On MMT and Venezuela

For those of you not members of the C-Realm Vault podcast, the latest episode features some correspondence from me, so because I’m feeling lazy this weekend, I’ll just feature that correspondence here.

The context was an older episode I listened to after finally getting around to watching Westworld. Getting even more meta, the relevant part was another letter from a listener called Gus. Gus was reacting to an interview with Charles High Smith, of the Of Two Minds blog.

Charles is not a fan of the Universal Basic Income idea, and he argued that it was ‘unaffordable.’ It would simply cost too much money to implment. This isn’t unique—it’s clearly the most common criticism of UBI (along with moral hazard). Charles also felt that people needed formal work in order to feel like a valuable, contributing member of society, and that not having a job was detrimental to one’s self-esteem—also a common argument.

Listener Gus took issue with that, using Modern Monetary Theory (MMT) as a takeoff. Here is some of his correspondence, read by KMO on CRV293:

“The piece of the puzzle missing is actually understanding money, debt, accounting. A lot of the stuff in the interview sounded like it came from 5-10 years ago, before people learned MMT, or Modern Monetary Theory. Charles [Hugh Smith] mentioned the old notion that money is anything that acts as a store of value, a medium of exchange, [or] a unit of account, which was the best people could come up with when they didn’t really understand money–just defining it by what it does, rather than what it *is*. It’s like saying that a tree is anything that is tall, provides shade, and that you can climb. So in prison, basketball hoops can be trees.”

“Money is transferable credit – an IOU – debt for the issuer; credit for the bearer. An emergent social phenomenon existing in accounting balance sheets, and there are loads of repercussions in your thinking once you really grasp the concept, plus learn a bit about how the plumbing of government finance works. So all the opinions, predictions, evidence, etc. about the psychological effect of jobs and work for humans–great. But having strong opinions about money, UBI, Steve Keen’s proposals, inflation, etc. without actually understanding debt and money? It’s like listening someone talk about orbits in the solar system before they learned basic Newtonian physics.”

“For example a ton of very smart people get sucked into the Right/Libertarian black hole when their staring assumption–that government spends our tax dollars–is faulty, even if they have sound, principled logic applied after that…”

KMO then reacts to this part of the letter:

“This is something I encounter a lot–A LOT. ‘If you didn’t mention my pet theory, then you’ve never heard of it.’…I can assure you that Charles Hugh Smith has encountered Modern Monetary Theory. It’s not a new discovery…”

KMO goes on to compare MMT advocates to the acolytes of Ayn Rand, in the sense that they believe that those who don’t share their point of view either must not have heard of it, or are just too dumb to understand it (i.e. either stupid or ignorant). This attitude is also shared, he says, by advocates of Peak Oil Doomerism, Techno-utopians, and many other topics.

Let me just break in for a moment here (I realize this is confusing as to who is saying what, but I don’t know how to make it any clearer—sorry!). I certainly hope that I don’t display the rigidity and fanaticism of a Randroid in my advocacy of Modern Monetary Theory. But I don’t think Gus’s assumptions were all that unreasonable.

First, there is no way from just hearing the interview to know whether or not CHS was familiar with MMT or not. Second, he may reject the premises, but we don’t know why. Is it for legitimate reasons, or is just for emotional reasons?

And this may be behind the “attitude” of some MMT advocates CHS criticizes. Here’s something I encounter a lot–A LOT–people don’t wish to logically refute the points raised by MMT, they simply refuse to accept it! I’ve literally heard people say that they simply “refuse to believe” that the national debt is not a horrible crisis, or that taxes are not required for the government to spend. It’s literally a “faith-based” argument. It’s like people saying “I experience the earth as a flat plane, thereby it is so,” and refusing even to look at a globe or a photo of the earth from space for emotional reasons.

So, if there’s a bit of arrogance and frustration on the part of MMT supporters, I would say it’s partly because people refuse to engage in legitimate, good faith debate, or even attempt to refute its logic, and just keep repeating the “conventional wisdom” as a kind of religious mantra.

