Dougald, whenever I read one of your posts it makes me want to find you and have a coffee and talk about what you have written. I came upon MMT because I was searching for a reason why the massive money supply expansion in 2008-09 did not result in massive inflation they way I had been taught that it would in grad school.
It has now been shown quite conclusively that there is no relationship between the money supply and inflation. And the “too much money chasing too few goods” monetarist explanation is incredibly simplistic in a way that Kelton and other MMT theorists make clear. Inflation that results from supply chain issues (such as experienced in the pandemic and its aftermath) needs a fiscal policy reponse aimed at increasing supply (or potentially regulating prices or even rationing in the short term).
Increasing central bank interest rates to address inflation (however caused) works. But the way it works is cruel and almost always “overshoots” its objective. Making business investment more expensive due to a higher rate of interest kills job growth which siphons wage income out of the economy, which leads to a lower rate of inflation.
So the wage earners typically in the bottom half (or third, or quarter) of the labour market pay an exorbitant cost of the “war on inflation” while those holding assets benefit. I am not a communist but this doesn’t sound like a plan any democratic country should be pursuing on behalf of its citizens.
Dougald you have mentioned the New Deal and the changes ushered in by FDR in several posts. One of the very significant changes that occurred during WWII and was cemented through unions after the war was the 40 hour work week.
Prior to WWII the typical full time work week was 60 hours! Rifkin in The End of Work makes a convincing case that the Depression was largely caused by wage income not keeping pace in the economy with productivity gains as the US industrialized its economy. Workers simply could not afford to buy what the economy was producing and the economy ground to a halt.
Not only did the work week decline to 40 hours post-war, but incomes also rose! In effect the balance between worker productivity and earnings was “reset” and remained in step as the economy grew until about 1978/9. Policy decisions by government systematically empowered corporations in the wage setting process and in fact, inflation assists this process in that wages did not rise as fast as prices throughout the next 4 decades.
Anyway, this is turning into its own post (sorry).
In the 1920s, union membership slumped. It only rose again once there were jobs to be had. The 1920s had plenty of turmoil but the “roaring 20s” was a gilded age like today where debt-driven stock and property speculation was driving the market. The high-pressure economy of the great compression 1938-1945 had the effect of inflating away people’s personal debt.
It wasn’t until the Wagner Act was passed in 1935 that unions had the right to organize and employers had to recognize (and bargain with) unions though. In Canada PC 1003 put essentially the same framework in Canada, but not until 1944.
Prior to the passage of legislation that established a framework for union recognition and bargaining, employers often resisted (violently in many cases) recognizing unions. The tradition of referring to fellow union members as “brother” and “sister” dates from a time when joining a union was a political act and the use of names was to be avoided.
The impact of unions (including union avoidance strategies that mirrored provisions in union contracts in terms of wages and benefits) explains much of what happened in terms of post war wage growth and how it was able to keep pace with productivity gains.
I get the focus on debt flows over time but I think there is another aspect to the story of where we are now that is the “wage/effort” bargain and how that has changed over time, and the government’s role in it.
Outstanding. The post moved me from a free subscriber to a founding subscriber. As an avid reader of Kelton Steve Tain dickheads Randall Ray, Warren Mosler, etc. this article is a great mini book on MMT, adding a succinct discussion of the political and philosophical benefits and opposition to MMT the 400 word summary was particularly nice although I can’t get any of my friends, family or peers to get past point one the use of the term “taxpayer of money “is so pervasive in the media and a literature, even in Substack and other newsletters of otherwise very bright people I don’t know how we get past this point
Thank you! I will be writing more. The challenge of understanding what's actually happening is both that for most people, their experience of money is totally different, precisely because they are not a central bank! As Galbraith said, when it comes to economics, the majority is always wrong.
It is also the case - which needs to be addressed in deeper detail - is that theorists have been unable to articulate how money works, because it is treated as something material - a coin or a bill or a gold bar - when it is symbolic. As a result, economics has been expressed throught metaphors of the age - liquidity and flows, or hydraulics, or mechanical efficiency, or physics, when money itself is information, and information works in very counterintuitive ways, although there is tremendous science and engineering that describes its functioning, we are stuck with what is essentially a string of superstitious taboos.
A fascinating read. Seems to point at the background reasons for why I have been thinking what I have been thinking. If your long held habit is to play with an elastic band and nearly every time you snap that elastic band and it flicks back and painfully hits you, well, maybe you should stop doing that.
Thanks for such a well thought out piece and for making these points. I have read Keltons book as well. And I agree so much with how you describe the religious aspect of our economic policy. No matter how much evidence piles up, we can reject it out of hand because it doesn't fit our beliefs. If I had a nickel for every time I've heard someone say that "we can't run government policy that way because that's not how I run my household" I would have a hell of a lot of nickels. Maybe not quite as many as Mellon. But it would be close.
I've become more convinced that we should be designing our society around caring for people. That's seniors, young people, those with disabilities. That our economy and money are just tools in that end goal. But fear is in the way. It seems that all of us get captured by the fear that if we even make small changes the whole existing structure will collapse. So we just go back to our zero sum game, and try to pry some dollars from the hands of our neighbours.
I should also point out that I really like how this article lays out the fact that far left snd far right are so similar in what they want.
Dougald, whenever I read one of your posts it makes me want to find you and have a coffee and talk about what you have written. I came upon MMT because I was searching for a reason why the massive money supply expansion in 2008-09 did not result in massive inflation they way I had been taught that it would in grad school.
