Fed Nixes Narrow Banks Redux

J. P. Koning at AEIR writes well on the Fed's efforts to quash narrow banks, more clearly than my previous efforts here here and here. 

As a quick review: Narrow banks take your money and invest it 100% in interest-paying reserves at the Fed. They are completely immune from runs, failures, and financial crises. You would get a lot higher interest than the big banks currently pay.  The Fed should be giving them a non-systemic medal. Instead, the Fed is fighting them tooth and nail.

the Fed is floating the idea of destroying the narrow-bank business model before it can ever be tested in the market.

J.P. clearly goes through the Fed's proffered objections, demolishing each in turn.  The financial stability concern makes no sense -- after all, they can buy treasury bills directly or buy treasury - backed money market funds. Reserves are that, with instant rather than one day settlement, or money market funds that now are allowed to invest in reserves.

J.P is, I think, a little too polite. He writes,

An Apocalyptic View of Central Banks

In the department of genuinely terrible, and terrifying, ideas, I just got the a request from Simon Youel, the Media and Policy Officer at Positive Money, regarding the appointment of Mark Carney's successor as Governor of the Bank of England.  Positive money is organizing a "joint letter to the Financial Times, calling on the Chancellor to appoint someone who’ll foster a pluralistic policy-making culture at the central bank."

The proposed letter:

Applicants to be the next Governor of the Bank of England are asked to commit to an eight year term lasting until 2028. By then the world will be a very different place.  

Three key trends will shape their time in post. Firstly, environmental breakdown is the biggest threat facing the planet. The next Governor must build on Mark Carney’s legacy, and go even further to act on the Bank’s warnings by accelerating the transition of finance away from risky fossil fuels.  

Secondly, rising inequality, fuelled to a significant extent by monetary policy, has contributed to a crisis of trust in our institutions. The next Governor must be open and honest about the trade-offs the Bank is forced to make, and take a critical view of how its policies impact on wider society. 

Thirdly, the UK economy is increasingly unbalanced and skewed towards asset price inflation. Banks pour money into bidding up the value of pre-existing assets, with only £1 in every £10 they lend supporting non-financial firms. The next Governor must seriously consider introducing measures to guide credit away from speculation towards productive activities.  

As the world around it changes, the function of the Bank itself must evolve. Its current mandate and tools are increasingly coming into question, and a future government may assign the bank with a new mission. The next Governor must meet this with an open mind, not seek to preserve the status quo. 

To equip the Bank to meet the challenges of the future, the new Governor will also need to ensure it benefits from a greater diversity of backgrounds, experience and perspectives throughout the organisation. 

The Bank of England’s own stated purpose is to promote the good of the people. We need a Governor genuinely committed to serving the whole of society, not just financial markets.

Cost divergence

Source: Marginal Revolution

This lovely picture is from Why are the prices so D*mn High? by Eric Helland and Alex Tabarrok. (It's covered in Marginal Revolution: The Initial post,  Bloat does not explain the rising cost of education, and an upcoming summary on health care.)

Bottom line: objects got cheap, people got expensive. Technology, automation, globalization (thank you China), and quality improvement made goods cheaper. People, especially skilled people, got more expensive. All of which should make you feel good if you're a person and especially a skilled person.

The source of the relative rise in the cost of education and health care is less clear. Looking around at  a typical university,  school system, or hospital suggests massive bloat and inefficiency. Alex suggests  not:

I assumed that regulation, bloat and bureaucracy, monopoly power and the Baumol effect would each explain some of what is going on. After looking at this in depth, however, my conclusion is that it’s almost all Baumol effect. 

Refreshing YIMBY at NYT

Farhad Manjoo writes an excellent YIMBY (yes in my back yard) essay in the New York Times, remarkably placing the blame squarely where it belongs -- progressive politics.

Across my home state [California], traffic and transportation is a developing-world nightmare. Child care and education seem impossible for all but the wealthiest. The problems of affordable housing and homelessness have surpassed all superlatives — what was a crisis is now an emergency that feels like a dystopian showcase of American inequality. 

