated by the economic system?
And why do they get it wrong?
@Neil Wilson, What I would argue is what’s available for trade and exchange isn’t the result of reduced or deferred consumption, but of the avoidance of excess production or accumulation going to waste. The alternative to grapes rotting on the vine is to turn them into wine and save them to drink in the winter. Production doesn’t respond to demand; production responds to the inventive nature of man.
Accumulation or saving is a very primitive impulse. Perhaps the default for people whose inventive skills are few.
that’s in regard to perishables
they mostly thnk it’s about ‘real interest rates’ whatever that actually means?
@Neil Wilson,
Neil, I think that is trying to scale up micro to macro and overlooking the fallacies of composition involved in individuals rationally pursuing maximum utility. What is perfectly reasonable for individuals turns out to be rotten for the economy. Issues arising from saving are fundamentally related to the paradox of thrift.
So I attribute the problem to methodological individualism and related assumptions. The construction of the model leads to conclusions that are not representative of reality taken in aggregate. Methodological individualism is flawed because it ignores that society is a system make up of individuals in relationship and in systems analysis relations among elements are as significant as the elements. This is the basis of institutional economics, and MMT economists are institutionalists. Actually, the UMKC economics dept is known as institutionalist rather than MMT, MMT being a subset of the field emphasizing monetary institutions.
@Neil Wilson,
“How exactly do neo-classicals believe savings desires are frustrated by the economic system? And why do they get it wrong?”
Many people are still calculating static savings, in a dynamic-value world.
The unenlightened paradigm is to equate savings with accumulation of static assets. The enlightened view is to equate savings with accumulating dynamic, leveragable capabilities.
This argument began when the first agile barbarian showed up at the first fixed gate. Amazingly, the argument has NEVER concluded, despite overwhelming evidence insufficiently distributed.
Unfortunately, most economists study neither military science nor biology/chem/physics … or any other system science.
“demand leakages” is an interesting phrase, but a bit muddled. Are we looking at two nouns describing actions (demanding/requesting and leaking) in which the second implements the first, as a demand for information is “satisfied” by a leak, or are we looking at an imperative verb of which “leakages” are the object?
Regardless, my take is that the phrase actually refers to a symptom of a problem, not the problem itself, much as a fever, is a symptom of infection and of the need for an increased expenditure of energy to counter-act the invasion — i.e. the fever is both a symptom of disease and the effort to deal with it. If we look at “demand leakages” from that perspective, then “demand,” instead of being considered as an initiator of action that’s perhaps flawed, can be seen as akin to a dam whose leaks are evidence that, instead of concentrating the force of the flow to produce energy as it falls, has been undermined and merely serves to retard the flow. In other words, “demand leakages” are a symptom of an economy that’s been stopped up, or exists in a state of constipation, and is in need of an enema (stimulus) to get it going again. The dammed demand needs to be released, which probably means the leaks have to be stopped and the “savings pools” or backwaters drained.
Tax cuts won’t do that, but neither will increasing rates, because stagnant water can’t be captured. So, instead of draining the pools, perhaps we have to rely on the equivalent of evaporation to dry them up. Not sure what that would be.
Will the fear of inflation, of worthless coin becoming even more worthless, do it? How do we persuade the hoarders of coin that their obsession differs little from the fixation with how many angels can dance on the head of a pin?
We rescued an old man from his falling-down house in which foot-long icicles hung from his ceiling. Not only did he have $17,000 in a savings account, but there was over $6000 in un-cashed Social Security checks and buckets of coin lying around the place — i.e. more than enough to have fixed the roof, fixed the toilet and reconnected the electric service. But, the old man had an excuse — he was 89 and brain-addled. What accounts for the hoarders of coin on Wall Street?
you’re making way too much out of it.
‘demand leakage’ is the traditional term for ‘unspent income’
nor is it a problem per se. It just means we can enjoy an off setting fiscal adjustment.
if anyone wants to work and not consume his output, that just means someone else gets to consume it.
think of unspent income as a charitable donation to the rest of us.
for an analogy, if you buy subway tokens and then just hold them and not ride the train, are you creating a problem for anyone,
or just making a donation?
@WARREN MOSLER,
‘demand leakage’ is the traditional term for ‘unspent income’
ONLY in economics jargon! $5 says 99% of the electorate has no idea what “demand leakage” means. Would be far better to discipline all users to say “unspent income” instead, or even to specify “unspent fiat currency”.
As you say, unspent fiat just allows an opportunity for others to leverage the under-utilized initiative.
That would be self-apparent to more people if stated in some way other than “demand leakage”.
@roger erickson,
Exactly. The concern is clarity, not historical precedence.
