Thursday, 6 December 2018

Balance of Payments

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A good introduction:
The balance of payments data is basically a balance sheet of our nation’s net borrowing or supply, in dollar terms of goods, services and financial assets, to/from the rest of world. The major component of the balance of payments is the current account ...
Make sure to read the rest.

Wednesday, 5 December 2018

Something Is Rotten in the State of France

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An interesting overview:





MMT and the External Sector

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Ramanan expands his assessment of the export issue to cover broader problems in the MMT-conception of the external sector:


Hi Georg,

Basically, there's Post-Keynesianism and there's MMT. MMT is part of Post-Keynesian theory. 

To be more precise: what's correct in MMT is not original and what's original is not correct. 

But still, it is very useful, as it provides non-economists to become immediately interested in economics and they can start learning. 

Some work of MMTers like Scott Fullwiler is useful in central bankey stuff. 

MMTers are right side of the political economy generallly, not always. 

MMT is million times better than mainstream. 

But MMTers fail to understand the importance of the external sector. 

Free trade puts a large constraint on nations and "exports are cost" is wrong. Rich nations impose free trade on poor nations while they themselves had protection in their early stages of development. 

A poor nation if it expands demand, its imports will zoom and might soon be faced with balance of payments crisis, fixed or floating. 

So the solution is a reform of the world order, WTO, IMF etc so that surplus nations can't run surpluses beyond a point. 

Etc. 

Ramanan


My reply:


Hi Ramanan,

Thank you for your enlightening synopsis. I can entirely relate to it. Other than criticising the Mosler-export-doctrine, I had not yet come to appreciate wider problems with MMT's treatment of the external sector. Thank you for this pointer. I shall also consult Godley on this issue, which I have become aware of very recently thanks to your posting.

Best regards,

Georg

MMT and Exports

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I have received the following reply to my comment here (the blog in question allows one to post a comment, but the comment does not show up in a thread; it can be seen only by the owner of the blog, who has sent me the following response to my comment:

Hi Georg, 
This is on your comment on my blog concertedaction.com 

Warren Mosler proposes dichotomously that exports are costs and imports are benefits. How is Mosler’s position related to the above finding?  
Mosler is wrong in thinking that exports aren't needed to growth. That is one thing many have criticized about Neochartalism. 
So basically "MMT" is a wrong theory. 
Ramanan

To which I have replied:

Thank you for your reply in which you write: "So basically "MMT" is a wrong theory". 
By that, do you mean 
MMT is a theory 
(a) not entirely wrong but containing flaws, notably an inadequate assessment of the role of exports, or 
(b) whose account of the role of exports implies that the entire edifice of MMT is erroneous, or 
(c) that is in its entirety wrong partly because of a mistaken view of exports and partly for a number of other reasons? 
Personally, I do not think that MMT is "basically a wrong theory" - I find it an excellent tool to study economics by criticising economics (lending a falsificationary "bias" to any study of economics), and learning-by-criticising economics by bringing more reality into the subject's purview. 
As for the Moslerian view of exports and imports, I have written this in my own blog: 
(2) A Puzzle: Exports = Cost, Imports = Benefit ?