Just look at San Francisco, Nancy Pelosi’s city. One of every 11,600 residents is a billionaire, and the annual household income necessary to buy a median-priced home now tops $320,000. Yet the streets there are a plague of garbage and needles and feces, and every morning brings fresh horror stories from a “Black Mirror” hellscape: Homeless veterans are surviving on an economy of trash from billionaires’ mansions. Wealthy homeowners are crowdfunding a legal effort arguing that a proposed homeless shelter is an environmental hazard. A public-school teacher suffering from cancer is forced to pay for her own substitute. 

At every level of government, our representatives, nearly all of them Democrats, prove inadequate and unresponsive to the challenges at hand. Witness last week’s embarrassment, when California lawmakers used a sketchy parliamentary maneuver to knife Senate Bill 50, an ambitious effort to undo restrictive local zoning rules and increase the supply of housing.

He notices the same hypocrisy that struck me walking past the "all are welcome here" signs in Palo Alto:

Then there is the refusal on the part of wealthy progressives to live by the values they profess to support at the national level. Creating dense, economically and socially diverse urban environments ought to be a paramount goal of progressivism... Urban areas are the most environmentally friendly way we know of housing lots of people. We can’t solve the climate crisis without vastly improving public transportation and increasing urban density. ... 

Yet where progressives argue for openness and inclusion as a cudgel against President Trump, they abandon it on Nob Hill and in Beverly Hills. This explains the opposition to SB 50, which aimed to address the housing shortage in a very straightforward way: by building more housing. ... 

Reading opposition to SB 50 and other efforts at increasing density, I’m struck by an unsettling thought: What Republicans want to do with I.C.E. and border walls, wealthy progressive Democrats are doing with zoning and Nimbyism. Preserving “local character,” maintaining “local control,” keeping housing scarce and inaccessible — the goals of both sides are really the same: to keep people out. 

“We’re saying we welcome immigration, we welcome refugees, we welcome outsiders — but you’ve got to have a $2 million entrance fee to live here, otherwise you can use this part of a sidewalk for a tent,” said Brian Hanlon, president of the pro-density group California Yimby. 

It's an obvious point. But it's great to hear this point in the New York Times. An internal reflection on hypocrisy is much more effective than an outside charge.

I don't agree with everything. He starts with a good point,

One continuing tragedy is the decimation of local media and the rise of nationalized politics in its place.

Yes, everyone here in California is so consumed with Trump Apolexy that they don't even notice what the city council is doing. But Manjoo chalks the fundamental problem up to larger representation for rural states in the Senate. Hmm. If the same people who vote for San Francisco zoning have more power to push their agenda on the whole country, I don't see how that makes it better.

Still I see hope. California is a one party state, and the one party is slowly waking up to the fact that it must govern too. Slogans about the great progressive future are fine in opposition, but once you've been in total charge for a while, you do start to own it.  After trying everything else, California is slowly waking up to the fact that we have found the problem and it is us. Subsidies, vouchers, "affordable housing" mandates will never make a dent. Just Let Them Build some housing. It took Nixon to go to China. I was very happy to see the Obama administration recognize the havoc caused by occupational licensing restrictions. The YIMBY self-reflection is not over yet. 

Clemens on minimum wage

Jeff Clemens offers a "roadmap for navigating recent research" on minimum wages in a nice CATO policy analysis.  A review and a doubt.

He discusses the recent claims that minimum wages don't hurt low-skilled people. This is an impressive and readable account of a vast literature. It's not as easy as it seems to evaluate cause and effect in economics.  Evidence from small increases in the minimum wage over short time intervals in some locations in good economic times may not tell you the effects of large increases over longer time intervals in all locations in bad economic times.