Educating isn’t meant as an exercise in linguistic hubris, it should be the efficient elucidation of knowledge to the audience. Now to be fair, I don’t think you are guilty of hubris Warren, only to point out often specialists turned educators have their priorities backwards. We need to prioritize clarity. Utter clarity.
I do believe MMT has a good message which could be better packaged to reach a much larger audience. “Unspent income” or “savings” or even “savings pools” might not sound as fancy as “demand leakage,” but it is one example of language which will be easier for the lay person to understand. If this was an isolated example, I would say little harm, little foul, but MMT employs a number of less than intuitive words, such as:
1. Horizontal and vertical money
2. Currency issuer and currency user (although these aren’t far off the mark)
Not to mention utilizing descriptions such as “taxes destroy money” or “spending creates money” which only confuse the audience by conflating theory with description when in fact “currency recycling” is what the government really engages in (in addition of course to creation). Nothing changes here with MMT and the underlying theory, it just describes things better and more clearly. There’s no reason to have the language so idiosyncratically specific in the context of non-specialists when we can use more intuitive alternatives.
To crystalize my point: Suppose you were teaching a child basic arithmetic. Suppose the equation you were focusing on is 10 + 10 = x. Now, most people will rattle off x = 20, as that is what they were taught, but this assumes we are using a base 10 system instead of say binary where the same problem equals 0100 (binary for 4). Are you going to get into bases and all that fun jazz when initially trying to reach a student? That would be silly, but this is how specialists often think because they are so often used to talking to other specialists. Being specific about the base is great for mathematicians, but totally unnecessary for the average audience.
The objective should be conceptual clarity. You can have the finest product in existence, and if you market it poorly, very few (relatively speaking) will know about it. I believe rebranding MMT with clearer language utilized in the context of the broader audience would vastly improve its reception. For example:
1. Currency issuers could be rebranded as currency creators. “Issuer” is not as conspicuous in meaning as “creator”.
2. Currency users could be… this one is tough, we might leave this one. It’s not bad though not great.
3. Horizontal money is just money created by banks which has a corresponding liability attached to it. For every dollar of assets created, there is a dollar of liability created. I’m not sure what to call this money other than “bank created money” and explain all this money has a corresponding liability attached to it.
4. Vertical money is just “free and clear” money, meaning its creation does not have a liability attached to it. There’s got to be a better description than the one chosen.
5. Again, although theoretically sound but descriptively inaccurate is “taxes destroy money” or “government spending creates money.” We should call the collection of taxes and the subsequent spending “currency recycling”.
There are probably other examples, but the main idea here is for us all to think about how to get this message out in front of the masses in the perfect environment to be doing so (economics is the number one focus in the world right now, and we’re four months before a major election; people are listening, especially to good arguments with clear language; people just want solutions) with crystal clarity.
I don’t use horizontal and vertical outside of academic discussion.
and more recently i’ve been saying all govt spending is printing dollars and taxing unprinting dollars
the term ‘recycling’ is out of paradigm/part of the problem
@roger erickson,
I prefer ‘excess savings’ because that’s what they are. They are excess and cause a paradox of thrift.
Now of course that’s the outcome. For there to be ‘excess savings’ there first has to be a desire to save that generates those excess savings without a compensating automatic mechanism in the system to frustrate those desires.
I get a lot of traction on blog posts referring to ‘excess savings’ that have to be dealt with actively by government action.
@roger erickson,
Unspent Fiat? They’re going to think you’re talking about an Italian car that hasn’t been totaled yet.
Demand Slackage? Lazy Money?
Hello, AAA? My Fiat Economy won’t go anywhere!
not to mention the public funding and union busting that cleaned up Chrysler so they could turn it over to Fiat.
@roger erickson,
Roger, I agree in principle and also agree with R. R. about the terminology and presentation. I think that Neil’s approach of looking at stocks and flows in parallel systems involving information on one hand and “stuff” on the other is excellent,. The interpretation of the symbolic system relates the information to the actual events through mapping, which is what description is.
Systems analysis combines topology (continuity and connectivity) and cartology (correspondence of elements and relations of representational and represented systems in logical space). Dynamic systems behave similarly in a very general way, observing stock-flow consistency. This is recored and measured wrt economic in terms of units of account and accounting rules that establish the formation and transformation rules of the information system.
Theory is a generalized mapping of a complex information system that maps the a complex dynamic in terms of higher orders of abstraction, and theory also articulates direction of flow, which we call “causation.” This is where the testable hypotheses come it.
The challenge is to create two parallel information system, one for non-experts and another for experts and providing translation rules so that the two systems can be rigorous deconstructed.
