Thursday, 4 June 2015

Dr Andrew Black criticises MMT.

His basic argument in this Global Policy Institute article is that floating exchange rates have declined in popularity worldwide because of the problems they bring. I.e. the popularity of FIXED exchange rates has RISEN because of the alleged advantages: e.g. greater predictability for exporters and importers.

Thus the argument put by MMTers namely that government can simply expand demand to the point that brings full employment while letting the exchange rate look after itself is allegedly in tatters or much weakened.

Well my answer to the first part of that argument is: “Go ask people in the Eurozone periphery, especially the unemployed, what they think about the fact that in the EZ, exchange rates are fixed, and thus that uncompetitive countries have to deal with that problem by years of deflation and high unemployment.”

The response you’d get might be something like this.

As for the response from the unemployed in Greece, that might be unprintable.

In short, the fixed versus floating exchange rate argument is not a simple one. For example, according to Paul Krugman, Finland recovered much more quickly from its 1990 slump when it had its own currency than from the 2008 slump by which time it had joined the Euro.

The second weakness in Black’s argument is thus. If a country adopts an exchange rate that is fixed relative to the US dollar or the currency of some other larger country, the smaller country then clearly needs to be careful with how much it lets aggregate demand gyrate. That is, as Black rightly points out, the country cannot necessarily raise demand with a view to cutting unemployment for fear that will result in a devaluation of its currency: i.e. an “unfixing” of the currency.

But that point applies REGARDLESS of whether the country implements stimulus MMT style, or in some other or more conventional way, like an interest rate cut or a deficit funded by increased national debt. Thus an attempt to fix the exchange rate puts a constraint on ANY FORM of stimulus, not just stimulus MMT style. Ergo the “can’t let demand gyrate” problem is not a problem JUST FOR MMT: it’s a problem for ANY FORM of stimulus.

As to what the big difference is between conventional stimulus and stimulus MMT style, there isn't a HUGE difference. Conventional stimulus (to repeat) consists of “borrow and spend” (and/or cut taxes). In contrast, MMTers tend to favour “print and spend”.

Keynes actually advocated BOTH.

And finally, there are some VERY BIG chunks of the world economy which still have floating exchange rates. Of course there’s no sharp dividing line, as Black rightly points out, between a fixed and floating exchange rate. But the “chunks” I’d put in the floating category are: 1, the US, 2, China, 3, India, 4, Canada, 5, Russia, 6, the EZ (considered AS A WHOLE rather than individual countries within the EZ).

Re China, it’s true it’s currency was fixed re the dollar before 2005, but has appreciated by about 25% since then, so I put that on the “floating” side of the dividing line.

Moreover, that switch from a fixed to a floating exchange rate undermines Black’s claim that fixed rates provide exporters and importers with predictability. That is, most attempts to fix exchange rates eventually come unstuck. Britain’s exit from the European Exchange Rate mechanism a decade or two ago was another example that phenomenon. So to what extent are so called “fixed” exchange rates actually fixed?

Now that 1-6 list just above is the majority of the World’s population and economy. And there will certainly be other countries that could be added to that “float” category.

Conclusion: I remain an MMTer.

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