Saturday, April 11, 2020

MMT Style Economic Distortions

J.D. Alt has an interesting post wherein he compares government to "the Ouroboros—the mythical snake eating its own tail". He makes the case that MMT should not--as a theory--take an economy to self-destruction but should enable it grow in beneficial ways. I made two comments, the first warning of the dangers of misguided monetary distribution and the second pointing out what I see as being an MMT style economic distortion occurring now due to misguided covid-19 responses. The second comment is reproduced here.

[4/25/20 UPDATE: This second comment seems to have failed moderation. Despite two submissions, I never could find it present. There have been no site updates since April 13.]

 Roger's second comment:

The vision of " .... sovereign government as the Ouroboros" is  a good place to start, yet not an accurate depiction of the economic effects of the covid-19 response.  Clearly, government is 'consuming' part of the private economy today by effectively shutting down the 'non-essential' sector. Left 'unconsumed' is the 'essential' part of the private sector--mainly the food sector.

From this observation, we (who are interested in macroeconomic sectors) can see that government (the sector in control) has divided the private sector into two sub-sectors; 'non-essential' and 'essential'. Non-essential includes the aircraft industry, travel/lodging, construction, retail stores, restaurants, and entertainment industries. Essential includes the entire food chain, medical related to pandemic care and government itself. Non-essential sectors are expect to shut down activity, thereby becoming effectively 'consumed'.

Government is well aware that 'non-essential' workers and business owners are placed into dire economic straits by forced 'consumption'. Government has enacted several programs costing trillions of dollars that government does not have, relying on MMT recognized methods of financing (direct government printing) for funding sources.

But here is the alarming aspect of one program--the helicopter drop of money (approximately $1200) to all adult citizens who filed a Federal tax return. Both the government sector and essential private sub-sector will continue getting near normal income during the coronavirus emergency economic shutdown. These sectors do not need MMT style money-drop help. On the other hand, members of the shutdown 'non-essential' sector clearly do need help and a one-time payment of $1200 is unlikely to be fair compensation the economic hurt inflicted.

This one program, MMT style, seems destined to magnify the economic divide between government and 'essential' private sectors and contrasting 'non-essential' private sub-sector.

Perhaps additional (expected) future government support programs will address this looming economic distortion.

(c) Roger Sparks 2020


  1. Roger,
    Sorry for the delayed comment, but I like your labels of essential & non-essential - but I'd like to apply them to the economy, not just to a "sector". In my view, GDP measures the "essential" economy - that includes all household spending on finished goods and services. (I've been calling that the "productive" economy, but I like your term much better.) But there's another economy not measured by GDP that I've been calling the "non-productive" economy, but your use of "non-essential" fits much better - that's what's generically called the FIRE (Financial, Insurance, Real Estate) economy.

    I don't know whether I had formulated this KISS version of MMT the last time we talked back in December, but I'll post it here again anyway:

    GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending, because ALL spending is someone else's income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries to household bank accounts). All that's important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends ONLY on currency-users perception), there are no limits other than that perception.

    This is the production-and-consumption economy that I'm now calling the "essential" economy. The fact that the income side of GDP includes the net income of all domestic employees/employers but does NOT include personal or corporate income taxes or personal property taxes (nor the government's borrowings) show that those taxes/borrowings don't "fund" the production-and-consumption spending (& never did) which is what MMT has been saying. But it also shows that there's another economy that I've been calling "non-productive" that "non-essential" may well be the better descriptor.

    I'd like to discuss this with you further if you're up to it.

    1. Hi edzimmer,

      My apologies to you for not moderating your comment MUCH sooner. I made a terrible mistake in not understanding a change to blogger's comment approval methods, just gaining that understanding yesterday. I'll try to keep comment-moderating current from now on.


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