The "new conventional wisdom," of small effects, Jeff reports, ignores a lot of the more recent work, and especially work that  uses "data from individual-level administrative records" rather than "aggregate data and survey data," work that runs "experiments whenever possible," and work that "transparently analyzes compact historical episodes in the U.S. experience" (P. 8)

Two Videos

My Hoover colleague Russ Roberts just finished a nice video on inequality:

Among other takeaways, he stresses that the people who were rich in 1980 are not the same people or even families who are rich now. It is not true that "the rich got richer." He also tracks individuals through time, and poor individuals got richer to.  There is a lot more economic mobility in the US than the standard talking points.

The video is part of Hoover's Policy Ed initiative, and comes with lots of background information. I'll be curious to hear your comments.

A few months ago I went to the Friedberg Economic Institute to give an evolving talk I call "Free to grow" bringing together various themes of this blog and other writing. It's not nearly as polished as Russ's, and I'm still struggling to keep it under 10 hours!

(Click here to see the video.) The Friedberg Institute is a nascent free-market oriented organization in Israel. It mostly sponsors talks and classes for undergraduates, and for alumni of their program. As a result it is forming a club of sorts of talented and interesting young Israelis interested in economic freedom. If you're in Israel, check it out, and if you're invited to talk there, accept!

Almost sane housing supply

California, despite being a one-party state, is actively debating SB50 that would over-ride local zoning laws and allow construction of apartment buildings, especially near transit areas.

This is almost a remarkable outbreak of sanity. In a divided government, one can keep touting slogans. But when one party takes over, apparently permanently, they do have to actually govern, and eventually some reality must sink in.

Housing in California is ridiculously expensive. After California tried everything else -- "affordable housing" mandates on developers, subsidies, rent controls, public housing, and so forth -- it is finally facing the fact -- we need to just let people build. Given that California will not allow more land to be devoted to housing -- wisely, in my view -- and given that the first generation housing stock was built cheaply, using a lot of land for little house, the natural place to allow people to build is up: replace small single family houses on large lots with apartments, townhouses, or even single family houses on smaller lots.

The problem here is local zoning laws, building laws and various impeding regulations, which are more or less designed to preserve enormously expensive museums of 1950s suburbia. So SB50 overrides local laws.

The end result, though is saddled by a trip through the progressive sausage factory. I recommend Joe DiStephano's analysis with beautiful maps.

The first stop was rather clever: wrap it in green. "You can build" was never going to fly in California. So the original effort, SB25, restricted the effort to areas near transit. Who can object to allowing apartments near transit, so people can get out of their cars? Moreover, with this twist, SB25 put the kibosh on one standard local trick for restricting construction, requirements for lots of onsite parking.

The transit clause extends to "high quality bus corridors." Now in one sense that's great. Other than nostalgia and cuteness, and outside places like New York City, buses are much better transit options.  But one of the main reasons buses are great is that it is much easier to move a bus line than to move a rail line. You can be on a "high quality bus corridor" tomorrow.

"Jobs rich areas" are now included. Allowing people to live nearer where they work is better than any "transit" idea. That too is a little strange though. If people were allowed to build housing, jobs would locate there quickly. Housing first redevelopment is not too hard an idea.

Alas, the bus and jobs exemption only waive density and parking, and allow cities to keep height limits and other zoning restrictions. Which they will do.  

Then it descends into madness, and an invitation to endless litigation.

"Sensitive communities" are exempt. That means (still quoting Joe), "‘High Segregation & Poverty’ or ‘Low Resource’ in TCAC Opportunity Maps," "Other local areas determined by each regional government through a collaborative process," and "Tenant-Occupied and Rent Controlled parcels."

California will write a law allowing the construction of apartment buildings, and conversion of houses to multifamily units, yet will specifically exempt the areas most obviously in need of redevelopment. Once upon a time governments granted subsidies and tax breaks for redeveloping such places. Minorities and poor people will instead be condemned to live in rotten housing and rotten neighborhoods. Heaven forbid a few apartments get built near transit stops, some yuppies move in, grocery stores and coffee shops grow to serve them, and the rest of the neighborhood. 

Joe's maps tell the story. Where in LA will California allow apartments? Not in the places that need redevelopment! Perhaps if people could build apartments, these might become "jobs rich areas!"   

