Pilkington apparently doesn't have a very high opinion of monetary policy:
"Monetary policy acts for many analysts as a soporific, putting them to sleep when they should be focusing on real issues. It feeds nicely into their equilibrium models and allows them to sleep a little better at night. Even during the crisis their silly toy-models can yield them hours of fun as they tinker with them to produce higher inflation and lower interest rates. Meanwhile, Rome burns – and Keynes rolls in his grave."
"Discussions like this can refocus policymakers’ interest in fiscal policy by showing that monetary policy is a bunch of watered-down hooey that is fickle and unpredictable in its effects. In that, we can try to exorcise the neoclassical demon as best we can and bring government policy back to where it was in the three decades after WWII. Here’s hoping."
http://www.nakedcapitalism.com/2011/12/philip-pilkington-a-point-of-real-interest-in-the-latest-fed-minutes.html#comment-553687
Not exactly sure what to make of his post. There was quite a bit of reaction. It seems that the immediate impetus for Pilkington's post was a review Krugman wrote 15 years ago in 1996 for John K. Galbraith's "The Good Society: The Humane Agenda."
This is the link to Krugman's post http://www.pkarchive.org/cranks/GalbraithGoodSociety.html
Pilkington erronesously claimed in his post that it was from Galbraith's "The Affluent Society" which initially confused me as the book had been around for close to 30 years-why would Krugman suddenly be reviewing it in 1996? He quotes Krugman "JK Galbraith, remarkably, regards the Federal Reserve as a largely powerless institution; he dismisses the idea that the Fed can end a recession by cutting interest rates as a “quasi-religious conviction” that “triumphs over conflicting experience.”…
"Because Galbraith believes monetary policy cannot increase demand, however, he has a sort of Depression-era vision of an economy in which anything that increases spending is good… And so Galbraith is oblivious to the most serious problem facing modern liberalism: reconciling social justice with full employment."
So this is Pilkington's point of departure in eviscerating Krugman, Bernanke, and all 'Neoclassicals playing with their toy models.' I agree Krugman does not come out sounding great there, though it was 15 years ago and many of us were different then. For example, Cenk Ugher was a conservative Republican then. I was then as now a liberal Democrat but at the time I thought there was something to the idea of "ending welfare as we know it" ie, that welfare could and should be reformed. It's only in retrospect that it's clear that we didn't end welfare as we know it we simply ended welfare. And really quoting Krugman 15 years ago tells you little about what we need to do now or even where he is-he is not neoclassical.
The overall all reaction to Pilkington in the comments section seemed to be confusion. Some liked his making fun of Krugman's "toy models" many didn't appreciate the heavy snark. Also many found his point a little hard to grasp. He did however put a link to Warren Mosler-who is running third party for President this year-and who is a major Mondern Monetary Theorist (MMT) so evidently understanding MMT might be helpful in getting where he is coming from.
For on the face of it his point is hard to grasp. "While Bernanke et al have been bungling through with hapless and ineffective quantitative easing policies and ‘operation twists’, commentators like Krugman – who cut his teeth getting Japan wrong for years – have come out in support of negative interest rate policies, which essentially means trying to provoke inflation that will cause real interest rates to be effectively negative. These are two sides of the same bad economic model, I’m afraid. They are both based on the same crappy engineering-diagram-cum-economic-model and they both steadfastly refuse to recognise the key lesson Keynes tried to teach us about capitalist economies: namely, that the whole thing is subject to an overarching indeterminacy that cannot be accounted for in a childish toy-model based on equilibrium analysis."
"In fact, interest rate policy in the present environment is not simply worthless – it actually worsens the state of the economy to some degree. Why? Because of interest income channels. When the central bank lowers interest rates they assume that people will borrow more. And when Krugman says that we should have inflation outpace the interest rate, he is thinking along the same lines. What these folks never consider is the fact that low interest rates actually act as a net drain on new financial assets entering the economy."
