Power & Market
It seems that modern monetary theory (MMT) doesn't make a real distinction between monetary policy and fiscal policy. If that's the case, then a system based on MMT has no need of a central bank.
In the last several years modern monetary theory has been thrust forth excitedly by the more progressive ranks of the Democratic Party, led by Bernie Sanders and Alexandria Ocasio-Cortez, as a wondrous, curative economic elixir. MMT being brought to the fore has stimulated a robust discussion that has prompted many good questions. Not yet among them to my knowledge, however, are: Why do we still need the Fed, and does this mean that we should lower taxes?
For those who are unfamiliar with it, MMT is perhaps best explained by metaphor. Stephanie Kelton, the chief economist for Bernie Sanders’s campaign in 2016 and a leading MMT economist, has explained it in terms of a bathtub being filled up with water. The spigot is the federal government; the water is money; the tub is the economy; and the drain is taxes. According to MMT, when the Federal government needs money it simply “turns on the water” by contacting the Treasury, which contacts the Fed, which credits the federal government’s account at the Fed for that amount. The government then spends that money into the economy; to continue the metaphor, water is filling up the tub. Now there is only so much space in the economy for additional money. This is because, as we all know, more money chasing the same amount of goods causes inflation. To manage this, according to MMT, the government taxes money out of the economy as necessary—“draining the water.”
Recognition of this last point, according to its advocates, represents a serious contribution on the part of MMT theorists—the idea that the government isn’t collecting taxes to fund programs, but to manage inflation (when it needs money for government programs, it just turns on the spigot and runs more water into the tub).
Two things stand out. First, in the MMT conceptual framework there is no role for the Fed. Reading both Warren Mosler's and Stephanie Kelton’s available books and papers (the two economists most closely associated with MMT), that was what really stood out as differentiating them from the various post-Keynesian schools, from which they are otherwise all but indistinguishable: that MMT seems to make no distinction between monetary and fiscal policy. So, if MMT is correct, why do we still need the Fed?
Second, if, as MMT proponents claim, preventing inflation is simply a matter of ensuring that productive output rises at a consonant rate with the increase in the money supply, so that the same proportion of dollars are chasing the same proportion of goods and services in the future, it would seem to me, then, that all that needs to be shown is that letting individuals, businesses, and corporations spend their money how they want is more efficient in terms of ensuring total future production than taxing it out of existence to make way for more of its own spending. This is something that should be no more difficult to evidence than trips to the local post office and FedEx store, respectively. Far from suggesting that we raise taxes, the MMT framework seems to suggest the opposite: so does this mean we should lower taxes, too?
Recently here in Vancouver, Canada, medical mask resellers were punished by authorities, with their inventory seized and fines imposed. This is the second time resellers have been punished in recent weeks. This action is the exact opposite of what the government should do if it wants to see an increase in supply of medical masks to people who need them.
A local mayor, Brad West, has called the acts of the resellers to "egregious, so irresponsible, so selfish and so motivated by greed." It is this writer’s contention that unless the resellers stole those masks, it is the actions of local authorities which are egregious and irresponsible. West is presuming that those who buy those masks have no legitimate need for them. The CDC now states that wearing masks helps reduce the risk of COVID-19 exposure. How is it that the voluntary selling, and buying, of medical masks to protect you and your family is considered egregious and irresponsible?
The commercial actions of resellers, if anything, help boost supply of those masks to the consumer market. Retails stores and pharmacies are out of inventor,y because their supplier can’t ostensibly meet retail demand. Now, a reseller, through his own resourcefulness and researching of the wholesale market, has come upon a supplier who is willing to provide inventory to him. The reseller contacts the supplier and arranges for the purchase and shipment of those masks. He allocates time and energy to make this transaction, taking certain risks that the masks might not arrive in a timely manner or might be withheld by customs, or otherwise might not be delivered by a deceitful and unscrupulous wholesaler.
For his time and effort, the reseller is paid a profit (i.e., wages) over the wholesale price. His customers get hold of masks in a time when all store shelves are empty. The more resellers there are, the more orders are given to wholesalers and manufacturers, and the more of the product is made available to the consumer market. As demand gets satiated, prices eventually come down.