As its local governments are devoted to maintaining museums of suburbia, the state government is devoted to preserving museums of poverty, racial segregation, and lack of businesses and services. 

(To be fair, the state law only over rides local zoning laws. There is nothing that stops the city of LA from allowing development with or without SB50.)

As a classic example of how we got in to this mess, consider the instant reaction on the Menlo Park nextdoor.com 

Now, if we do a little Bayesian Improved Surname Geocoding -- not perfect, but good enough for the Justice Department to sue auto dealers -- we can conclude that the author is white, wealthy, lives in a house worth at least $3 million dollars, and a reliable progressive Democrat, bleeding hearts over climate change and inequality. Yet this post is worthy of the darkest anti-immigrant keep-the-poor-out    climate-denying right-winger. All the people who rehab the $3 million single family houses to $6 million single-family houses in Menlo Park drive in from 50 miles away, as do those who mow the lawns, wait the tables and so on. The young bright kid from Fresno who might get his break working here has little hope of finding a place to live. I guess there is a lot of hypocrisy going around these days, but this is pretty glaring.

Also echoing the local zeitgeist and how-did-we-get-in-to-this-mess thoughts is the ongoing saga of the Flintstone House. NYT here, and a good article at the Guardian If you've ever driven down 280, you've seen this cool house. It was recently sold, and the new owner took up the Flintstones theme:

Before:

After:

More great pictures at SF Curbed. How utterly cool, you undoubtedly think. What did the city do, make it a historic landmark to preserve it? No, the city is suing Ms. Fang, the owner, for landscaping without permits and "community input."

From the Guardian

... the tastemakers of Hillsborough have not extended their favor to the experimental stylings of William Nicholson, the architect...It was in response to the Nicholson’s construction of the Flintstone house in 1976 that the town first established its Architecture and Design Review Board (ADRB), ... established “so there would never be another home like that built in Hillsborough”.

...Mrs Fang claims that she attempted to work with town of Hillsborough to obtain the proper permits for her landscaping work, ..she says she feels like the town is playing with her like a cat with a mouse – “play, play, play, bite, until I die” – and claims she has interacted with the town 44 times while attempting to comply. At one point, the town lawyer pressured her to paint all the mushrooms a single color, she says. “Every time I complied with their request, they moved the goalpost,” she says.

"Design review," which produces Disneyland replicas of craftsman houses and bland identical French farmhouses, allows its executors to stymie permits with endless arbitrary whimsical requests for esthetic changes.

Bottom line, any residual meaning of "private property" is vanishing in California.

(I received a few comments from fellow libertarians last time I wrote about these issues. Shouldn't communities have the right to pass whatever restrictions they want? If they want to preserve a $5 million per house replica of 1950s suburbia, and wall out the unwashed masses, hypocrisy aside, why should the state stop them? I counter, this is not libertarianism, the defense of private rights, this is untrammeled majoritarianism, by which your neighbors via the city strip you of your right to sell your house to the highest bidder, do what you want with it, and strip the ambitious kid from Fresno who wants to move here of his right to be supplied by a competitive marketplace. It's also a monstrous inefficiency. A neighbor who is hurt by $500 from his dislike of looking at your property can destroy millions of value to you. Anyway, it's a longer discussion which I acknowledge here without getting in to it. )

Free Solo and Economic Growth

We recently watched "Free Solo", the great movie about Alex Honnold's free (no aids, no ropes) solo climb of El Capitan. Among many other things, it got me thinking about economic growth.

The abilities of modern day rock climbers are far beyond those of just a generation ago. The Wikipedia history of El Capitan starts with a 47 day climb in 1958, using pitons, ropes, and all sorts of equipment, and continues through development of routes and techniques to Alex's three hour romp up the face. 

Why wasn't it done long before? There is essentially no technology involved. Ok, a bit. Alex is wearing modern climbing boots, which have very sticky rubber. But that's it. And reasonably sticky rubber has been around for a few hundred years. There is nothing technological that stopped human beings from climbing much like this thousands of years ago. Alex, transported to 1890, might not have free soloed El Capitan without his current boots, but he would have climbed a lot more big walls than anyone else.