So Much for Exports Being a Cost

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LINK

Missed this working paper Sharp Instrument: A Stab At Identifying The Causes Of Economic Growth from May 2018 from three IMF authors with an impressive conclusion.
From the abstract
We find that export sophistication is the only robust determinant of growth among standard growth determinants such as human capital, trade, financial development, and institutions. Our results suggest that other growth determinants may be important to the extent they help improve export sophistication.
Note, not only is it saying that it is robust but that other factors are important as long as they improve export sophistication.
Cambridge Keynesians were clear on this. Here’s Wynne Godley in a 1993 article Time, Increasing Returns And Institutions In Macroeconomics, in Market And Institutions In Economic Development: Essays In Honour Of Paolo Sylos Labini, page 79:
… In the long period it will be the success or failure of  corporations, with or without active help from governments, to compete in world markets which will govern the rise and fall of nations.
and Nicholas Kaldor in Causes Of Growth And Stagnation In The World Economy, first published in 1996 and based on lectures given in 1984:
The growth of a country’s exports thus appears to be the most important factor in determining its rate of progress, and this depends on the outcome of the efforts of its producers to seek out potential markets and to adapt their product structure accordingly. The income elasticity of foreign countries for a particular country’s products is mainly determined by the innovative ability and the adaptive capacity of its manufacturers. In the industrially developed countries, high income elasticities for exports and low income elasticities for imports frequently go together, and they both reflect successful leadership in product development. Technical progress is a continuous process and it largely takes the form of the development and marketing of new products which provide a new and preferable way of satisfying some existing want. Such new products, if successful, gradually replace previously existing products which serve the same needs, and in the course of this process of replacement, the demand for the new product increases out of all proportion to the general increase in demand resulting from economic growth itself. Hence the most successful exporters are able to achieve increasing penetration, both in foreign markets and in home markets, because their products go to replace existing products.
[italics: mine]
The IMF paper is surprising, since the IMF believes in free trade in which market mechanisms work to achieve convergence in fortunes of nations, so exports is hardly important.

Monday, 3 December 2018

Making It Easier to Understand MMT (2) — Equilibrium, Demand, and Money

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In his critique of equilibrium economics, Kaldor points out that the economy is not driven by exogenous forces of the kind that ensure an unchanging framework conditioning, protecting, and perpetuating Walrasian equilibrating processes. Instead, the real economy is being compelled by endogenous forces to continuously adapt and evolve — and the pumping heart of these not always productive disruptions is modern fiat money. 

This explodes the neoclassical myth of the neutrality of money. Money shapes and changes the economy fundamentally — every day.

Money finances the very forces that build a reality in which there is no place for the abstract model of a moneyless barter economy as depicted by conventional economics.

At the same time, it is the pulse of demand that brings the economy closer to a more optimal state or pulls it away from it.

This pulse is fed my money.

The ability to increase production in response to demand is achieved in modern capitalism by an endogenous money supply: a banking and monetary system where capital investment can be financed by new money.

Kaldor notes that

“This is the real significance of the invention of paper money and of credit creation through the banking system. It provided the pre-condition of self-sustained growth. With a purely metallic currency, where the supply of money is given irrespective of the demand for credit, the ability of the system to expand in response to profit opportunities is far more narrowly confined.” (Kaldor 1972: 1250).
BIBLIOGRAPHY
Debreu, Gerard. 1959. Theory of Value: An Axiomatic Analysis of Economic Equilibrium. Wiley, New York and London.

Kaldor, N. 1972. “The Irrelevance of Equilibrium Economics,” Economic Journal 82: 1237–1252.

Sunday, 2 December 2018

Here Comes the Sun

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A good overview of (1) the facts that call into question CAGW and (2) the politico-religious pressures that keep the myths socially influential.



Willie just happened to choose solar science as a career and, like many solar scientists, after nearly three decades of scientific research in his case, came to believe that changes in the sun’s brightness, sunspots and energy output, changes in the orbital position of the Earth relative to the sun, and other powerful natural forces drive climate change. In brief, our sun controls our climate.
Even the IPCC initially indicated agreement with him, citing his work approvingly in its second (1996) and third (2001) Assessment Reports. That later changed, significantly. Sure, everyone agrees that the sun caused the waxing and waning of the ice ages, just as solar scientists say. However, the sun had to be played down if carbon dioxide (CO2) was to be played up – an abuse of science that makes Willie sick.
Unfortunately for the IPCC, solar scientists think solar changes also explain Earth’s most recent warming period which, they point out, began way back in the 1830s – long before we burned enough fossil fuels to make any difference. They also observed the shrinking of the Martian ice-caps in the 1990s, and their return in the last few years – in perfect time with the waning and waxing of Arctic ice caps here on Earth.
Only the sun – not the CO2 from our fires – could cause that Earth-Mars synchronicity. And surely it is no mere coincidence that a grand maximum in solar brightness (Total Solar Irradiance or TSI) took place in the 1990s as both planets’ ice caps shrank, or that the sun cooled (TSI decreased) as both planets’ ice caps grew once again. All that brings us back to Dr. Soon’s disagreements with the IPCC.
The IPCC now insists that solar variability is so tiny that they can just ignore it, and proclaim CO2 emissions as the driving force behind climate change. But solar researchers long ago discovered unexpected variability in the sun’s brightness – variability that is confirmed in other stars of the sun’s type. Why does the IPCC ignore these facts?
[...]