What the government has done is effectively shut down productive distribution and reseller channels, which are vital and very necessary in ensuring that retail customers get what they want. They have disincentivized entrepreneurs from going out and sourcing suppliers who can help satisfy demand.
And to make a bad situation even worse, the government has shut down a source of income for entrepreneurs who are now out of work due the lockdown and must now rely on employment insurance and other forms of government welfare, putting an even greater strain on government coffers (i.e., taxpayer money).
When will government ever learn?
Knox County mayor Glenn Jacobs, known worldwide as Kane, recorded a heartfelt video message for his constituents after eight of them committed suicide within forty-eight hours. His sober take on the human cost of the COVID-19 lockdown is too rare in today’s politics.
The coronavirus crisis and the government’s response are not going away anytime soon. Every day that is becoming clearer.
Last week in Knox County, Tennessee, within a forty-eight-hour period, eight suspected suicides were reported. That amounts to nearly 10 percent of 2019’s total of eighty-three for the county.
“That number is utterly shocking,” Jacobs said in a weekly video update. “It makes me wonder: is what we are doing now really the best approach? How can we respond to COVID-19 in a way that keeps our economy intact, keeps people employed, and empowers our people with the feeling of hope and optimism, not desperation and despair?”
Jacobs, who has libertarian tendencies and a very impressive grasp of Austrian economics, explained to his constituents that many so-called experts are offering them a false choice: healthy people or an open economy.
“In fact, we must have a healthy economy if we expect to have healthy people,” Jacobs said. “We don’t have a choice.”
In the same week that Knox County experienced its uptick in suicide, the jobless claims across America reached a record-shattering 6.6 million. That broke the previous record by a factor of five.
Flattening the curve may (or may not) be preserving hospital beds and resources, but as Jacobs keenly observes, “The unintended consequence is that we are creating another massive curve, a tidal wave that will overwhelm social services.”
Jacobs may be the most well-spoken politician on this impending national tragedy. In a saner society, he would be heralded as “America’s mayor.” Maybe one day he’ll have a bigger influence on Washington, DC.
Unfortunately, there is a growing stereotype of those who are against the lockdowns around the world. Such a person must not care about the elderly or sick, but only about economic growth. This caricature is based in some truth, sadly, but not at all in the case of Jacobs.
Jacobs does not conceive of the economy as figures on a graph or merely bodies working to keep dollars circulating. Rightly understood, the economy is about people, complete with their hearts and free will.
Two social commentators who get this are Brendan O’Neill and Peter Hitchens, both of the United Kingdom, where a similarly extreme stay-at-home order is in place.
“The problem with catastrophe is actually that you survive it,” Hitchens told O’Neill on the latter’s podcast. “It’s not like nuclear war where everybody’s dead. Economic catastrophe leaves people alive, staring into space, ghosts of their former selves wondering what on earth has happened.”
O’Neill remarked that the economy isn’t about a line going up on a chart, but about how people live, and sometimes whether or not they live.
“What they say is that this is a question of lives versus the economy, and they talk about the economy as if it’s just some kind of abstract machine, just numbers and money and profits, when in fact, the economy is people’s lives,” he said.
Killing the economy is killing people. Those who insist on social distancing and closing down everything “nonessential” should no longer be allowed to defend their position from an untouchable moral high ground.
This article originally appeared at The Advocates.
Michael Bloomberg dropped out of the Democratic Party's primary this week, but not before he spent more than $500 on political advertisements. According to Bloomberg (the news service, not the man),
Through Friday [Feb 21], he’s spent $505.8 million on broadcast, cable, radio and digital ads, according to Advertising Analytics. That’s an average of $5.5 million a day since he officially became a candidate.
It’s also $190 million more than all of his active Democratic rivals combined, including billionaire hedge-fund founder Tom Steyer, have spent on political ads.
This all netted Michael Bloomberg a whopping twenty-seven delegates. That's more than $18 million per delegate. This means Bloomberg didn't even succeed in becoming a spoiler or a kingmaker at the Democratic convention this summer.
In short, the failed Bloomberg ad blitz serves as a helpful reminder that advertising doesn't actually make people do anything. Ads on YouTube and TV—even when they are released in a veritable torrent as Bloomberg's ads were—are not enough in themselves to convince people to vote for someone.