Anyway, back to the show. KMO then presents a “steel manning” of the MMT point of view, using the analogy of running out of inches to build a house when all the labor and materials are present. He also brings up David Graeber’s book to dismiss the bullionist theory of money in favor of chartalism. He then backs up, apparently deleting some of his thoughts, and says the following:

[19:36] “…MMT gets presented to people nowadays as a coherent and new body of thought, and it is nothing of the sort. With reguard to the idea that a government can create as much money as it thinks is necessary with no underlying basis for that wealth; no physical correlate for that currency, well, let me just direct you to the example of Venezuela. Here’s a very short piece from Reuters:”

He the reads the following new story:

Venezuela annual inflation exceeds 6,000 percent in Feb – National Assembly (Reuters)

Followed by:

“So that short piece from Reuters brings in one very relevant piece of information which is that Venezuela is rich in oil. They should be able to convert that oil into monetary wealth and, if they are of a mind to, share it broadly with the people. Hugo Chavez managed this for some years, in spite of the fact that the U.S. administration was as opposed to the Chavez’s regime as they are to the current one. I’m definitely not discounting the portion of the narrative that says that Venezuela is struggling in this way in part because of economic warfare being waged against it by the United States and its allies.”

“But I would ask you, Gus, and anyone else who is enamored with MMT, how is the Venezuelan example not in line with the prescription of Modern Monetary Theorists? That is not a rhetorical question; I invite your feedback.”

“How is the Venezuelan example not in line with the prescription of Modern Monetary Theorists?” It’s a valid, and I think an important, question. Now, I didn’t think the example of Venezuela was a particularly valid demonstration of the core ideas of MMT , but I wanted to do a bit of research to verify that this was truly the case. Honestly, I wish MMT advocates would address this question a bit more heads-on; I had to dig to find good information.

But first, a few words about MMT. Is it, or is it not, a coherent body of thought? I would argue that various gaps in knowledge do not render it incoherent, otherwise we could dismiss the entirety of Neoclassical economics just as easily! We could also dismiss Marxism, Keynesianism, and a whole lot of other traditional economic and sociological concepts using the same logic. No one seems to be bothered by the many holes and inconsistencies in “traditional” economics which is taught in universities every single day—from the absurd fiction of Homo economicus to weaseling concepts like externalities and ceteris paribus. Yet, economics IS presented explicitly as a locally consistent and coherent body of thought to the public all the time! For example, just one idea—the Theory of the Second Best—seems to undermine much of Neoclassical economic thought:

In fact, it could be argued that Neoclassical economics—which eliminates money entirely from its analysis—is the more incoherent body of thought. It not only failed to predict the latest economic crisis, but may have even contributed to it with it’s ideas of rational expectations and markets tending towards equilibrium. By contrast, MMT does not have the same blind spot. This is pointed out in the introduction to the book Quantum Economics by David Orrell, author of Economyths:

What is economics?

How about this for an exciting definition: economics is the study of transactions involving money.

Obvious, right? Economists talk about money all the time. Everything gets expressed in terms of dollars or euros, yen or yuan. The health of a nation is reduced to how much they produce, as measured by Gross Domestic Product; a person’s value to society is expressed by how much they earn. Economics is about money! Everyone knows that.

And yet, if you look at an economics textbook, it turns out that the field is defined a little differently. Most follow the English economist Lionel Robbins, who wrote in 1932 that ‘Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.’ Gregory Mankiw’s widely-used Principles of Economics for example states that ‘Economics is the study of how society manages its scarce resources.’ Or as it is sometimes paraphrased, economics is the science of scarcity. No mention of money at all.

And if you read a little further in those same textbooks, you will find that economists do not talk about money all the time – in fact they steer clear of it. Money is used as a metric, but – apart perhaps from chapters to do with basic monetary plumbing – is not considered an important subject in itself. The textbooks are like physics books that use time throughout in equations but never pause to talk about what time is. And both money and the role of the financial sector are usually completely missing from economic models, or paid lip service to.

Economists, it seems, think about money less than most people do: as the former Bank of England Governor Mervyn King observed, ‘Most economists hold conversations in which the word money hardly appears at all.’ pp. 1-2

Second, is it something new or not? In fact, the term “Modern” in the name is a bit misleading. As KMO notes, many ideas date to the early twentieth century and earlier, including the work of Alfred Mitchell-Innes, G.F. Knapp, Frederick Soddy, Joseph Schumpeter, and Hyman Minsky, among many others.

