Fundamental Post Keynesian MMT and Simon Wren-Lewis

Language is a tool to that we use to communicate with the intent of facilitating an understanding. Depending upon a variety of factors, communication might be successful, but understanding is not achieved. Consider my first sentence. Most people will understand what I said. But there might be a few people, especially children, to whom the vocabulary is beyond their knowledge. Therefore, I communicated, but failed to facilitate an understanding. I would then have to tailor my language to the appropriate level if I wished to be successful. I might then say, “We both speak the same language. You can understand me and I you. If I say ‘This is a red car’, then you know exactly what car I am talking about and what colour it is. Therefore, I can tell you what I am thinking and you’ll get what I am saying.” Long winded perhaps, but sometimes necessary. So, how we use language is an art form, really. Every day our ability to use language effectively is tested in a variety of ways depending on who we are talking to. It’s a skill called fluency. The more fluent you are, the more apt you will be to communicate effectively with most people. Many professions and people speak the same language but use it differently, adding to the challenge.

For instance, people in the US and UK speak English. However, because of the unique vocabularies the two possess, both might not understand one another all of the time. Therefore, a person from the UK would seek a basic, common word in the English language to use in order for the person from the US to understand and vice versa. Professions, such as economics, use common words combined together that cause both words’ basic understanding to become lost except to the professional. As an example, consider the two words “vertical” and “transaction”. Most of the adult public knows the two words, but when an economist says “vertical transaction”, their meanings are lost altogether to the public, because the economist is referring to an activity that the profession labeled as a vertical transaction. The activity must also be explained. The economist’s target audience will determine the appropriate vocabulary. When speaking to the general public, the word “general” is a clue as to how the activity should be presented – in a general way. In basic English. If the words chosen are not basic level adult vocabulary, communication will undoubtedly take place, but understanding might not.

This is the exact reason why I always sound like your average guy on the street in my articles, rather than an academic or a professional economist – I am using basic vocabulary to communicate concepts and thus, facilitate an understanding with the general public who have little to no background in macroeconomics. I assume nothing. I do not assume that the reader has any knowledge of mathematics beyond basic math. I do not assume that the reader has an extensive vocabulary or a working knowledge of basic theory. To assume such things risks losing some people. The more commonplace my chosen vocabulary is, the better the guarantee that I am getting through to most people. And that is the point – to speak in a way that they can fathom in order that they might become educated, informed and reject mainstream nonsense that is responsible for their economic misery.

So, here I am in many articles repeating myself over and over saying, “US Dollars come from the US government. The US Dollar is a free-floating, non-convertible fiat currency. There is no gold nor any other currency to which the US Dollar is pegged. Therefore, the supply of US Dollars available to the US government is always equal to infinity.” I repeat the above, because the general public doesn’t know any better. Their concern is the federal government being broke and taxing them, because it is being fiscally irresponsible. But, in fact, what I have just said about the US Dollar and federal spending, which is found repetitively in my articles, is not a basic MMT concept. It has nothing to do with MMT.

Surprised?

If so, that is one half of my point for writing the opening paragraphs. If after reading my articles, you thought that the statement: “the federal government has an infinite spending capacity” is an MMT concept, then I have failed to facilitate an understanding with you. Shows you exactly how hard this teaching endevour really is. In order to discuss MMT, I must first convey a reality that is already well known to professionals, but not to the general public, because there is a deliberate, ideological intent to keep this basic, fundamental information from the general public. I first have to undo the anti-knowledge, then once the person understands and accepts the basic reality, then I can communicate MMT concepts and hopefully provide them with a fundamental grasp of concepts.

So, the essence of Post-Keynesian MMT is not the statement: “US Dollars come from the US government. The US Dollar is a free-floating, non-convertible fiat currency. There is no gold nor any other currency to which the US Dollar is pegged. Therefore, the supply of US Dollars available to the US government is always equal to infinity.” This statement is a prerequisite; a basic requirement for members of the general public before they can begin to understand basic MMT concepts and contributions to Post Keynesian thought. If a person truly understands the above reality, then given a few moments of thought, that person will conclude that what MMT is actually suggesting is that there is no hard financial constraint on the federal government’s fiscal policy space. In other words, the current nature of the monetary system allows the federal government many options that are not available to nations such as France, Greece and Spain. If there is no hard financial constraint on government, then there is no need for that government to obtain an income, nor to borrow back its own currency to affect the spending necessary to exercise those options – those options being dependent on the nation’s real resources and not the federal government’s finances.