Surely Willie and solar scientists are right about the primacy of the sun. Why? Because the observable real world is the final test of science. And the data – actual evidence – shows that global temperatures follow changes in solar brightness on all time-scales, from decades to millions of years. On the other hand, CO2 and temperature have generally gone their own separate ways on these time scales.

Global temperatures stopped going up in the first two decades of this century, even though CO2 has steadily risen. The IPCC blames this global warming “hiatus” on “natural climate variability,” meaning something random, something not included in their models, something the IPCC didn’t see coming.
This confirms the fact that their models do not add up to a real theory of climate. Otherwise the theory would be falsified by their incorrect predictions. They predicted a continuous increase in temperature, locked to a continuous increase in CO2. But instead, temperature has remained steady over the last two decades, while CO2 climbed even faster than before.
[...]

Unlike the IPCC, Willie and I cannot simply ignore the fact that there were multiple ice ages millions of years ago, when CO2 levels were four times higher than now. And even when CO2 and temperature do trend in tandem, as in the famous gigantic graph in Al Gore’s movie, the CO2 rises followed temperature increases by a few centuries. That means rising CO2 could not possibly have caused the temperature increases – an inconvenient truth that Gore doesn’t care about and studiously ignores.

Saturday, 1 December 2018

Making It Easier to Understand MMT (1)

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My intuition is that (at least people like me — educated in the spirit of neoliberal economics) need to understand two themes before they will be better able to access the messages of MMT.

(1) Self-Regulating, Optimal Equilibrium Does Not Work

The balancing mechanisms that are supposed to ensure equilibrium within and between the main markets of a free market economy do not work in the way described in MSE (mainstream economics), in fact, they do not exist, and are kept alive in a theory that is makes false statements about the real economy. We should, therefore, take a look at the equilibrium vision underlying MSE and the equilibrating mechanisms that it postulates — the labour market, the market for salable goods and services, and the market interaction supposedly balancing savings and investment.

If the economy is in a healthy state, it is not because the equilibrating mechanisms described by MSE have been left to work as they naturally do. And it is not the disturbance of these mechanisms from without that explains an unhealthy state of the economy. They are irrelevant to understanding the state an economy is in.

(2) The Right Level of Aggregate Demand Matters — The Right Level of Government Spending Matters

Money as a store of value enables people to exercise discretion in spending their income such as to affect aggregate demand (AD) and thereby leave AD sufficient or insufficient to ensure full employment. In a system of fiat money, government has the ability to attune its level of spending so that full employment will be attained in the face of the private sector's need to pay taxes and its revealed preference for net savings. If government does not spend enough so that the private sector is left with enough to net save and pay taxes, the latter will make a diminishing contribution to AD.

So, the condition for an optimal state of the economy cannot be automatically attained by leaving impersonal self-regulating mechanisms to work out the desired equilibrium solution.

Man must interfere.

He must decide upon the values that he wants to support by his interference.

He may gear his interference toward low inflation at the expense of large numbers of unemployed. 

Or he may concentrate resources on achieving the objective of full employment, deciding that inflation can be kept at reasonable levels at which it is a condition of healthy growth, while its residual costs will be minute compared to the costs of unemployment.

Making It Easier to Understand MMT (0)

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This is not really a post, it turns out no more worth than a note that is not really fit for publishing. But I am in brainstorming mode, trying to come up with a plan how to explain MMT in a way that is as easy to grasp as possible.

The below degenerated into a piece of moping that takes me off the itinerary that I had originally in mind — identifying topics that should be explained transparently to readers before elucidating MMT itself so that they will be able to benefit from a context within which the new look at economics will appear more immediately intelligible ...