But, I would argue that “Modern” does, in fact, make sense, in the sense that it analyzes our current monetary regime. If we were to analyze the operation of the monetary and economic systems for the Roman Empire, the Carolingian Empire, medieval England, Renaissance Venice, or Ancien Régime France, its analysis would not be valid. Instead, iIt analyzes our MODERN monetary system, which was established after 1688 when a consortium of wealthy merchants and bankers formed a joint-stock corporation called the Bank of England in order to manage King William of Orange’s war debt. The king’s debts now circulated as negotiable currency, with taxes now going to fund the debt to the bank which managed the state’s finances. As David Orrell notes in Quantum Economics:

In medieval England the stock half of a tally stick became a money object representing a credit, made up by the king, that could be collected. With the founding of the Bank of England, the direction reversed, so that money is now based on the state’s debt to the private sector. With modern fiat currencies that are backed only by the word of the state, the central bank goes a step further and creates money not by loaning real assets to the state, but by loaning made-up funds, produced magically at the press of a button. p.92

In some other ways, Modern Monetary Theory IS new. The modern renaissance in this subject began with a bond trader named Warren Mosler. Later, economists such as Randall Wray and Stephanie Kelton, among others, began to flesh out the paradigm, using economic history as a guide. Numerous other economists have also contributed to this field—Steve Keen, Bill Mitchell, Michael Hudson, Pavlina Tcherneva, et. al. So, a good part of the formal development and propagation of MMT ideas has, indeed, taken place in the last thirty years or so.

Finally, about the theory part. As MMT advocates never tire of pointing out, MMT is descriptive of how the monetary system of a sovereign nation works. I have not yet seen its description of how money works in modern economies actually refuted. The worst you could say is that it’s irrelevant, which is what mainstream economics usually does.

I compare it to the hydrological cycle. The hydrological cycle describes the movement of water on planet earth. The ramification of this to the ecosystem, expressed by things like monsoons or droughts, would be the theory derived from it.

Similarly, there is a theoretical aspect to MMT in the sense that it’s proscriptions–how we should run an economy based on this information–are theoretical. It’s fair to discuss and criticize them. But in that sense, all of economics is a theory, described by Wikipedia as, “a contemplative and rational type of abstract or generalizing thinking, or the results of such thinking.” MMT is at least based on the reality of how money works, unlike “traditional” economics. And, like any theory, it will be developed, refined, and extended over time based on new data and research.

My letter is below. If you’ve listened to CRV319 then you’ve already heard it.

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Re: Venezuela: The most common factor I’ve seen cited for Venezuela’s economic crisis is the fall in the price of oil. Being a major oil producer, paradoxically, is a cause of, rather than a palliative, for Venezuela’s economic woes. The reasons stem from the Resource Curse phenomena, or something called the “Dutch Disease” (for reasons too obscure to go into here.)

We all remember the spike in oil prices around 2008, when many believed that the Peak Oil “reckoning” was upon us. Basically, the Chavez administration used the windfall from the years of high oil prices to implement a suite of generous social policies—his “Bolivarian Revolution.” And, in those years, it really did reduce poverty and increase the living standards of poorer Venezuelans quite substantially based on economic metrics. This led to support for Socialist policies, which is still ongoing in a significant portion of the electorate.

The Dutch Disease is when a nation’s entire economy is centered around one particular commodity (such as oil). Thus, the country’s national budget is tied to the price of that commodity, which fluctuates. When the price is high, the government’s budget is flush. But a reversal in the price of that commodity causes the entire national budget to go into the red, and the overall economy takes a significant hit, affecting the currency and interest rates. This tends to not happen in more diversified economies, although it’s worth noting that even in the United States, the state budgets of places like Texas and Oklahoma also take a hit during periods of low oil prices (less so California in recent times). Texas is, however, not a sovereign currency issuer.

The problem is, that because the Venezuelan government’s revenues were so tightly bound to the price of oil, when the price of oil plummeted after 2013 or so, it took the government’s budget down along with it. The socialist government, however, chose not adjust the social spending it put in place during the era of high oil prices. As this economic blogger put it:

“…growth has been tied to terms of trade and the price of oil. Also, not only the economy collapses when the price of oil collapses, but exchange rate depreciation, in the black market now, leads to high inflation, which goes often with shortages. Anybody that has lived through high inflation in Latin America in the 1980s knows this. It has nothing to do with fiscal policy, or with the central bank printing money. The fiscal situation worsened as a result of lack of growth and the external problems.”