As I said, when speaking to the general public, the word “general” is a clue as to how macroeconomics should be presented – in a general way. In basic English. One would think, however, that such language would be entirely unnecessary when speaking to a “professional” economist. Unfortunately, even then it is necessary to think as a child and speak as a child just to facilitate understanding. Which is the other half of my point for writing the opening paragraphs: being forced to speak to a so-called “educated professional” as though he or she were a child just to facilitate an understanding of what they claim is already obvious to everybody.

Simon Wren-Lewis, yet another New Keynesian who might very well be “new” somehow, but certainly not “Keynesian”, is well aware of the reality that the US government and the UK government are the monopoly currency issuers of their respective currencies and that both have an infinite issuance capacity. The evidence being that he is the main figure who said with regard to MMT that “everyone knew this already”. So, even though Wren-Lewis “knew this already”, for ridiculous reasons, he chooses instead to act as though he doesn’t know this already and maintains a neoclassical viewpoint which only ends up leading to a denial of reality, as demonstrated by the title of Wren-Lewis’s recent blog post, “Fiscal rules should target the deficit, not spending”. Knowing that both the US and UK governments have no hard financial constraints on spending and that they have policy flexibility, then with a moment of thought one realises that to be in keeping with reality, the title should have read:

“Fiscal rules should target prosperity and nothing else”.

The main reason why Simon cannot bring himself to say the above, is because he subscribes to the nonsensical notion that (Q) is constant. In other words, the economy is static and always at full employment, because Wren-Lewis’s model reflects his preference for the way the world should work, not how it actually works. Simon says: “Assume we are always at full employment.”, then Simon naturally says: “Inflation!”

Ellis says: Simon Wren-Lewis is a static kind of man living in a dynamic world.

In a dynamic economy, any increase in the amount of currency is not necessarily inflationary and the transmission mechanism itself is not inflationary – it is the spending of that currency on goods and services that can become inflationary. For instance, if the UK government were to inject eight trillion pounds into a reserve account and those eight trillion pounds just sat there unspent, they would not be inflationary. The eight trillion pounds would first have to make their way into the hands of persons somehow and be spent on goods and services, which could then become inflationary.

Consider two sectors: the monetary sector and the real sector. When the monetary sector comes up against the real sector through spending on goods and services, inflation can occur. In a dynamic economy, full employment is never always constant, thus when there is a real ability for output to increase and unemployed labour for sale, then further spending will result in increased output and not an increase in the price level. So, the insight here is that the actual focus of a government’s fiscal policy should be on the real sector, which is the goods and services produced from real resources and not the monetary sector (balancing the budget over the cycle).

Thus, when I say that Wren-Lewis’s blog title, “Fiscal rules should target the deficit, not spending” is completely wrong, then I mean what I say, regardless if to you it sounds correct. What Wren-Lewis is actually saying is “The deer hunter should target himself, not the deer”. Again, to be in keeping with macroeconomic reality (and sanity), it should read:

“Fiscal rules should target prosperity and nothing else”

We should not be expected to resort to basic English to explain the obvious to so-called “professionals”: unemployment is neither the result of a choice made by labour preferring leisure over work, nor is it the result of mystical market forces. Unemployment exists precisely because the government’s fiscal rules are targeting some imaginary hard financial constraint and not prosperity. The longer the federal government’s fiscal policy targets some imaginary and so, a quite voluntary financial constraint, the longer involuntary unemployment is sustained and along with that, some or much of the nation’s output capacity will remain idle. Understanding that the economy is dynamic and not static, we know then that output expands and contracts; the expansion side of the coin limited only by either the labour supply or other real resources necessary to produce goods and services. Clearly, a nation cannot produce more than it is actually capable and any reasonable government would not attempt to spend beyond this real limitation. Since we know that increased spending can increase output, then we have insight into inflation: Federal spending will become inflationary only when it pushes aggregate demand beyond the real productive capability of the economy. Therefore, we understand that Simon Wren-Lewis is a proponent of waste – an advocate of macroeconomic inefficiency.

Wren-Lewis’s “critique” of fundamental Post Keynesian MMT is obviously both nonsensical and hypocritical. To claim that he “knew this already”, but persistently fails to act as though he did know it, leads one to question the real motivation of Wren-Lewis. It is certainly quite suspect of him to contend a complete working knowledge of reality prior, but then deny that reality outright, focusing instead on a New Keynesian model of a static economy which, in fact, bears a close resemblance to failed, microeconomic neoclassical dogma rather than any fundamental contribution of Keynes. It is pure nonsense. If, on this basic, fundamental issue alone, we can easily demonstrate Wren-Lewis’s critique as nonsensical, certainly we are right to question the veracity of any of Simon Wren-Lewis’s further arguments against Post Keynesian MMT, especially the Job Guarantee proposal.