Expert systems should avoid ordinary language because it is so rich as to be ambiguous and lead to confusion. That’s the reason for formalization, operational definitions and technical terms. But this looses non-experts. So some translation rules need to be provided for communication between systems.
A lot of the kerfuffle between MMT and MCT (monetary circuit theory) is over MMT’s simplification for general understanding. Some on the MCT side don’t seem to get this, and so their problem is communicating a complex system to the public in an understandable way.
Perhaps the biggest problem communicating to the public is that money is information rather than a thing of the same order as other stuff. Money functions more like a thought than a “thing,” just as do other symbols that contain information about things but are not themselves “things” of the same order. This is the fundamental mistake of the commodity theory of money, which this now being revealed through “digital currencies.” Obviously, people enculturated in the digital age will be easier to reach than those who not so enculturated.
Moreover, most people are concrete thinker rather than abstract. They just don’t understand abstract concepts very well, and they don’t do nuance either. So the public has to be pitched at the freshman or sophomore level of high school, that is, way down on the reading scale and no math other than simple arithmetic.
or, the old how many shrinks does it take to change a light bulb…
@Warren Mosler,
Currency recycling is not outside of MMT paradigm… A currency creator can reuse the money it creates via fiscal policy. It doesn’t have to reuse it–it could do what MMT suggests and simply delete the money out of accounts without a corresponding deposit into government accounts. But there is no reason it cannot choose to reuse it. I mean look, reusing previously created money is in fact what happens currently. Tax money doesn’t just disappear, theyr’re deposited into a government account(s). I’m not sure why you would be averse to describing what happens currently as currency creators recycling the money it created via taxes and respending (with supplementary moments of money creation).
I think unfortunately until you and your colleagues are willing to recognize taxes do not equal money destruction, your views are going to largely continue to fall on deaf ears amongst the broader audience. Self-imposed hurdle.
have you read ‘the 7dif’ on this website?
The problem with the recycling analogy is that it suggests there is a fixed amount of stuff that has to be cycled around.
There isn’t a fixed amount of stuff – there is a dynamic amount of signalling information. It costs nothing to produce and nothing to destroy.
Recycling is a bad analogy.
@Warren Mosler,
Seems that he is just saying that when one pays taxes, then the tax credit is applied to one’s liability to Tsy and a Tsy revenue account gets marked up, either the Tsy account at the Fed or a TTL account at a bank. In that way the Tsy add is an asset that cancels liabilities or adds to a surplus. Is that not the case?
Warren,
Indeed, I own your book, Wray’s “Understanding Modern Money”–I’ve read Kelton’s working paper on this from I believe ’99 (more than once), Fulwiller’s follow up paper from years later, etc.
Admittedly I feel a bit odd telling you and the other founders of MMT your judgment about what is and isn’t in paradigm is mistaken. MMT has got economics just about nailed, but on this particular descriptive point, I do believe you conflate what could be with what is–what’s theoretically sound with a description of current operations. Anyhow, I’m happy to have the conversation in more depth and am open-minded to your rebuttals, although I’ll let you decide whether this comment section of your site is the appropriate place for that or whether you’re even interested. Take my comments as concerned, friendly advice 😉 I want to see you and your colleagues succeed.
@Robert Rice,
Where do you see the disconnect between descriptive, theoretical (causal), and prescriptive (policy change or institutional change)? Seems to me that the theory (causality) follows from the description, and the recommendation for policy shifts and institutional change are well-distinguished. But maybe not clearly enough in your mind?
@Tom Hickey,
Tom,
You haven’t accurately characterized the distinction I’m referring to. No worries, but let’s try to be perfectly clear:
Currency issuers do not have to collect taxes to fund spending, not a single penny. This is the essence of MMT. In no way does the issuer need the users’ money. However, currency issuers might choose to collect previously created money and reuse it for its spending. This implies nothing about an issuer’s ability to issue more, it just describes what’s actually happening. Hence, the distinction I’m drawing is between sound theory and accurate description. MMT’s conclusions are correct–taxes do not have to fund spending. However, that’s a policy choice, not an intrinsic reality of the system. An issuer can choose to reuse previously created money through fiscal policy.
In a sentence; MMT is sound theoretically, unsound on this particular point descriptively. Removing the descriptive inaccuracy will enhance MMTs ability to reach the masses and not change a thing about the theoretical underpinnings.
understood, thanks!
ok, one take away is that the dollars govt. spends don’t ‘come from’ anywhere. the fed just credits your bank’s account at the fed.
this matters in regard to the fundamental dynamic at work which is taxes function to create unemployment- people looking to sell real goods and services in return for the needed funds- and not to ‘raise revenue’ per se.
right now we have Congress thinking they need our dollars to ‘get the money to spend’ or else they are ‘forced to borrow from the likes of china’ etc. and therefore we could be the next Greece, etc.