It has now been shown quite conclusively that there is no relationship between the money supply and inflation. And the “too much money chasing too few goods” monetarist explanation is incredibly simplistic in a way that Kelton and other MMT theorists make clear. Inflation that results from supply chain issues (such as experienced in the pandemic and its aftermath) needs a fiscal policy reponse aimed at increasing supply (or potentially regulating prices or even rationing in the short term).
Increasing central bank interest rates to address inflation (however caused) works. But the way it works is cruel and almost always “overshoots” its objective. Making business investment more expensive due to a higher rate of interest kills job growth which siphons wage income out of the economy, which leads to a lower rate of inflation.
So the wage earners typically in the bottom half (or third, or quarter) of the labour market pay an exorbitant cost of the “war on inflation” while those holding assets benefit. I am not a communist but this doesn’t sound like a plan any democratic country should be pursuing on behalf of its citizens.
Dougald you have mentioned the New Deal and the changes ushered in by FDR in several posts. One of the very significant changes that occurred during WWII and was cemented through unions after the war was the 40 hour work week.
Prior to WWII the typical full time work week was 60 hours! Rifkin in The End of Work makes a convincing case that the Depression was largely caused by wage income not keeping pace in the economy with productivity gains as the US industrialized its economy. Workers simply could not afford to buy what the economy was producing and the economy ground to a halt.
Not only did the work week decline to 40 hours post-war, but incomes also rose! In effect the balance between worker productivity and earnings was “reset” and remained in step as the economy grew until about 1978/9. Policy decisions by government systematically empowered corporations in the wage setting process and in fact, inflation assists this process in that wages did not rise as fast as prices throughout the next 4 decades.
Anyway, this is turning into its own post (sorry).
In the 1920s, union membership slumped. It only rose again once there were jobs to be had. The 1920s had plenty of turmoil but the “roaring 20s” was a gilded age like today where debt-driven stock and property speculation was driving the market. The high-pressure economy of the great compression 1938-1945 had the effect of inflating away people’s personal debt.
It wasn’t until the Wagner Act was passed in 1935 that unions had the right to organize and employers had to recognize (and bargain with) unions though. In Canada PC 1003 put essentially the same framework in Canada, but not until 1944.
Prior to the passage of legislation that established a framework for union recognition and bargaining, employers often resisted (violently in many cases) recognizing unions. The tradition of referring to fellow union members as “brother” and “sister” dates from a time when joining a union was a political act and the use of names was to be avoided.
The impact of unions (including union avoidance strategies that mirrored provisions in union contracts in terms of wages and benefits) explains much of what happened in terms of post war wage growth and how it was able to keep pace with productivity gains.
I get the focus on debt flows over time but I think there is another aspect to the story of where we are now that is the “wage/effort” bargain and how that has changed over time, and the government’s role in it.
PS. Love the works of Keynes and J. Kenneth Galbraith.
Outstanding. The post moved me from a free subscriber to a founding subscriber. As an avid reader of Kelton Steve Tain dickheads Randall Ray, Warren Mosler, etc. this article is a great mini book on MMT, adding a succinct discussion of the political and philosophical benefits and opposition to MMT the 400 word summary was particularly nice although I can’t get any of my friends, family or peers to get past point one the use of the term “taxpayer of money “is so pervasive in the media and a literature, even in Substack and other newsletters of otherwise very bright people I don’t know how we get past this point
Thank you! I will be writing more. The challenge of understanding what's actually happening is both that for most people, their experience of money is totally different, precisely because they are not a central bank! As Galbraith said, when it comes to economics, the majority is always wrong.
It is also the case - which needs to be addressed in deeper detail - is that theorists have been unable to articulate how money works, because it is treated as something material - a coin or a bill or a gold bar - when it is symbolic. As a result, economics has been expressed throught metaphors of the age - liquidity and flows, or hydraulics, or mechanical efficiency, or physics, when money itself is information, and information works in very counterintuitive ways, although there is tremendous science and engineering that describes its functioning, we are stuck with what is essentially a string of superstitious taboos.
Oops, the power lack of power of dictation obviously I didn’t mean to say dickhead. It was Dick Ehnts. Steve Keen.. Wray.
I just assumed you were Australian.
A fascinating read. Seems to point at the background reasons for why I have been thinking what I have been thinking. If your long held habit is to play with an elastic band and nearly every time you snap that elastic band and it flicks back and painfully hits you, well, maybe you should stop doing that.
You would think.
"If we are going to talk about a theory, or engage in discussion around competing ideas, we should at do our best to have an informed debate."
THAT IS QUITE THE BOLD ASSERTION, SIR.
Thanks for such a well thought out piece and for making these points. I have read Keltons book as well. And I agree so much with how you describe the religious aspect of our economic policy. No matter how much evidence piles up, we can reject it out of hand because it doesn't fit our beliefs. If I had a nickel for every time I've heard someone say that "we can't run government policy that way because that's not how I run my household" I would have a hell of a lot of nickels. Maybe not quite as many as Mellon. But it would be close.
I've become more convinced that we should be designing our society around caring for people. That's seniors, young people, those with disabilities. That our economy and money are just tools in that end goal. But fear is in the way. It seems that all of us get captured by the fear that if we even make small changes the whole existing structure will collapse. So we just go back to our zero sum game, and try to pry some dollars from the hands of our neighbours.
I should also point out that I really like how this article lays out the fact that far left snd far right are so similar in what they want.
Thanks for such a great article.