Clearly, there has been an explosion in human ability to climb rocks, just as there has been in human productivity, our knowledge of how to do things, in more prosaic and more economic activities. And, reading the history, the rate of improvement has grown over time. 

Financial Inflation?

Torsten Slok sends this lovely picture of the S&P500 and the price index for portfolio management and investment advice services. Torsten explains that "50% of the decline in core PCE inflation since the peak in July has been driven by financial services, and with the stock market rebounding, we should expect to see the financial services component move higher again."

What's going on? I think it's this: Most portfolio management payments are a percent of value -- you pay a fee, say 1%, of the total value of the portfolio. When the stock market goes down 10%, you pay 10% less in fees. Now, the BEA's job is to figure out, did you get 10% less quantity -- did you get 10% less "valuable advice" for that fee? You're not an idiot, so you're paying 1% off the top of your wealth annually, a third of Senator Warren's dreaded wealth tax, for something of value, the BEA figures. Or did the "price" of financial services go down 10%? Evidently, the BEA assumes the price, not the quantity changed, so the "price" of financial services tracks the stock market.

This is of course nonsense. On the other hand, I have no better idea how to separate 1% management fees into a "price" or a "quantity" (or, heaven forbid, a "quality improvement"). The number of people working to provide you financial advice didn't change 10%. Though, in the long run, it will if the market stays down. How should, or does, the PCE handle rents, or dividend payments? I don't know.

I went back to the documentation for how the PCE is constructed to try to understand these questions and see if my hunch is correct, but I failed to understand anything in there. (I got lost in the "commodity flow method," see p. 5-27.) I would value comments from people who understand this stuff.

Overall, I think the lesson is that our measures of inflation are pretty noisy. First we throw out food and energy. Now it looks to me that "core" should throw out management-fee based financial services, or at least assume that the price is fixed (1% sounds like a fixed price) rather than the quantity. Do real estate and other commissions do the same thing and the price index rises and falls with the price of housing? What's next?

(The point of throwing out food and fuel is not that they don't matter but a feeling that the core CPI today is a better guide of where the overall CPI will be in the future. A more thorough analysis of which components are better forecasters of overall CPI would be welcome.)

Maybe an inflation measure that is less comprehensive but better measured isn't such a terrible idea. Maybe the Fed worrying about 1.8% vs. 2% inflation is not such a good idea.

Rent Control Poem

"kevinsch" posts an remarkable essay on rent control on a  Seattle city council blog (HT Marginal Revolution).

I’m not an economist, not a landlord, nor a renter. But since we’re having this debate, I went to the UW Library and pulled the literature on rent control so I could understand the issues, the studies, and what the experts conclude.  Here’s what I found. 

1. Within the community of economists there is broad consensus that rent control is a bad idea. The consensus is on par with the scientific community on climate change, and the medical community on the safety of vaccinations. 

Given the widespread move to introduce rent controls on the left coast, savor that.

2. There are two documented benefits of rent control: it decreases economic displacement for people living in rent-controlled housing, and it can reduce the volatility of rental pricing in cities where there is sufficient stock of rental housing. 

3.  There is a very long list of documented harms that rent control causes. It provides a strong disincentive to build more rental housing. It drives landlords to reduce spending on maintaining their units until the quality of the housing has drawn down to the point where it matches the allowed rent. And thus by reducing property values, it reduces property tax revenues. It reduces mobility for renters, causing them to stay in their rent-controlled housing rather than move when a better job or the needs of their family require it. It misallocates the total housing stock by encouraging people to stay in housing that doesn’t match their needs.  It encourages rental property owners to convert apartments to condominiums, thereby reducing the rental housing stock. It inevitably leads to a “cluster” of regulations piled on top to try to legislate away all of rent control’s problems. And it doesn’t help the people with the greatest need, but rather the people most capable of gaming the system. 