@WARREN MOSLER,
100% agreed–Congress is mistaken. Many believe the Federal government is a currency user, which couldn’t be further from the truth.
You and/or your colleagues recognition of the effect taxes and government spending have on aggregate demand is very important. Taxes reduce demand whereas government spending will lead to its increase. That seems to be the important point: fiscal policy affects demand levels. The collected revenues aren’t needed to fund the government (although they can nevertheless still be used to fund it, as a policy choice; this is what’s happening currently, i.e. currency recycling).
By the way, you may not hear this very often, but thank you for your and the other MMTers contributions over many, many years in developing this theory. It reminds me a lot of the neo-Darwinian synthesis which tied distinct ideas in biology together, i.e. bringing together natural selection, inheritance, and genetics:
http://en.wikipedia.org/wiki/Modern_evolutionary_synthesis
MMT is a similar synthesis with its own novel contributions.
thanks!
Neil,
Currency recycling implies no such thing. If someone reuses something previously created, how does this imply more of that something cannot be created? That we are stuck with some fixed amount? We reuse materials, and we produce more. Reusing in no way presupposes producing more is impossible as evidenced by our actual recycling program.
For example, we recycle paper. Are you suggesting we couldn’t produce an indefinite amount of paper? Trees can be replanted. I suppose at some point we could use up all the carbon, but come on, for all practical purposes, my point is made.
Don’t let your own dogma get in the way. The world needs your “A” game.
@Robert Rice,
Let’s not get into ad-hominem here.
The implication from recycling is always that we *shouldn’t* produce any more if we can avoid it and that it is wasteful to just throw things away.
And the other implication from recycling is that there is a process required to get it ready for reuse.
None of that applies to money – which is pure information.
When I work with Objects in a computer program I create and delete them at will. That there is a garbage collector managing the memory for me, handling the accounting and reusing memory space is irrelevant to the logic of the program I’m running.
In fact we created garbage collectors so we didn’t have to worry about that nonsense any more and could concentrate on the important stuff.
Treasury and the central bank are the monetary system’s garbage collector.
@Neil Wilson,
I didn’t call you any names Neil. And besides, ad hominem has a very specific meaning in logic (one most people don’t use correctly). I did not answer your argument with an attack on you, which is what an ad hominem of the sort you’re referring to technically is. I answered your argument with an argument. I just added that it’s important for you to not hold your position as unfalsifiable (as dogma). I say the same as much to myself as to you. And the world does need your “A” game (*our* A game), especially right now. “A” game includes being open-minded and honest. Not saying you’re being dishonest… Just sayin it’s important to not be dogmatic. Anyhow…
Look, I’m not sure of any analogy that doesn’t fail at some point to, in every possible manner, perfectly reflect that which it is intended to help elucidate. But analogies don’t have to perfectly reflect every aspect, just the intended aspect. Recycling may have a value judgment attached to it when associated with materials and the responsible usage thereof, but I don’t think most people would associate that value judgment with the operational aspect of recycling when used with regard to money. Recycling is intended as an operational description, and I think that would be fairly conspicuous to a general audience. Money is input into the currency user sector by the currency issuer, extracted back out via taxes, and reinput again in spending. Recycling seems like a very good, easy to follow, intuitive description. Sure, money doesn’t have to go through a preparation process or anything like materials (although it does need to cancel a tax liability before it’s reused), but then again, no analogy is perfect.
The bottom line: money recycling (aka fiscal policy as it currently operates) certainly doesn’t suggest any limitation on creating more money as you’d previously argued. I think it conveys the reuse of previously created money by currency issuers in a simple to understand manner.
@Robert Rice,
The language you are using suggests that you not one to understand the effect words have on people and the inferences they draw from them.
@Neil Wilson,
Well, sure, but we’re all doing the same thing when we’re trying to frame our presentation. We have to speculate on what people will generally accept, react negatively to, you get the idea.
I think you’re point is one worth acknowledging–perhaps mere speculation on what people will receive or won’t receive isn’t sufficient to proper framing. We could always collect empirical data like a marketing company through surveys/polls to find out just what their reaction will be, but that is certainly more involved than our conversation allows for.
Anyhow, we’re ultimately on the same team, so I’d like to say I appreciate your contributions to the discussion. And I apologize if I offended you earlier. It wasn’t my intent. A lot of smart people here, and I certainly regard you as one.