We saw a similar issue during the 2016 election, when Hillary Clinton outspent Trump 2 to 1. Indeed, among so-called outside groups (such as super PACs), "Pro-Clinton ads outnumbered pro-Trump ads 3 to 1—a mind-numbing 383,512 ads for Clinton compared to 125,617 supporting Trump."
This isn't to say that having $500 million lying around for advertising makes no difference. It may be that if Elizabeth Warren had had that sort of advertising budget, she might have been able to compete better with Bernie.
But the fact remains that if an advertisement asks a person to take some sort of action—whether it's buying Acme zit cream or voting for Michael Bloomberg, that action has to be something that the person targeted by the ad is open to doing. That is, the person being asked to buy or vote must have been already "conditioned"/"brainwashed"/"socialized"/"educated" in such a way that the advertisement's request for action seems like a good thing.
[RELATED: "Advertisers Aren't as Powerful as We Think," by Ryan McMaken]
Often, ads simply stand no chance of succeeding because they're not addressing what the target audience is inclined to desire.
Ludwig von Mises realized this long ago and noted,
It is a widespread fallacy that skillful advertising can talk the consumers into buying everything that the advertiser wants them to buy. The consumer is, according to this legend, simply defenseless against "high-pressure" advertising. If this were true, success or failure in business would depend on the mode of advertising only. However, nobody believes that any kind of advertising would have succeeded in making the candle makers hold the field against the electric bulb, the horse drivers against the motorcars, the goose quill against the steel pen and later against the fountain pen.
Examples of this phenomenon abound. In recent years, for example, we've seen articles on how so-called Millennials are uninterested in buying what the funeral industry is selling. That is, expensive coffins and funerals are highly profitable for funeral homes, but fewer people under fifty are interested in buying. They want less-profitable cremations. So, the funeral industry has had to change the way it does business. But this raises a question: why should the funeral industry change anything? Why not just run a bunch of advertisements telling people to buy $20,000 coffins? Then surely everyone will buy them, right?
But that's obviously not how it works.
And then there's the story of the American waterbed industry. Many people over forty may still remember the time in the 1980s when all the cool kids had waterbeds. But then they fell out of favor and waterbed stores collapsed in a heap of irrelevance during the 1990s. But why did the waterbed merchants allow that to happen? Why didn't they just run a bunch of advertisements telling people to buy waterbeds?
People do what advertisers tell them to do, right?
After all, we're told that "Russian hackers" with some targeted online ads — many of which were little more than low-budget unsophisticated memes — "swayed" the 2016 election and somehow turned Hillary voters into Trump voters.
The next time a modern-day McCarthyite insists that the 2016 election was stolen by Russian memes, let's keep in mind that with $500 million, Bloomberg couldn't manage to convince more than a few voters to vote for him instead of for Joe Biden, who apparently thinks he's running for the US Senate.
So, let's just chalk up the failed Bloomberg campaign to yet another case of how all the ads in the world won't convince people to buy a product—or vote for a candidate—they don't like, don't want, and generally regard as useless.
Dr. Joe Salerno recently penned a response to economist Tyler Cowen's call for "State Capacity Libertarianism." It's a very important essay, and I encourage you to read it. It gets to the heart of a very important and broad question in America today, namely whether what we can call the "managerial capitalism" of the twentieth and early twenty-first centuries is working.
Embedded in Salerno's broader critique of Cowen, focused on the predatory nature of state power, is this important point about the unsatisfying doctrine of economism:
The bulk of Henderson’s [economist David Henderson, another Cowen critic] article is thus confined to citations of research and anecdotes indicating how the free market and entrepreneurship would solve or alleviate the problems raised by Cowen, including traffic congestion, low-quality K-12 education, and climate change. Near the end of his article Henderson rehearses the venerable public choice argument demonstrating that the perverse incentive structure confronting politicians, bureaucrats, and voters in the political arena produces the inefficient outcomes that Cowen bemoans. This contrasts with the alignment of incentives guiding and coordinating the actions of consumers and producers in the market economy, which would conduce to a more efficient resolution of most of these problems.
Henderson does score cogent points against Cowen. But, in the end, Henderson’s version of libertarianism amounts to little more than economism, the narrow and hollow doctrine of enlisting market forces to improve social efficiency under the existing political regime. Henderson’s economistic approach to libertarianism is epitomized in Milton Friedman’s classic work Capitalism and Freedom.