A brief note on Venezuela and the turn to the right in Latin America (Naked Keynesianism)

The above blogger points out that this is not a new or unique phenomena for Venezuela. Long before the Maduro or Chavez administrations, a very similar thing happened in the late 1980’s. Falling oil prices caused a budget crisis, and the implementation of Neoliberal economic “reforms.” This, in turn, led to urban rioting in the capital of Caracas, called the Caracazo. Wikipedia has this to say about the Caracazo:

“A fall in oil prices in the mid-1980s caused an economic crisis to take hold in Venezuela, and the country had accrued significant levels of debt. Nevertheless, the administration of the left-leaning President Jaime Lusinchi was able to restructure the country’s debt repayments and offset an economic crisis but allow for the continuation of the government’s policies of social spending and state-sponsored subsidies. Lusinchi’s political party, the Democratic Action, was able to remain in power following the 1988 election of Carlos Andrés Pérez as president.”

“Pérez then proposed a major shift in policy by implementing neoliberal economic reforms recommended by the International Monetary Fund (IMF)…Measures taken by Pérez included privatizing state companies, tax reform, reducing customs duties, and diminishing the role of the state in the economy…The most controversial part of the economic reform package was the elimination of the gasoline subsidies, which had long maintained domestic gasoline prices far beneath international levels and even the production costs. When the subsidy was eliminated, gasoline prices rose by as much as 100% and so the costs of public transportation rose by 30%.”

Caracazo (Wikipedia)

SO I don’t think that analogies between the Venezuelan economy and our own can tell us very much. They are fundamentally different creatures. After all, the United States is the world’s largest economy, and issues the world’s reserve currency. Those facts alone make any analogy difficult, if not impossible. There is always a demand for dollars. There has never been a single case of hyperinflation in the postwar period in any major industrialized G-7 economy. I’m sorry, comparing the U.S. to Zimbabwe, which I often hear, is absolutely ridiculous. No one who does that should be taken seriously.

Furthermore, despite popular belief, most of U.S. debt is held domestically and denominated in U.S. dollars. As MMT economists will tell you, this makes a huge difference. It effects the level of allowable domestic spending by governments. This is not the case with Venezuela. This is the best one-paragraph summary I’ve seen of the situation from a poster on Reddit:

“Venezuela gave up being monetary sovereign when they borrowed US Dollars, Euros, and gold. They borrowed these, in part, to finance trade with foreign powers. The idea was to repay these loans with dollars earned by the sale of oil — but the oil market dropped and they were unable to obtain enough dollars from the sale of oil, so they printed more of their own currency to trade in exchange for dollars. When that happened, prices began to increase, due to there being more and more bolivar in the system. To keep prices down, the government enacted price caps. This backfired, causing producers to stop producing, effectively destroying the productive capacity of the country. So now they owe a lot of foreign debt, their currency is crap, their productive capacity is trashed, and people are mad.”

https://www.reddit.com/r/mmt_economics/comments/7t9hxs/is_venezuela_monetarily_sovereign_or_not/

So the debate is not whether any sovereign state does, or does not, have the money to accomplish any particular social goal it sets for itself–whether that be poverty alleviation or infrastructure improvement. The question is, rather, “What the macroeconomic effects will be?” To say, “We don’t have the money,” is not a valid argument for a sovereign currency issuer (although it might be valid for a currency user, such as a corporation or a municipality). To say, “we don’t have the resources,” or “it will be inflationary” IS a valid argument, however. Furthermore, the amount of debt is immaterial. The amount of debt is only significant if it affects the costs to borrow. Confidence in the currency is also tied to confidence in the institutions of any particular government, including its levels of corruption and its ability to reliably collect the taxes it is owed by its citizens. Many so-called “banana republics” struggle with this, as do even some Mediterranean states like Greece and Italy.

For a smaller economy like that of Venezuela, it needs to borrow, and it needs to import. It is not an autarky. Just because it has lots of oil does not mean it can be self-sufficient, or make all the resources it needs to run its economy. Thus, issuing more money without the ability of the economy to supply more goods and services WILL be inflationary according to MMT. It’s worth noting that Venezuela is under an economic embargo, which is not, of course, true of the United States. I’ve also heard credible stories of right-wing business leaders deliberately hoarding goods and refusing to distribute them specifically to undermine the socialist government. I can’t reliably confirm this, but if true, this would also factor into Venezuela’s hyperinflation problem. That’s also very different than the case in the U.S.