... than if you ... well, read the sketch: 

Planted on the path to understanding MMT are a number of mines of opacity or counter-intuitivity. For sometimes celebrities of the school like Warren Mosler like to amuse themselves by shocking people with special gimmicks of opacity or counter-intuitivity. 

[From here on I am getting lost in reconstructing my problems in understanding points (1) and (2). Move on nothing much to see.]

Thus Mosler claims that (1) by imposing taxes on the people, government creates unemployment in the first place, or that (2) exports are costs and nothing but costs and imports are benefits and nothing but benefits. 

I think these games of cryptic "explanation" are counter-productive. 

Ad 1: If I am forced to pay taxes in the government's currency but cannot find work by which to earn government currency, then I am unemployed, argues Mosler. I am in need of employment of a certain kind (government currency earning employment) and cannot get it, therefore I am unemployed. So by imposing taxes and demanding government currency for the settlement of tax liabilities, government creates (the possibility) of unemployment in the sense of a person not being able to find work that is remunerated in terms of government currency.  What he is trying to say is that government manages to get its currency accepted by forcing people to pay taxes in that currency, thus creating the need for people to get jobs remunerated in government currency; this in turn enables government to make people work for it (or other institutions seeking government currency to pay their tax obligations). A terribly roundabout way of getting a point across. 

Ad 2: Even worse is Mosler's caper of insisting that exports are costs, while imports are benefits. Exports, he argues, require severance from/loss of real goods, when by contrast imports provide real goods. However, it is silly to look at two concepts as mutually unrelated categories when understanding the phenomenon that these categories are used to describe depends on the interaction between them. It is the interaction of exporting and importing that provides benefits that you cannot see when you narrowly insist on the contrast between the resource-releasing nature of exports and the resource-receiving nature of imports. By releasing real goods of a certain kind I may be able to receive goods of a kind that I value more highly; without this release the receipt could not be effected. So exports put me in a position to realise value enhancement in my portfolio of real goods, not to mention other benefits gained from exporting. Of course, if I am able to receive all foreign goods that there are without the need to export, one may say I am enjoying only benefits and do not incur any costs in terms of real goods, but its that really true, considering costs such as violence and exploitation (which are the precondition for unconditional acquisition) and lack of incentives to become internationally competitive?

Regulatory Limits - The Case of the International Maritime Organization (German Post)

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Aus einem Artikel, der die neue Gesetzeslage in Sachen Begrenzung des Schwefelgehalts bei Schiffstreibstoffen und ihre Auswirkung auf die internationale kommerzielle Schifffahrt beleuchtet – zusammenfassend hält der Artikel fest:

Dies ist wieder mal ein Beispiel für die Festlegung von Grenzwerten – die der Mehrheit der Bevölkerung gar nichts sagen – durch ferne und abgehobene Gremien. Ähnlich der Stickoxide durch die EU. Die Bombe ist erst geplatzt, als der Normalbürger von Fahrverboten betroffen war. Aktuell hat man gerade die Diskussion über „unverbindliche Empfehlungen“ der UNO auf einem ganz anderen Gebiet. Auch die IMO [International Maritome Organization]-Grenzwerte waren einst nicht bindend. Hier setzt die Kritik an den einschlägigen Industrieverbänden ein. In der Phantasiewelt der Linken [...] schreiben die Lobby-Verbände die Gesetze. In der Realität ist das mitnichten so. Sie stehen einer Mauer von – überwiegend ungebildeten, aber ideologisch gefestigten – Politikern, Bürokraten und Nicht-Regierungsorganisationen gegenüber. Allesamt Personen, die für die wirtschaftlichen Konsequenzen ihres Handelns in keiner Weise verantwortlich sind. Die meisten sind nicht einmal demokratisch legitimiert. Das Vehikel Umweltschutz hat sich inzwischen als eine Gefahr für alle Gesellschaften herausgebildet. Auf keinem Sektor sind so viele Scharlatane und Ideologen unterwegs. Mit der zunehmenden Abnahme naturwissenschaftlicher Kenntnisse in Deutschland wird eine notwendige Aufklärung über technisch-wirtschaftliche Abhängigkeiten immer schwieriger.