It's remarkable that someone who is not an economist could so quickly find all these subtle effects. Yes, most people quickly get that landlords will not keep up apartments, and builders won't build them. But most people don't quickly get the disincentives for renters not to "move when a better job or the needs of their housing require it." Or that it leads not to nirvana for the low income renter, but helps "the people most capable of gaming the system." I would only add that it really hurts the young ambitious person of limited means who wants to move to town to get that upward-mobility job.

4.  In many cities with rent control, tenants see annual rent increases at the maximum amount allowed, because landlords understand that if they skip a year they will never catch up. 

5.  Rent control’s harms can be mitigated in part through an aggressive public/social housing program that creates a large quantity of units using public funds. However, in those places it’s unclear that rent control itself is adding much value beyond the significant value that the public housing program alone delivers. 

OK, Kevinsch is not an economist so I'll let this pass. The history of aggressive public/social housing programs in US cities are an absolute disaster.

More deeply, he missed the underlying cause of the problem -- building, zoning, and land-use restrictions. Supply meets demand. If builders were allowed to build cheap apartments for modest renters, they would do so. If builders were allowed to build expensive apartments for high-income renters, who then would move out of buildings suitable for low rent apartments, they would do so.

6.  As this paper says, rent control “confers its benefits early, and extracts its costs late.” That’s one of the reasons it’s such an attractive policy idea. 

Well, it confers benefits to renters early. The loss of property value to landlords is instant, but apparently nobody cares about them. The "one time" capital tax is always tempting.

7.  As this article puts so well, among rent control advocates there are no rent control failures; there are only bad implementations. 

Ditto, say, Socialism and Venezuela.

8. And finally, as this research paper suggests, economists have been thorough at convincing themselves that rent control is a bad idea, and inept at convincing anyone else.

This is a gem. And so true. Like, say, tariffs. I wish I knew just how to fix that despite the immense effort and millions of dollars going in to better dissemination of economic ideas.

The essay goes on, and it's worth reading the whole thing. 

There is a lesson here. Why do our governments, and especially local governments, so often wander into terrible economic policies? The "education" theory says they just don't know basic economics, and don't have any competent policy advice. If they and their staff could just be "educated" things would get better. (And if we could break through all the competing parties who also want to "educate" politicians.) The "interest" theory, more typical among public choice economists, views political outcomes as the result of power, not ideas. Rent control wins when incumbent renters who want to stay put win the political battle over landlords, mobile renters, and potential newcomers, and invoke whatever ideas butter the toast of their cause.

That the city council of Seattle has available such amazingly good policy advice speaks to the latter, sad to say for those of us in the "education" business.

The third view is that ideas still matter at the larger level.  A bad idea like rent control requires the asset of the general voter. Yes, incumbent renters who know how to work the system may win the political battle over landlords, property owners, people who want to move to the city and rent, and mobile renters or those not good at working the system, who will lose.  But the larger mass of homeowners, condo owners, and non-controlled renters must go along. They don't have a personal interest, other than a general desire to feel good by helping those who face higher rents, so they don't have much reason to study the issue. If the general electorate understood how bad rent control is for their city, and most of the people they want to help, perhaps economic policy would be better. There is hope for ideas. 

Jenkins on ACA

Holman Jenkins "Obamacare is popular because it failed" from a week ago is worth savoring and has an interesting new idea.

On Obamacare's failure:

ObamaCare’s user cohort now consists almost entirely of willing “buyers” who receive their coverage entirely or largely at taxpayer expense. It also consists of certain users who take advantage of the coverage for pre-existing conditions and stop paying once their condition has been treated.... 

...For a family of four not benefiting from a subsidy, notes insurance industry veteran Bob Laszewski, a policy can cost $15,000 with a $7,000 deductible. In other words, “they have to pay $22,000 before they get anything.” 

In every larger aim, the Affordable Care Act has predictably failed. It was supposed to ramrod efficiency through the health-care marketplace. Instead, it has become just another inefficient program bringing subsidized medicine to one more arbitrarily defined subset of the population.

