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Mike Segar/Reuters (original image modified)

Stephanie Kelton, a prominent Modern Money Theory (MMT) proponent, has a new book out, The Deficit Myth, and it is finally making the rounds of reviews by economists and commentators. As to be expected, there are some whataboutisms. In the case of Josh W. Mason’s largely positive review in the American Prospect, the question is: what about the banks?

I guess something that needs to be stressed here is that The Deficit Myth isn’t meant to be “the” book on MMT that explains all aspects of economics. MMT as a body of work is a vast literature for which Kelton is attempting to condense a few very basic arguments for a general nonacademic audience. The confusion around public finance is hard enough to disentangle without bringing banks into the picture. However, it is one question, among other critiques made by Mason, worth addressing if only to take the opportunity to educate those that might have similar questions.

Mason makes three main critiques to Kelton’s arguments in The Deficit Myth that I want to respond to. But for the purposes of this article, I will only address the issue of private bank money. …


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ZUMA PRESS INC/ALAMY

The media likes to report nominal figures which can give news consumers a false sense of the trends. But in a monetary economy with inflation (increasing prices), nominal figures tell you almost nothing. Using real numbers, which are adjusted for inflation, give you a much better sense of what is really going on in terms of actual gains and purchasing power for workers. For example, if your salary has increased 2-percent, but the cost of everything has also increased 2-percent, you are not earning more than you did before in real terms. …


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Given the recent Supreme Court decision in Janus v. AFSCME, the public sector union case, I thought it worth explaining why labor unions are so important aside from the usual explanations given.​

In 1956, Richard Lipsey and Kelvin Lancaster, developed the Theory of Second Best for the Walrasian model. They demonstrated in their paper that when one optimality condition cannot be satisfied, manipulating other variables away from optimum can create a second best outcome in an economic model. In other words, if one market distortion cannot be removed, then a second best equilibrium can be achieved by imposing a second market distortion. …


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Vox Media has an interesting YouTube video floating around on Facebook about pennies (see below). If you haven’t seen it, you have probably heard a take on the theme: pennies are useless and cost the government more money to make them than they are worth ($0.0107 per penny). While this is true, one might be misled into believing that the government is somehow losing millions of dollars from the manufacturing of the currency, but it’s not when you factor in the rest of coins and bills the U.S. produces into the equation.

In monetary economics, there is a concept called “seigniorage”; which dates back to the Middle Ages from Old French seigneuriage meaning the “right of the lord (seigneur) to mint money”. Seigniorage is generally defined as the net revenue or profit, if you will, from the face value of the coinage or token minted minus the cost of production and maintenance. For example, the cost of producing a dollar bill is a couple cents (say $0.05), so the rest of the value generated by producing a dollar bill ($0.95) counts as revenue to the treasury. So even though it costs $0.0107 to make a penny, the treasury is not losing money when you factor in the combined seigniorage revenue from all the coins and bills produced into circulation; it’s still a huge positive net revenue. In 2016, in fact, the U.S. Mint reported seigniorage net income of $668.5 …


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I often get into debates online with generally smart people about the inefficiencies of socialism. These conversations often revolve around the planned economy of the Soviet Union. I have argued elsewhere that the Soviet Union was not really socialist (so I’ll avoid addressing that myth here). The most important point to get across to people is that central planning and state ownership are not necessary conditions for a socialist economy. My own preference is a market socialist economy, one in which the majority of firms are worker-owned and consumer cooperatives, but resources continue to be allocated via regulated markets. Although I agree that planned economies have significant drawbacks (mainly principle-agent, incentive, and information problems), I disagree that planned economies are inherently less efficient than market economies. The reason I prefer markets is to maintain consumer sovereignty and freedom of enterprise, not because they are necessarily more efficient. …


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Since the candidacy of Bernie Sanders for U.S. president in 2016, socialism has been garnering more interest, particularly among young people. A Harvard University survey in 2016 found that 51 percent of young people, between 18 and 29, did not support capitalism, and 31 percent support socialism. The survey clearly indicates young people favor an alternative, but the gap in support for socialism suggests an ambivalence toward what that alternative should be. I would also suspect that of the 31 percent that do support socialism, many do not have a clear idea of what it would look like — in no small part due to the robust myths and misconceptions which were propagated by the U.S. government, and that continue to pervade even the academic sphere. Socialists have put forward a plethora of possibilities. These proposals generally fall into one of two categories, market socialism or planned socialism. The focus of this article and subsequent parts will focus on the former. …


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​There were many underlying factors which contributed to both the financial crisis and the Great Recession. The trigger of crisis and recession begins with the burst of the housing bubble in mid-2007. As subprime mortgage default rates began to accelerate, overly leveraged financial institutions holding risky products such as mortgage backed securities (MBSs) and collateralized debt obligations (CDOs) triggered a crisis of asset devaluation. Financial institutions holding both MBSs and CDOs and financial derivative products such as default swaps took a double hit inducing a liquidity crisis and immediate default risk.