Economism, an older cousin of public choice theory, is a throwback to the idea of homo economicus. Economism sees individuals as relentless rational actors, always seeking to maximize their (narrowly) economic well-being. Public choice argues for applying this focus to state actors as well, and thus for using policy as a tool for greater economic efficiency. As Salerno puts it, "economism attempts to enlist market forces to improve social efficiency under the existing political regime." It seeks to align the "incentives guiding and coordinating the actions of consumers and producers in the market economy, which would conduce to a more efficient resolution of most of these problems."
But is this wise, or even realistic? Should the state apparatus be charged with nudging humans toward more efficient (read: aggregated) economic outcomes? Does the Austrian tradition counsel economism, and does broader support for laissez-faire policy compel it?
Of course not, says C. Jay Engel writing at Bastion magazine:
The Viennese students of civilization would never have talked in the way Cowen does. Contrary to the “free market” economic establishment, the Austrians, and especially Misesians, completely deny the neo-classical construct of homo economicus. As conservatives such as Russell Kirk rightly point out the actual unrealistic nature of this construct, the Austrians are forever exempt from the criticisms related to the “economism” of man. It is true that man does not live by bread alone, as Wilhelm Ropke echoed the Biblical phrasing; his sociological needs, fulfilled by his community setting and connection to place and kin, are often more important than a singular emphasis on his material opportunities. The Austrians recognized this more than the typical policy-advising economists of the twentieth century.
Furthermore, we need not consider man's higher or spiritual motivations to refute such a narrow view of his conduct. As Engel explains, only the rigorously subjectivist perspective of the Austrian school offers a rational critique of economism:
no school of economic thought is as enduringly relevant as the Austrian School. Only they, with their subjective theory of value, can account for the displeasure of those Westerners who are not experiencing the mythical wonders of booming GDP. It was they who derided the absurdity of using formulas of aggregation to pronounce the successes of central economic decision making. It was the Austrians who alone among economists could account for the fact that mankind's wants were so much more complicated and complex than just a cold material prosperity could fulfill.
Subjectivism is what separates "efficiency" from real value. The cold-hearted free market economist, always portrayed as fixated on material wants, cannot win hearts and minds in the arena of social science with this bone-dry approach. On the contrary, Misesian economics is human in orientation, always focused on actors rather than aggregates. Real people act, real people imbue their actions with value knowable only to them.
Ultimately, Cowen and economism turn what ought to be robust social science into a handmaiden for state efficiency. Political liberty becomes nothing more than a mechanism for "better government." But as Dr. Salerno reminds us, this narrow view disregards the inherently predatory nature of the state itself:
Libertarianism becomes in their hands a recipe for constraining state action in the interest of optimizing social efficiency. This economistic, hollowed-out version of libertarianism may be called “state efficiency libertarianism.”
In contrast, hard-core, muscular libertarianism begins with the insight that the state is fundamentally different in nature from society and economy, and stands wholly apart from them.
Recently, the BBC produced a radio series on "50 Things That Made the Modern Economy". One episode focused on the economics of prohibition, crediting the work of Mark Thornton's Economics of Prohibition for helping write the script for the show.
The episode is available here.
Dr. Thornton's book is available here.
(Thanks to Bob Broadfoot for letting us know!)
Modi's Policy of Higher Taxes, Spending, and Inflation Make India a Growing Risk in Emerging Markets
India’s economy had an annual growth of 5.0 percent in the April-June quarter, the slowest in more than six years dragged down by weak consumer demand and private investments.
A Reuters poll of economists had forecast annual growth of 5.7 percent for April-June, compared with a 5.8 percent rise the previous quarter. For April-June 2018, India reported 8 percent growth.
Last year I commented about the risks for India here.
Governments always consider that economic problems come from lack of demand, and they assign themselves the task of “correcting” that wrong assumption by massively increasing deficits and using monetary policy well beyond any logical measure.
India’s rising populist policies are part of the nation’s current problems.
Recent data is quite concerning.
Industrial production, manufacturing PMIs and growth estimates are coming down (according to Focus Economics).
According to Kotak Economic Research, India’s current account deficit is forecast to be the highest in six years. The overall balance of payments is moving into larger deficits than expected, as capital inflows weaken and are unable to current account deficit.
