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MMT’s inflationary bias

from Lars Syll

A view yours truly often encounters when debating MMT is that there is an inflationary bias in MMT and that its framework ignores expectations.

Hmm …

It is extremely difficult to recognize that description. Given its roots in the writings of Keynes, Lerner, and Minsky, it is, to say the least, rather amazing to attribute those views to MMT. Let me just quote one source to show how ill-founded the critique is on this issue:

defMMT recommends a different approach to the federal budgeting process, one that integrates inflation risk into the decision-making process so that lawmakers are forced to stop and think about whether they have taken the necessary steps to guard against inflation risk before approving any new spending. MMT would make us safer in this respect because it recognizes that the best defense against inflation is a good offense. We don’t want to allow excessive spending to cause inflation and then fight inflation after it happens. We want agencies like CBO helping to evaluate new legislation for potential inflation risk before Congress commits to funding new programs so that the risks can be mitigated preemptively. At its core, MMT is about replacing an artificial (revenue) constraint with a real (inflation) constraint.

  1. August 26, 2020 at 4:41 pm

    The fact that MMT does not go into all the technical details on how best to forecast inflation, including what weight should be given to “expectations” does not detract from the basic point made by MMT, namely that the size of the deficit and debt (contrary to the claims of Rogoff, Reinhart etc) is irrelevant. I.e. the only important question is whether the D & D are likely to result in excess inflation.

    Entire books and hundreds of papers have been written about expectations: the idea that MMT needs to get bogged down in those arguments is nonsense.

    Moreover, expectations looms large in Ricardian Equivalence, and I very much agree with Joseph Stiglitz who said “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.” I.e. expectations are to a significant extent an excuse for academic economists to churn out papers based on assumptions which have only a tenuous connection with reality.

    • Craig
      August 26, 2020 at 8:13 pm

      MMT is exactly right about the mechanics of money creation and that deficits are actually necessary to keep the economy from bogging down. Their assertion that inflation will not occur however, is mistaken. The ideas of general equilibrium, “balancing the books” and balancing the deficit’s effect are all either fallacious or wishful thinking because they assume that money itself is the cause of inflation. Even the ideas that scarcity of income or resources are responsible for inflation is a secondary cause.

      The primary cause of inflation is the lack of an effective way to create individual and systemic monetary abundance and yet that simultaneously REDUCES prices by a percentage far beyond the normal rate of inflation,which is generally a smallish single digit percentage due to competition.

      Doing this, which would far and away benefit all economic agents more so than any other suggested reforms, and then conscientiously regulating anti-social attempts to destabilize it could change the entire reality of the scarcity/austerity and yet creeping inflation pattern of economics.

      And 50% discount/rebate policies at both retail sale and at the point of note signing are the strategically pinpointed means of doing that.

      • August 27, 2020 at 10:27 am

        So, Craig, you have never come across “conspicuous consumption” whereby sellers raise prices to suggest quality, persuading buyers to show off their wealth and good taste?

      • Craig
        August 27, 2020 at 4:29 pm

        Let the foolish rich pay exorbitant prices on a handful of products and services which will have no real negative systemic effects …and tax any POTENTIAL revenue garnered from such arbitrary price rises at a rate of 100% (because if there is any competition for such products, the rich, who may be ostentatiously dumb, but aren’t necessarily stuuuupid, will probably buy the lower priced frivolous status product.

  2. John Doyle.
    August 31, 2020 at 8:03 am

    Inflation is not a bogeyman. That is erroneous, but the mainstream is clutching at straws which cannot save them from drowning. The bankers, who are the main enemy, will continue to push that barrow. Will the politicians continue to support that line or get into line with the reality?

  3. Ken Zimmerman
    September 20, 2020 at 3:54 pm

    Lars’ assessment of inflation is wholly consistent with the history of inflation in the US. The modern concept of inflation in the US was an outgrowth of government efforts to measure prices, which stemmed from the same Progressive impulses (late 19th and early 20th century) to assess whether the industrial system was allowing most citizens to meet their basic needs. From the standpoint of facing up to inflation, there were two forces at work. One was what that proverbial ‘gent or lassie on the street’ experienced when buying groceries, or a car, or filling the car tank with gas. The other was what the consumer price index said each month. The former was the lived experience of prices; the latter was a statistic, an indicator, that we call “inflation.” Often the two judgments did not match. This mismatch was mostly trivial from the 1930s (when the official statistic, indicator was invented) until the 1970s when the conflicts over the two judged values of inflation became extreme. And have remained extreme till the current period.