"If I’m a saver – and there are a LOT of savers out there these days – and the central bank lowers the interest rate or targets a negative real interest rate, I lose interest on my savings. This ‘interest income’ would have added to aggregate demand – that is, total spending power – as it would mean new net financial assets flowing into my bank account and encouraging me to consume more. Instead, my savings sit around idly earning nothing and so I have even less of an incentive to purchase goods and services."
He seems to think that Krugman is a fake Keynesian-is really neoclassical-but yet that interest rate policy might even do some harm because it "punishes savers?!" What could be more unKeynesian than that? For guidance I checked out a bit more from the MMTers. It's hard to place them exactly or figure out what they are for or against-just like Pilkington's post it seems that in general MMT take positions where it's hard to know what we're even discussing much less if it's true or not.
Here is what they say on a website entitled "Pragmatic Capitalism." First they offer this warning: "This subject is very dense, highly complex and counterintuitive to much of neoclassical economics. Because it requires a substantial time investment I would recommend preparing yourself to spend several hours (or even days) on the material before getting overwhelmed by it. The discussion forum also covers many of the common misconceptions when first confronting this subject. Novice investors, economists and layman might be interested in reviewing the video introduction to MMT which can be found in the media section on the website"
Well, forewarned is forearmed I guess. "MMT is a description of the monetary system within a nation operating a fiat currency which involves an autonomous monetary system, monopoly supply of currency and floating exchange rates. MMT describes how a government creates, destroys and utilizes its monetary unit and also how the private sector utilizes the state’s monetary unit for its own benefit."
"MMT is based on the state theory of money which says that modern fiat money is always a “creature of the state”. The theory was first introduced by GF Knapp as “Chartalism”. This is derived from the Latin word “charta” which means token. This is used to describe the reality of modern fiat currencies as nothing more than a state issued token with no linkage to commodity based money. We do not reside in a system in which currencies have any linkage to metals therefore, such thinking is not applicable to a modern fiat monetary system, although such thinking has persisted and still clouds much economic thinking to this day."
While MMT or its forerunner was evidently around prior to it(Sumner claims, right or wrong that Joan Robinoson was already MMT before the theory http://www.themoneyillusion.com/?p=10530) it seems that with the Nixon Surprise it has really come into its own as since then we have been on a real fiat money system. It is pretty clear then that they believe that analyzing the monetary system changes radically now that we are on the fiat monetary system. The fact taht we no longer reside in a system where currencies have any linkage to metals means that a whole new way of thinking about monetary policy is necessary. The thing that must be kept in mind for the MMTers is that modern fiat currencies are mere state issued tokens with no linkage to commodity based money.
As other monetary theories fail to keep this im mind they are error prone. It's not easy to figure out where the MMTers are exactly. "One important element of MMT is its political agnosticism. There are components of MMT that tend to be left leaning, however, there are also components of MMT that are right leaning. For instance, MMT is agreeable to many right leaning economists because it favors lower taxes, reducing (or ending) the Fed’s role in the monetary system and focusing on efficiency of government (reducing wasteful spending and malinvestment). MMT is also agreeable to left leaning economists because it favors government deficits, tighter bank regulations and a focus on full employment. Importantly, it is neither an offshoot of Keynesianism, Monetarism nor Austrian economics, though there are components of each involved to some extent. Rather, MMT is an offshoot of many different theoretical frameworks with GF Knapp, Abba Lerner, Hyman Minsky and Wynne Godley playing central roles in helping to craft it."
So on the one hand MMT favors lower taxes, reducing or ending the Fed's role in monetary policy and reducing "wasteful spending and malinvestment" it also favors government deficits, tighter bank regulation and a focus on full employment. It is hard to see how some of these can go together. If they oppose "wasteful" spending where are the deficits that they do favor supposed to come from? If they want to cut spending and reduce the Fed's role again, how if full employment going to be focused on much less achieved?
As you can see both Pilkington and his MMTers are giving me more questions than answers. Sumner regularly makes catty comments about them and Krugman more than once has argued against them but it's hard to argue as I don't get their views. I will read more later and maybe I will come up with something.
Their focus on the change to a pure fiat monetary system is interesting. Are they right that it somehow requires a radically different monetary approach? I don't know the answer to this till I get more about why they say this is so but it is an interesting claim.
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