Another warning comes from the maturities in foreign exchange. Nearly $220 billion of short-term debt, equal to more than half of India’s foreign exchange reserves, will come up for maturity in 2018-2019 fiscal year. Moody’s states that India is one of the countries that are least exposed to a rising US dollar. However, Moody’s did not expect the rupee to fall this much.
The average maturity of debt is close to 10 years and over 96 percent of it is in the local currency, according to Moody’s. However, it also notes the country’s low debt affordability. Given that the vast majority of debt is in the local currency, the incentive to depreciate the rupee is very high.
Foreign exchange reserves remain acceptable but can fall rapidly. Foreign exchange reserves are likely to suffer another dip as the rupee falls against the US dollar.
At the same time, 68% of the fiscal deficit target for 2019 consumed in the first quarter.
India expects a fiscal deficit of 3.3% of GDP in 2018-19 that seems quite challenging, given the weakening of data and the rise in expenses. The deficit was revised up to 3.5% of GDP in 2017-18.
The combination of wider trade and fiscal deficits added to lower reserves makes the currency weaken severely. The rupee keeps plummeting to new lows vs the USD.
India’s government usually solves this equation increasing subsidies and raising taxes. That combination will not work in a world that has a lower tolerance for fiscal and trade imbalances and a risk-off scenario. Additionally, the tax wedge is already a high burden. As Prateek Agrawal notes, “if one looks at GST and taxes on the affluent sections, India would rank as one of the highest taxed countries globally. For consumption, these sections are actually paying close to 60 percent of the income as taxes).
Additionally, printing more rupees is not going to solve the challenges.
The situation in India is not as desperate as in Turkey or Argentina, because FX reserves are not being depleted at a high rate, but the trend is concerning and the outlook for growth, trade and fiscal balances is weakening.
The government has preferred to raise taxes and increase spending, and the demonetization policy was a big mistake (read). All the cash that was taken out of the system came back a few months later. It is time for India to change its historical policies of subsidizing the low productivity sectors to penalize the high productivity ones with more taxes.
India can easily navigate this turmoil if it changes some misguided demand-side policies. The question is, will the government do it? Or will they prefer to blame an external enemy and increase the imbalances?
If the government decides to ignore these issues, India could become a big risk in emerging markets.
The Macro Problem of Microtransactions: The Self-regulatory Challenges of Video Game Loot Boxes by Matthew McCaffrey has been published as a case study for Harvard Business Review.
The video game industry has ignited a global controversy surrounding microtransactions in gaming, especially the use of loot boxes: randomized rewards with potential real-world value. Consumers and legislators are calling for the regulation of these revenue models on the grounds that they are unfair, predatory, or could be considered gambling. This article examines the controversy from a management perspective. First, I introduce current regulatory responses to the controversy and what they mean for business practices. Then, I explain ongoing industry-level and firm-level attempts to self-regulate as a way to placate consumers and governments. These tactics highlight a wide range of broader strategies that game developers and other stakeholders can pursue in order to improve customer relations and, more publicly, signal their commitment to self-regulation and avoiding consumer harm. These practices can be applied more broadly to firms that offer controversial products or services that do not yet fit within current regulatory frameworks.
Available for purchase here.
For more from McCaffrey on the topic on the Mises Wire:
I am quoted in the Washington Post in a story about the controversy over video game loot boxes. Loot boxes have been much debated in the past few years, with consumers frequently venting their outrage and regulators circling the gaming industry eager for a chance to flex their political muscles. As I've argued repeatedly, however, many critics overlook the economic significance of loot boxes and other microtransaction models.
The Post article has to do with upcoming changes to Rocket League that will remove its loot boxes, and what these changes will mean for the thriving black market that's grown up around the game. These changes are likely all to the good, as they show that the market is working to keep consumers happy: gamers complain loudly about loot boxes, and developers and publishers are changing their revenue models in response. My point, as I've been stressing since all this began, is that this process is a small part of a much larger experiment going on in the industry right now in which entrepreneurs try to figure out new ways to keep (mainly AAA) games profitable. Yet despite the much-publicized backlash from consumers, we haven't heard the last from consumers about what they think the best revenue models are, and we don't yet know what the industry will look like once the dust has settled.