    Today, the disconnect between CPI as a leading indicator (of inflation) and how the average American experiences or understands inflation exposes the limitations of this and the other economic indicators invented in the 1930s and after. The indicators may measure the economy (based on the definition from the 1930s still in use today), but they cannot determine whether the economic system is meeting citizens’ needs and expectations. How individuals experience “the economy” is distinct from how statisticians measure the economy. The indicators were invaluable tools in the first half of the 20th century, especially in contrast to the complete absence of such indicators for most of human history. But by the end of the 20th century, the gap between what these numbers say and what many people and businesses experience was growing untenably wide. And has continued to widen in the 21st century.

    The so called ‘leading indicators’ were intended to measure the health of the system, but along the way, they became referendums on whether people are content and satisfied. For that job, the indicators have been found pitifully wanting. How we got here is one story; what we do about it is another. The indicators began as metrics to provide guideposts to help policy makers and businesses understand what was going on. By the early 21st century, however, they were used to justify trillions of dollars of government spending and business investment. Indeed, it is now almost impossible for government to spend money, for businesses to plan, and for individuals to make decisions about investing and retiring without reference to these numbers. Rather than taken as guides, they are used as inputs into a system that is assumed to operate like a machine. Calibrate the inputs correctly and you can, with reasonable accuracy, predict the outputs. It all seems very neat, and it is. It is also, with alarming frequency, wrong and dangerously destructive. One of the many precarious gifts from economists to we average Americans.

    The backlash has been particularly intense regarding ‘official’ measures of inflation. Many now point out there is no simple thing called ‘inflation.’ Yes, there is a number reported monthly and collected diligently from thousands of surveys of households across the country. But that indicator is only one of multiple gauges intended to capture prices and costs of living. CPI itself has been revised and criticized numerous times and continues to be. The volatility of the number fuels popular beliefs that these figures are gamed in favor of those who have power and resources (e.g., banks and other large financial entities). Writing in Harper’s magazine in May 2008, Kevin Phillips describes the legacy of suspicion surrounding official inflation figures, saying, “Since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economic are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt, even as real economic growth has been slower than claimed.” Academics are worried, as well that the entire fiat currency system is a proverbial house of cards ready to collapse at any moment and bound to eventually. In 2003, University of Chicago professor Austan Goolsbee claimed that the US government was “cooking the books” in the way that it measures economic trends. Add in the big fish of finance. It seems there is a full house on worry about US economic indicators. Bill Gross, fund manager at Pimco, which manages trillions of dollars of assets for individuals and institutions, wrote in 2004 that CPI is essentially a government con job. “My quarrel, though, is not just with those who are fixated on the core CPI or the core PCE, but with those who support what we know as hedonic adjustments. Talk about a con job! The government says that if the quality of a product got better over the last 12 months that it didn’t really go up in price and in fact it may have actually gone down! Why, we could be back to Bernanke deflation real soon if the government would quality adjust enough products. For instance, prices of desktop and notebook computers declined by 8% a year during the past decade . . . but because the machines’ computer power and memory have improved, their hedonically adjusted prices have dropped by 25% a year since 1997. No wonder the core CPI is less than 2% with computers dropping by that much every year. But did your new model computer come with a 25% discount from last year’s price? Probably not. What is likely is that you paid about the same price for hedonically adjusted memory improvements you’ll never use. Similarly, government statisticians manipulate the price increases for cars and just about any durable good that comes off an assembly line but find it difficult to extend that theory to underwear or a pair of shoes. Perhaps that’s next. Talk about Uncle Sam getting into your shorts!”

    In short, inflation is a cultural artifact. Invented, defined, and applied by people for purposes they judge to be useful or beneficial for some part or parts of society. How that determination is made, put into practice, and defended are the issues we, as social scientists need to address.

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