According to economist James R. Crotty, retired professor at the University of Massachusetts Amherst, there are two major underlying causes which led to the financial crisis: The first was bad theories such as the efficient financial market theory, and, generally, New Classical Macroeconomics. Such theories made assumptions at odds with the real world. For example, efficient market theory included assumptions such as: a) investors can determine the true distribution of risk; b) liquidity is never a problem; c) markets maintain stable equilibrium; d) default is rare; e) agent borrowing is limitless at risk-free interest rates. All of these assumptions turned out to be false. The second underlying cause was the “New Financial Architecture” which primarily consisted of flawed institutions and erroneous practices related to aggressive risk taking, over leveraging, and light government regulation. …


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It has been some years since the financial crisis of 2007–08 and subsequent recession, yet the recovery of economic growth is still anemic relative to the years leading up to the crises. The gap between potential GDP and real GDP has closed, but only because potential GDP estimates have been continually revised downward. Despite years of near-zero interest rates, real gross domestic investment growth continues fall since its initial recovery in 2010 (see Figure 1). However, identification of these trends have been pinpointed as occurring before the financial crisis. According to Summers (2015), looking back to 2003–2007 “no one will argue that performance was extraordinary” despite low interest rates, and prior to that the “2001 recession required a near brush with the zero bound.” …


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I t’s at the same time amazing and disturbing that mainstream introductory economics textbooks still teach fractional reserve banking and the money multiplier. Undergraduate students, myself included when I was an undergrad, learn that banks operate as intermediaries between savers and borrowers. If you are lucky enough not to have to spend all of your income, you deposit that unused income in a reputable bank. The bank in turn loans out those deposited funds to someone else at a profitable rate of interest. By loaning out your unused funds, this creates a multiplier effect by which the borrower spends the money which becomes someone else’s income, and so on. This assumption is crucial to monetarist theory. Banks are merely intermediaries between savers and borrowers; thus it is assumed that the money supply can be directly controlled using the interest rate policy by the Federal Reserve. The only new money that can enter the system is through the government. A low interest rate policy by the Fed can increase demand for money loans, increasing the money supply. Reducing the rate would do the opposite. Government spending into the economy either by direct fiscal expenditure or injection of reserves into the banking sector would increase the money supply causing inflation from “too much money chasing too few goods” as Milton Friedman would say. …


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One of the popular interpretations of the Soviet system by socialists is that it was a form of state capitalism in which the bourgeoisie class was replaced with a statist class. Some of the proponents of this view include Charles Bettelheim, Stephen Resnick and Richard Wolff, but each with their own slightly different take. The common version of this view is that the top officials of the communist party became a new capitalist class which appropriated surplus value from employees of the state. Beginning with Bettelheim’s version of this analysis, from his book Class Struggles in the USSR, he suggests that the Communist party came to dominate the working class, thereby becoming a “new” bourgeoisie class. Bettelheim’s analysis, however, suffers from some problems. In the Soviet system, there was no private ownership of the means of production, no real enterprise competition, and no production for profit. Soviet elites (or nomenklatura) had no drive or even means by which to accumulate capital. Rising within the ranks of the Communist Party or government administration was the only means by which to obtain greater status in the society, and the only way to do that was to perform well in your position — that is not to say government officials (apparatchiks) did not enjoy certain privileges; although elites were at the front of the queue for consumer goods in times of shortage, only a select few had a higher standard of living than, say, the average American middle manager. Furthermore, workers had guaranteed jobs; they could not be fired as it was against the law, so party members could not use unemployment as a disciplining device for labor as is the case under capitalism. And since most basic needs were met through the provision of public goods, workers were not dependent on any one elite for subsistence. This analysis also runs counter to Marxist theory which argues the bourgeoisie class exerts influence over the political class, and thereby state policy. In the Soviet system, there was no bourgeoisie class to offer patronage, and state policy was determined within the party. …

About

AARON MEDLIN

Doctoral student of Economics at the University of Massachusetts Amherst. Commentary, research and more at aaronmedlin.weebly.com

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