Knuth is famous for three things (at least three things):
- Not finishing a book series - the seminal Art of Computer Programming. First started in 1962
- Refusing to write real cheques due to bank fraud
- The phrase 'Beware of bugs in the above code; I have only proved it correct, not tried it''
All of which I thought were very appropriate to the general state of the world economy - paralysed like the early medieval congregations convinced by endless repetition of incorrect doctrine that the world would end in 999AD.
The alternative approach is rational and pragmatic. The pragmatic approach emphasises getting something useful done that might just benefit people based on the current available evidence, but in a way that acknowledges that you don't know everything and you might have to back it out. It handles edge cases as part of the method rather than obsessing about them to the exclusion of the useful 90%. It uses tight feedback to keep areas of concern under control.
So rather than worrying pointlessly about edge cases, about the relative risks of hyperinflation, whether there are real or budget constraints or the theoretical direction of causality, why not do something pragmatic that takes what we know and don't know into account?
Concentrate instead on the central policy change that makes all the difference.
Instead of
'what are you going to cut to fund programme X/tax cut Y[1]'
you can have:
'fund programme X/tax cut Y[1], which will either pay for itself by expansion in the real economy (in which case inflation will stay steady and there will be no compensatory tax/interest rate[1] rises), or it won’t (in which case this tax/interest rate[1] will change).'
(1 - delete as applicable depending on political prejudice/religious belief[1]).
In other words the policy options switch from ‘pre-fund’ to ‘post-fund as required to maintain stable prices’. Taxation is no longer linked rigidly to the amount of government spending, but to the combination of government spending, net private sector nominal saving and the real expansion of the economy.
It is powerful to be able to say “We intend to introduce a Job guarantee scheme funded by the state and we expect that the economy will be able to expand its output to absorb this extra spending. However we reserve the right to increase Corporation Tax by up to 3% to compensate should it feed through to demand inflation. Obviously we want to avoid that so over to you Mr Entrepreneurs to create the necessary economic expansion.”.
It's pragmatic, it provides a clear incentive backed with money and it targets help at real people who are suffering today. They simply can't afford to wait 50 years for the theory to get worked through accurately.
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17 comments:
Timely post. When there's mass unemployment, it does not take precision perfect policy to deliver vast improvement in economic outcomes.
Neil - apologies if you comment on this elsewhere on your blog, but what are your thoughts about how to get the word out on MMT a bit more effectively?
It feels to me as if MMT needs a publication to 'sponsor' it: not just publish a piece by an MMTer, but encourage all its key financial and political journos to read a little about MMT, so that the whole publication is free from the govt=household fallacy.
This seems the Independent’s sort of thing, but I think the paper is in a death spiral now so it would be a waste of time. I wonder whether the Grauniad could ever be got on board in this way. They certainly became (if temporarily) an ‘official’ wikileaks publication, so perhaps they could be persuaded this would be a distinctive cause. They already feature Dean Baker, but he doesn’t give them a proper conceptual framework to justify the paper’s instinctive opposition to Coalition cuts.
What do you think? I would love a knowledgeable MMTer to get an hour with Larry Elliot to take him through this stuff.
I see a lot of pleas for someone to sort out the Wikipedia page but it never happens, which I find breathtaking given eg how prolific Bill Mitchell is...
Anders
Neil - another thing if I may.
Re your recent "Sectoral Balances in a nutshell" piece, do you have in ordinary XL one of Bill's simplified models showing the sector financial balances? He only provides xml files which I can't convert to XL.
My preference would be a new political party based on rationality and evidence. That may be an oxymoron of course.
The entropy in the existing structures is too great.
How about The Pragmatic Party?
This gets you the sectoral data in Excel if that's what you're after.
Thanks for the XL. Sounds like you don't hold out much hope of MMT making it mainstream in the near/medium term.
Anders
I think to get it mainstream you need to get it to 'bubble up'.
The UK mainstream media and political system is highly concentrated in a particular area that suits those funding the operations. And IME they filter effectively.
Last time I did this, the group I helped run sued the government to get a focus point that journos can report on.
The politicial party idea is just a floater for a focus point.
I like your idea. I think the educated public will love it, ut I fear that the uneducated / uninformed majority will react against it because they won't understand the details. -- and that for me is the problem with polictics. The Daily Mail and sensationalisation of news creates an extreme 2-sided view and very little room for proper open debate.
P.S. I'd join the Pragmatic Party
Neil - "bubbling up" without a wikipedia page seems a dim prospect indeed.
I hear your point about the entrenched positions of UK parties and media, but the very fact that MMT is consistent with a any political hue you could name (in terms of desired size of G/GDP) ought to make it widely palatable IMO.
Anders
Hi Neil! You write: We intend to introduce a Job guarantee scheme funded by the state and we expect that the economy will be able to expand its output to absorb this extra spending. However we reserve the right to increase Corporation Tax by up to 3% to compensate should it feed through to demand inflation.
Wouldn't the excess demand have to be taken away from those responsible for demand instead of those who are expected to supply in anticipation of demand, as in your suggestion? Ideally speaking, in the sense that both groups are separable, wouldn't your logic increase inflation instead of decreasing it - more money chasing less goods? Or at least not do much to curb it. Just a thought.
That's just an example of the general idea. I'd want to take more soundings before deciding on a final design if I were ever asked to put it into practice.
However my thinking went something like this.
The people responsible for putting the prices up are the businesses. Individuals don't do that - they just paid the higher prices and got nothing extra for it.
So all you're doing here is discouraging the behaviour. If you put prices up, it will be taxed away. If you expand production you get to keep the loot if you want.
CT is also paid after accounting for investment so you can reduce it by investing more - again increasing production.
Perversely lower corporation tax (and certainly stepped corporation tax) likely reduces investment as it becomes relatively more expensive for shareholders to invest than draw the cash.
It's always amused me why the rate of corporation tax gets so much press and not the basis for calculating the profit to which you apply the percentage.
The people responsible for putting the prices up are the businesses. Individuals don't do that - they just paid the higher prices and got nothing extra for it.
So all you're doing here is discouraging the behaviour. If you put prices up, it will be taxed away. If you expand production you get to keep the loot if you want.
Who comes and decides whether mark ups are really worth what they're claimed to be? I think you're going at a macro problem with micro solutions. And although I take your point about the CT, I find there are other valid views that incorporate low CT and steeply progressive income tax, as in most continental European countries (I think). Sure, a neoliberal idea, but stringent in its own way and with other measures in place to curtail corporate power (unions, etc.). The whole corporate vs. individual debate I find very complex because there are inherent power asymmetries involved purely by definition. But that's another discussion...
Like your site!
It is immensely complex and you need evidence to shape policy.
However the evidence suggests that the economy will quantity adjust not price adjust - therefore the point is ultimately moot.
Any chance of the sectoral information further back in time?
Curious the ten years before mid 97 had mean deficits of 3.8% yet people are panicking about the 1.5% in the ten years from mid 97.
Perhaps the Tories were running more of an MMT fiscal policy than neu labour?! ;)
Any chance of the sectoral information further back in time?
Curious the ten years before mid 97 had mean deficits of 3.8% yet people are panicking about the 1.5% in the ten years from mid 97.
Perhaps the Tories were running more of an MMT fiscal policy than neu labour?! ;)
I've done it as far back as the ONS data shows. Beyond that there doesn't appear to be the statistics.
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