SO, in conclusion, there are significant differences between the situation in Venezuela and that of the United States. Having said all that, however, many economists working in the MMT paradigm DO, in fact, believe that a Universal Basic Income would be inflationary. If you increase the supply of money faster than the economy can absorb it, inflation is a likely outcome according to MMT. No contradiction there. Also, if you increase government spending without adjusting the level of taxation, you increase the supply of the currency floating around. This will “dilute” the value of that currency, causing inflation. If a UBI scheme is to be truly Universal, its quite likely that the economy would not be able to accommodate the sudden increase in spending power in the short run, leading to inflation. Such inflation would eat into the real monetary value of any UBI scheme we wish to implement.

That’s why most of the MMT economists I read and follow advocate something called the “Job Guarantee” rather than a Universal Basic Income. This would simply be the hiring by the government of people who cannot currently find remunerative work in either the public or private sector. Essentially, this is simply the government acting as the employer of last resort. Such workers could then be deployed to accomplish important social tasks that the private sector currently finds unprofitable. AS MMT economists point out, the U.S. can purchase any commodity for sale in U.S. dollars, including the labor of its own citizens, in whatever quantity is able to be supplied.

The debate over the Job Guarantee usually does not center around whether or not we have the money to accomplish it. Governments already employ millions of people, after all. Rather, the debate centers around whether there is enough useful work to give these people to do, or whether such jobs would end up being merely useless busywork; in David Graeber’s phrasing—”Bullshit Jobs.” That is open to debate. In my experience, people who believe that such jobs would be useless are the ones who gravitate towards UBI, as do people who already have non-remunerative creative gigs (we might include ourselves here).

In parts of Europe, in the age before Neoliberalism, the government was often commonly used this way. Aspiring politicians would promise–and then create–all sort of new government positions for their supporters and patrons in the cause of “job creation.” That’s why, back in the day, visitors to Southern Europe would be struck by the numerous government employees appeared to do little ease besides eat lunch and watch football while smoking. This, in turn, plays into the European stereotype of “lazy Southerners” that effects the debate over things like Greece’s economic problems to this day.

I would put forward the argument that the United States already has a similar program in place: The U.S. military. In my opinion, the U.S. military acts as an employer of last result and an economic stimulus package for the private sector. Surely, the level of military spending is far in excess of any practical need. And it keeps going up. Furthermore, no one EVER questions whether or not we have the money to pay for military spending. Here are some statistics I ran across:

“The U.S. Department of Defense is the nation’s largest employer, with over 1.4 million active duty personnel and 1.1 million reservists. It also employs 861,000 civilians. There are 450,000 employees stationed overseas in 163 countries. An additional 3 million Americans receive income from DoD.”

“There are also 1.1 million people serving in the National Guard and Reserve forces, and two million veterans and their families who rely on this income from their past service. Because of the enormous number of past and present personnel, the DoD is also the nation’s largest healthcare provider, serving 9.5 million military members, retirees, and their families.”

Department of Defense, What It Does, and Its Impact (The Balance)

So, although your correspondent was technically correct about us having the money, the actual picture is more complicated. But I don’t think that Venezuela or Zimbabwe tell us much about the case in the U.S.

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Interestingly, it appears that something like the Caracazo is taking place in Paris right now. It’s even caused in part by rising gasoline prices (in this case by new taxes rather than the elimination of subsidies).

3 thoughts on “On MMT and Venezuela

  1. I’m not a UBI fan… I’m not sure that /just/ giving people money is a cure for all social ills (despite Mrs. T’s infamous quip that ‘there is no such thing as society’). The UK government has been dabbling in a thing called ‘universal’ credit. Previously, benefits were split: you’d get your rent paid, and something separate on top. So they’ve tried lumping all this together for reasons of ‘efficiency’. Unfortunately, in the words of Bridget Jones, ‘some people are just hopeless’, and fail to pay the rent.

    Reading between the lines of the UK Green Party manifesto, they seem to support something like an employment promise: if industry is to be greened, it’s likely it’ll require more labour.

  2. Another great analysis. Helps to order my own thinking on MMT, JG, and life in general, for better or worse.

    Thanks as always for all the thought, work, and care of presentation that you have done for us readers all year even if we haven’t always directly expressed it every time. Here’s hoping you have a great New Year’s and that we can look forward to more from you than we deserve for what we pay in that year. Take care.

  3. My problem with the UBI idea is that, in the US, the rentier class would simply confiscate it. Rents would increase by precisely the amount of the UBI. Only those who own their own home would be exempt from this new usury. So far from being inflationary, the UBI would widen the gap between the haves and have-nots and cause further friction in society.

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