Blog-Reference
Warren Mosler asserts: “Deadly Innocent Fraud No.1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow. Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no ‘solvency risk.’“
Operationally true, of course. With regard to the economy holds, the Legitimate Sovereign can do anything. The two questions, what is legitimate and who is the sovereign has to be discussed and decided in the political realm. What Legitimate Sovereignty means in concrete detail is NOT an issue for economics ― understood as science. It should be clear, though, that from the fact that the government is not operationally constrained to kill the whole population does not logically follow that this is legitimate. Legitimacy entails operational self-constraint. From the fact that government spending is not operationally constrained does not logically follow that it is legitimate. From the fact that the government is not constrained in creating any amount of money does not logically follow that this is ‘good’ economic policy. The detailed discussion about operational feasibility distracts from the core of the matter.
The core of economics is the question of how the monetary economy works and how deficit spending affects employment, income, profit, the creation/destruction of money, absolute and relative prices, growth, nominal and real distribution over the whole cycle from the origination of private and public debt to its full redemption.
Warren Mosler is right on all operational details but he does not get the big picture. He is, like the economists he criticizes, an incompetent scientist and inexcusably bad at macroeconomics.#1 The common defect of all schools of economics is macroeconomic profit theory.#2 Warren Mosler’s MMT movement is no exception.
“Deadly Innocent Fraud No.2: With government deficits, we are leaving our debt burden to our children. Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.”
True, except for the fact that MMTer confuse (or play a shell game with) the words we, us, and our.#3 Debt or no debt makes a huge difference for the DISTRIBUTION of real output (and accumulated real wealth) between the ninety-nine percenters and the one-percenters ― “we” and “our” in ‘We owe the debt to ourselves’ refer to DIFFERENT people.#4
“Deadly Innocent Fraud No.3: Federal Government budget deficits take away savings. Fact: Federal Government budget deficits ADD to savings.” Or “Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us ― businesses and households, residents and non residents ― what is called the ‘non government’ sector. In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”
Unfortunately, MMTers got National Accounting wrong.#5 Fact is that government deficits add NOT to OUR savings but to profit. It holds Public Deficit = Private Profit. Not to realize this (or to shell game it away) is the one deadly error (fraud) of MMT.#6
“Deadly Innocent Fraud No.6: We need savings to provide the funds for investment. Fact: Investment adds to savings.” Or “I like to say it this way: ‘Savings is the accounting record of investment.’”
This is rubbish since Keynes. The axiomatically correct relationships are Qm≡−Sm in the case of the pure production-consumption economy, Qm≡I−Sm in the case of the investment economy, Qm≡(I−Sm)+Yd+(G−T)+(X−M) in the general case. Legend: Qm monetary profit, Sm monetary saving, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import.
Saving is NEVER equal to investment. Therefore, all I=S and IS-LM models are provably false and this includes Post Keynesianism and MMT.#7
With MMT policy, Warren Mosler has found a way to endorse full employment, healthcare, and other social agendas and to increase at the same time the business sector’s profit with the help of the sovereign money issuing state.#8
Egmont Kakarot-Handtke
#1 For the full-spectrum refutation of MMT see cross-references MMT
#2 The profit theory is false since Adam Smith
#3 On the saying “We owe the debt to ourselves”
#4 MMT and the promotion of Wall Street's idea of social policy
#5 Rectification of MMT macro accounting
#6 MMT and the magical profit disappearance
#7 For details of the big picture see cross-references Refutation of I=S
#8 MMT: Redistribution as wellness program
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Wikimedia AXEC118d
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REPLY to Kaivey on Nov 13You say: “Our government is run by the oligarchy and we need a more democratic government accountable to the people.”
This, obviously, is a political analysis/conclusion. And, clearly, it has to be dealt with in the political realm. Economists, though, seem never to have fully realized that there is, for very good reasons, a strict separation of politics and science.
Since the founding fathers, economists violate the principle of the separation of science and politics which has been clearly stated by J. S. Mill: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.”
The compelling reason for the separation of politics and science is that the two realms are guided by different and incompatible principles. The one question in science is about the truth of a theory, i.e. its material and formal consistency: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)
The designation MMT = Modern Monetary Theory indicates allegiance to science. The problem is that MMT is nothing but crappy proto-science. This status MMT shares with the rest of economics. Economics is what Feynman famously called a cargo cult science and neither right-wing nor left-wing economic policy guidance ever had sound scientific foundations since the soapbox economists Adam Smith and Karl Marx.
At present, neither Krugman nor Wren-Lewis nor Keen#1 nor Varoufakis nor Mosler nor the rest of political loudspeakers, fake scientists, amateur journalists, bloggers, and blatherers can back up their political agenda pushing with a scientifically acceptable economic theory.#2 In order to become a science, economics has to get rid of ALL these folks.
#1 Debunking Squared and Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn and Keenonomics, aggregate demand/change of debt, and some misleading critique
#2 For details of the big picture see cross-references Political Economics
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REPLY to Calgacus on Nov 14You say: “New Deal style deficit spending can be and almost always is the option that causes the smallest future additional distributive burden of the 99% towards the 1% - one which is mostly negligible.” and “An important way station in realizing this is understanding the flaw in the idea that surpluses are needed to pay for deficits in some way. In particular the idea that this follows from money being a creditary relationship.”
(i) Public deficit spending increases public debt. The concept of debt includes repayment in period t, otherwise, it is a gift. Now, the repayment can be postponed indefinitely. So, as a LIMITING case t goes to infinity, t → ∞. MMT simply pushes repayment beyond the time horizon where it is conveniently forgotten.
(ii) The limiting case, though, does NOT make the debt disappear. Debt gives rise to interest. And a debt with infinite duration gives rise to an infinite interest burden for the household sector which takes the form of a tax burden.
(iii) Interest payments redistribute income from we = all taxpayers = creditors + non-creditors to creditors.
(iv) In the LIMITING case, the interest rate is zero if the debt is held in the form of overdrafts/deposits at the central bank (with deposits = money). In this limiting case, no redistribution of income takes place.
(v) The two limiting cases taken together make public debt resemble a gift: no repayment, no interest burden.
(vi) What is missing in this picture is that Public Deficit = Private Profit. Profit, though, is not indefinitely held as a zero-interest deposit at the central bank. Let us assume here that profit is distributed as dividends and that this dividend income is fully spent. The additional consumption expenditures lead to a price hike and a redistribution of period output between wage income receivers (a.k.a. ninety-nine-percenters) and the receivers of dividends (a.k.a. one-percenters). Needless to emphasize that non-distributed profits can alternatively be used to buy all kinds of assets, e.g. other firms.
In sum: Public deficit spending has real distributional effects. Whether these are ‘huge’ or ‘small’ depends on the duration of the debt, the rate of interest, and on profit distribution or how non-distributed profit is used. Compared to taxation, public deficit spending is, in any case, a BAD deal for the ninety-nine-percenters.#1 Apart from the distributional issue, it holds in any case that public deficit spending increases the economic power of the business sector.
MMTers and Post Keynesians and Functional Financers in their utter scientific incompetence simply have no idea how the monetary economy works.#2 The profit and employment theory is provably false since Keynes.#3 The only positive feature of Keynesianism/MMT is that microfounded Orthodoxy is an even greater heap of proto-scientific garbage.
#1 On the saying “We owe the debt to ourselves”
#2 Why Post Keynesianism Is Not Yet a Science
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
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REPLY to Calgacus on Nov 15The balances equations MMT is based upon are provably false.#1 By consequence, the whole analytical superstructure of MMT is false. As a matter of principle, there is NO NEED to refute more specific claims of MMT about the nature of money or about operational details of money creation/destruction.
The core of the argument is: the macroeconomic foundations of MMT are false since Keynes. Because of this, all MMT policy recommendations lack sound scientific foundations. And this, in turn, means that MMT is not economics but brainless agenda pushing. On closer inspection, it turns out that MMT claims to push the agenda of the ninety-nine-percenters but in fact — intentionally or unintentionally does not matter — it pushes the agenda of the one-percenters.
So, MMT is refuted as an approach.#2 The lack of consistent axiomatic foundations is, of course, compatible with the fact that SOME claims of MMT are accidentally or commonsensically or trivially true. This does not help much. The flat earth theory contained also statements that were trivially true but this has not saved it from being flushed down the drain.
You say “But what you are doing is like trying to refute or prove a statement of classical Euclidean plane geometry with calculus or differential geometry.” It is pretty obvious that this pseudo-methodological blather is beside the point and an insufficient answer to the PROOF of MMT’s material/formal inconsistency.
So, let us first of all, get the sectoral balances equations right. At first, we have only the business- and the household sector.#3 The two sectoral balances are given as follows:
Qm≡C−Yw profit Qm is household sector’s spending C minus wages Yw,
Sm≡Yw−C saving Sm is wage income Yw minus consumption expenditures C,
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Qm≡−Sm
The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law. For a start, the household sector’s budget is balanced, i.e. C=Yw, hence macroeconomic profit is zero.
Transaction money is needed by the business sector to pay the workers who receive the wage income Yw per period. Transaction money is produced (i) either in the form of an IOU by the business sector, or (ii), by the central bank in the form of overdrafts/deposits with deposits = money. The average stock of transaction money is given as M=kYw, with k determined by the payment pattern. In other words, the average stock of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by either the business sector as an IOU or by the central bank in the form of deposits and overdrafts which are always equal. The idealized transaction pattern is shown on Wikimedia.#4
The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank is continually created and destroyed during the period under consideration.
The transaction equation M=κYw=κPX=κPRL tells one that under the condition of budget-balancing C=Yw and market clearing X=O the average stock of transaction money doubles if employment L doubles. The economy NEVER runs out of money. Transaction money is a generalized short-term IOU that bears no interest.