(On "stop paying," see the excellent paper by Rebecca Diamond, Michael J. Dickstein, Timothy McQuade and Petra Persson. They document that many people sign up for ACA insurance, get a flurry of health care, and then quit. Half of new ACA enrollees in California quit by the end of the year. This number includes everyone, even those getting subsidized premiums, so it is likely that people paying full premiums quit even sooner.

Ip on carbon tax

Over the weekend, Greg Ip at WSJ wrote a  nice piece on the carbon tax.

Greg addresses some common objections.

This urge to stop at nothing to find an effective solution is understandable. How can you put a price tag on the future of the planet?

..Green New Deal backers make another powerful argument: Global emissions levels are still rising, and to reverse them, carbon prices would have to be so high they’d be politically toxic. Better, the activists argue, to simply go straight to a massive, government-directed transition. 

This attitude is common. But there is no evading economics. Either you have visible economic damage (carbon tax) of $1,000 per ton or invisible economic damage of $10,000 per ton.  Prices are better than restrictions because you can see where you're wasting $10,000 per ton, which money could reduce 9 times as much carbon properly deployed.

There is also a political judgment here that people will not stand for a visible tax, but will stand politically, or perhaps be too stupid to notice, the much larger shadow price of direct controls. They won't pay $5 at the pump for gas, but will stand for banning cars. I don't think that's true. I don't think the left thinks it's true either. The way the Green New Deal and even the IPCC reports now bundle carbon reduction with a vast left-wing political agenda, and a rather Orwellian drive to silence criticism confirms it.

Smith, MMT, and science in economics

Many blog readers have asked for my opinions of "Modern Monetary Theory." I haven't written yet, because I try to read about things in some detail, ideally from original sources, before reviewing them, which I have not done. Life is short.

From the summaries I have read, some of the central propositions of MMT draw a false conclusion from two sensible premises. 1) Countries that print their own currencies do not have to default on excessive debts. They can always print money to pay off debts. True. 2) Inflation in the end can and must be controlled by raising taxes or cutting spending, sufficiently to soak up such printed (non-interest-bearing) money. True. The latter proposition is the heart of the fiscal theory of the price level, so I would have an especially tough time objecting.

It does not follow that the US need not worry about deficits, and may happily borrow tens of trillions to finance all sorts of spending. Borrow $50 trillion or so. When bondholders revolt, print money to pay off the bonds. When this results in inflation, raise taxes to soak up the money. OK, but this latter step is exactly raising taxes to pay off the bonds. Moreover, if bondholders see that the plan is to pay off bonds with printed money, they refuse to buy or roll over bonds in the first place and the inflation can happen right away.

This may reflect a common confusion between today's money with the new money that pays off debt. It would only take $1.5 trillion in extra taxes or lower spending to retire current currency (non-interest bearing government debt) outstanding. But  that's not the task after the great bond bailout. Then we have to raise taxes or cut spending by, in my example,  the $50 trillion printed to pay off the bonds. Large debts are either paid or defaulted, and inflation is the same thing economically as default. Period. (Currency boards run in to some of the same problem. Backing today's currency is not enough to avoid devaluation, if one does not back all the debt which promises to pay currency.)

I must admit some amusement that Keynesian commentators, having urged fiscal stimulus and decried evil "Austerians" for years, are apoplectic to be passed on the left. But that does not make the ideas of those passing on the left any more right.  There is also a different and interesting strain of thought, exemplified by recent writings by Larry Summers and Olivier Blanchard, that the current low interest rate environment might allow for somewhat, but not unlimited, extra borrowing. Those ideas are completely different analytically. I hope to cover them in a later blog post.

Noah Smith and guru-based theory

But, as I said, I have not studied MMT, so perhaps I'm missing something. Enter Noah Smith, who has delved in to figure out just what MMT is and whether or how it hangs together.

Noah interestingly characterizes MMT as  "Guru-based theory." Noah: