The previous post got quite a bit of attention — more, I think, than anything I’ve written on this blog in the dozen years I’ve been doing it.
I would like to do a followup post replying to some of the comments and criticisms, but I haven’t had time and realistically may not any time soon, or ever. In the meantime, though, here is some existing content that might be relevant to people who would like to see the arguments in that post drawn out more fully.
Here is a podcast interview I did with some folks from Current Affairs a month or so ago. The ostensible topic is Modern Mone(tar)y Theory, but the conversation gave me space to talk more broadly about how to think about macroeconomic questions.
A pair of Roosevelt reports (cowritten with Andrew Bossie) on economic policy during World War II are an effort to find relevant lessons for the present moment: The Public Role in Economic Transformation: Lessons from World War II, Public Spending as an Engine of Growth and Equality: Lessons from World War II
Here is a piece I wrote a couple years ago on Macroeconomic Lessons from the Past Decade. Bidenomics could be seen as a sort of deferred learning of the lessons from the Great Recession. So even though this was written before the pandemic and the election, there’s a lot of overlap here.
This report from Roosevelt, What Recovery? is an earlier stab at learning those lessons. I hope to be revisiting a lot of the topics here (and doing a better job with them, hopefully) in a new Roosevelt report that should be out in a couple of months.
If you like podcast interviews, here’s one I did with David Beckworth of Macro Musings following the What Recovery report, where we talked quite a bit about hysteresis and the limits of monetary policy, among other topics.
And here are some relevant previous past posts on this blog:
In The American Prospect: The Collapse of Austerity Economics
A Baker’s Dozen of Reasons Not to Worry about Government Debt
Good News on the Economy, Bad News on Economic Policy
A Demystifying Decade for Economics
Thank you for the link to your podcast with the guys from Current Affairs. I enjoyed your discussion and also listened to three previous ones.
I have a minor criticism though. About 21 minutes in you explain that the banking system creates the vast majority of the ‘money’ the economy uses. But it seems as though you are saying this is news to MMT- and that is not at all the case. Banking and how it works is actually pretty important in MMT and that fact is often emphasized. I’m sure you are familiar with (and tired of) MMTers citing a certain Bank of England publication that says just that. The MMT point is that it is only the currency issuing government that actually issues money that is not tied to a debt obligation. MMT calls it a ‘net financial asset’ for the private sector. All bank issued ‘money’ is created as a debt to the borrower, but money the government creates through spending is not. And I think MMT would say that is an important difference. Especially in say a recession where credit is tight because banks are reluctant to take risks.
Hi Jerry.
I appreciate that many people in the MMT world have talked about endogenous money and are very aware of how credit money works. The problems are (1) MMT is actually a pretty big conversation and the popular version, including the Kelton book, is not always the same as the more sophisticated one; and (2) it is possible to know something is true, but not to have taken fully on board its implications for other questions. This latter happens in mainstream economics a lot!
In this case, it just isn’t logically possible, as far as I can see, to think that money is in any meaningful sense a public monopoly, or that fiscal deficits and surpluses matter because they create and destroy money, once we accept endogenous credit money. The idea that deficits are good “because they create money for the private sector to spend” might be a loose shorthand for how fiscal policy affects aggregate demand, but when people start taking the shorthand literally it creates real problems.
As far as there being an economically important difference between government-created and bank-created money, I’m afraid I don’t agree.
Well I said it was a minor criticism and that I did enjoy your discussion overall.
“As far as there being an economically important difference between government-created and bank-created money, I’m afraid I don’t agree.”
You remember 2008 and the financial crisis I imagine. And I think you were discussing Minsky (although that might have been one of the previous episodes and I am confusing things, happens often). But you might reconsider that statement in either case. Wouldn’t you agree that bank created money has more potential to create a financial instability than government spending? I mean the inflation potential is similar but the debt aspect is different.
Hi, Josh,
I know you’re too busy to reply, but maybe thinking about how you would answer this can inform your future work, and in particular any debates with MMTers, as they will certainly have similar questions in mind. As a math teacher, I always found that going through the details of one clear example was worth a thousand words of theory… 🙂
If I loan my brother a $100 bill from my mattress hoard, with which he plans to buy a used lawnmower, start a one-man mowing service, and (hopefully) pay me back from his future profits, have I myself “created money endogenously”?
If not, why would a Bank X loan of $100 to him (entered by keystroke into his checking account with Bank X) for the same purpose be considered to have “created money endogenously”. Again, Bank X’s Fed reserve account will soon be debited by $100 when my brother’s check to Al’s Hardware store for the mower clears from Al’s bank, to Bank X, via the Fed–just as my total money was debited by $100 when I took it out and gave it to my brother. In both cases, it seems, money that already existed (rather than being “created”) was simply put into another person’s (my brother’s) hands for their use, in return for which I, or the bank, are left holding nothing but his (shifty-eyed) promise to pay it back.
UNLESS that $100 didn’t actually exist in Bank X’s reserve account at the time of clearing after all; in which case the Fed would have loaned it to Bank X temporarily, via keystroke entry into Bank X’s reserve account. But then that’s the Fed “creating” the money, and loaning it to Bank X, who didn’t have that money prior to the Fed’s keystroke. Right? If not, why not?
Now, the bank might be considered to be the Fed’s “agent”, perhaps only implicitly, and with admittedly quite broad powers of independent judgment and action, in “creating money”; but it’s hard (logically) to see it as being any more than such a delegated extension of the Fed’s (not the bank’s) ULTIMATE money-creating powers. I believe that it is only in this ultimate sense that (sophisticated) MMTers makes their claims about who’s creating money–especially since, as you acknowledge, MMT is extremely savvy about banking!
If the answer is that I, too, DID “create money exogenously” in giving out my $100, fine…but that’s not what I (nor MMT, nor most folks, I think) regard as creating money. I suspect there are floating about this argument differing semantic takes on the phrase “creating money”, in which case clearing up the semantics would seem to be quite valuable–and thus end the pointless (if they are merely semantic) debates between MMT and the rest.
If the answer is that I did not “create” money, but the bank did, what is the relevant difference between the situations? This seems like an easy example to address in detail, and if you’re right that MMT’ers are in substantive error (rather than merely having semantic differences) in their take on who’s actually “creating” money, it should, by using this example, be easy to win any such debates with them–you’ll become (even more) famous–as “the man who (finally!) refuted MMT!”
Suppose you counterfeited the $100 cash you loaned out, so well that no one could spot it as fake. Then you would be creating endogenous money–a private person creating cash money the same way the government does when it prints federal reserve notes.
Or you could pan for gold or mine bitcoin, seems like all that is endogenous money.
Hi, Bill,
Interesting points, but off the top of my head, I think MMT, and probably Josh and most others, don’t want to call everything that has use-“value” and/or exchange-value by the name of money. MMT is only interested in fiat money, and the issue I was addressing was whether bank loans, which certainly function as fiat money, are “created”, or merely re-circulated from previously created fiat money that was created by the Fed. MMT would say fiat money has to be acceptable by the govt. for taxes, which the gold and bitcoin aren’t. Money can of course be faked, but I don’t think that’s relevent to whether I create money vs. the bank, when we give pre-existing non-faked money to the lawn entrepeneur.
And I think none of the examples are relevant to the distinction (if any) between bank money and Fed money regarding whether it can be created “out of thin air.” Banks can with essentially no effort create bank loans to borrowers, as can the Fed create loans to banks. But I can’t at will and with no effort find gold, nor counterfeit bills, nor mine bitcoin. I guess I could write IOU’s, which if “trusted”, could circulate like money–but again, I eventually then have to honor it eventually with an actual $100 bill when requested, so I didn’t really create new money.
Perhaps it’s also that money should be essentially universally usable, as is fiat. But there are many situations where I can use fiat, but not gold, nor bitcoin, nor even the fake bill, if, say, every bank has a microscope they use before accepting cash deposits.