Now, the government sector GS is added. The three sectoral balances are given as follows:
Qm≡C+G−Yw profit Qm is HS and GS spending C+G minus wages Yw,
Sm≡Yw−T−C saving Sm is wage income Yw minus taxes T and expenditures C,
Bm≡T−G budget surplus Bm is taxes T minus government expenditures G,
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Qm≡−Sm−Bm.
The business sector’s monetary profit Qm is equal to the household sector’s dissaving plus the government sector’s budget deficit. For a start, taxes T are set to zero. Deficit spending −G is equal to cumulative money creation by the central bank. The household sector’s budget is balanced, i.e. C=Yw, i.e Sm=0. In this case, the business sector’s profit is equal to the government’s deficit, i.e. Qm =−G. It holds Public Deficit = Private Profit.
The combined transaction pattern of the household- and the government sector is shown on Wikimedia.#5
The transaction pattern of the business sector is the exact mirror image. So, while the government sector ends up with overdrafts, the business sector ends up with deposits of equal magnitude.
Two things happen, (i) there is a price hike because aggregate nominal demand is now C+G, and (ii), output O is redistributed between the household and the government sector. There is REAL taxation without nominal taxation because of T=0. Nominal taxation is simply shifted into the indefinite future.
The government’s deficit spending causes an increase in the financial assets of the business sector. At first, the financial asset consists of deposits at the central bank which bear zero interest.
In the second step, the public debt is consolidated by the issuance of long-term government bonds or other types of securities. Government securities are offered with a certain maturity and interest rate. In the present case, the business sector is in possession of deposits and decides which amount to buy. It is here assumed for simplicity that the whole government debt is consolidated. After the switch from non-interest-bearing deposits to interest-bearing bonds, the newly created money vanishes again from the central bank’s balance sheet.
So, over the whole cycle, the household sector is taxed in real terms, suffers a reduction of net income for the duration of consolidated government debt via interest payments = taxes, while the business sector makes a profit which is equal to the budget deficit and enjoys interest income for the duration of the consolidated debt.
Compared to immediate taxation T=G, the household sector is worse off with government deficit spending and the business sector is better off. These are the distributional effects of the MMT policy. Other effects have been dealt with elsewhere (for employment policy see #6).
Bottom line: MMT is proto-scientific garbage, politically biased in favor of the one-percenters, and sold as beneficial for the ninety-nine percenters.
#1 Rectification of MMT macro accounting
#2 For the point-by-point refutation see cross-references MMT
#3 The production-consumption economy is defined by the macro axiom set: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start X=O.
#4 Wikimedia AXEC98 Transaction pattern C=Yw
#5 Wikimedia AXEC99 Transaction pattern C+G greater than Yw
#6 Full employment through the price mechanism
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REPLY to Calgacus on Nov 16I said “The balances equations MMT is based upon are provably false. As a consequence, the whole analytical superstructure of MMT is false. As a matter of principle, there is NO NEED to refute more specific claims of MMT about the nature of money or about operational details of money creation/destruction.”
You answered: “That is getting things completely backwards. MMTers do not say that ‘MMT is based upon’ some balance equations.”
The fact is that the sectoral balances equations constitute the very core of MMT’s self-presentation. #1, #2, #3, #4, #5, #6 Fact is also that the MMT balances equations are mathematically/ provably false.#7
Because of this, ALL MMT policy recommendations lack sound scientific foundations. The economics of Kansas City, Bard, the Virgin Islands, Australia, etc is qualitatively below the level of Trump University.
MMT is refuted on all counts and whether Calgacus, Mitchell, Tcherneva, Mosler, Wray, Kelton, Fullwiler, Forstater, Kaboub, Tymoigne, and the rest of scientifically incompetent MMTers understand/accept this is a matter of indifference.
#1 Presentation Pavlina Tcherneva, Sectoral Balances Spain
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| Source: Google Images |
#2 Wikipedia Modern Monetary Theory
#3 Wikipedia Sectoral Balances
#4 Billy blog Flow-of-funds and sectoral balances
#5 For the point-by-point refutation of Peter Cooper’s posts see cross-references MMT
#6 Warren Mosler “Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”
#7 MMT and the magical profit disappearance
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LINK to Twitter Real Progressives "Sectoral analysis provides a key..." Nov 21
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COMMENT on Brad Voracek's 'USA 2017 Q1 Sectoral Balances Update' on Nov 21 |
| Source: The Minskys, Brad Voracek |
The sectoral balances are provably false. Profit = sectoral balance of the business sector is missing. See MMT and the magical profit disappearance, see also MMT: The one deadly error/fraud of Warren Mosler.
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COMMENT on Deficit Owls on Nov 28 |
| Source: Twitter Deficit Owls |
The sectoral balances are provably false. Profit = sectoral balance of the business sector is missing. See MMT and the magical profit disappearance, see also MMT: The one deadly error/fraud of Warren Mosler.
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| Source: Huffpost, Warren Mosler |
For more misleading charts see Down with idiocy!