Is the Natural Rate of Interest Really Zero? (Answering MMT)

[music] This is the Human Action podcast, where we debunk the economic, political, and even cultural myths of the days. Here's [music] your host, Dr. Bob Murphy. Hey everybody, welcome back to Human Action Podcast. In this episode, I'm going to be walking through a fun example of a program that a fan of MMT uh namely Randall Ray uh implemented at his school with his students and it sheds light I think very well on the difference between the Austrian and the MMT camps. So, let me just tell you a little bit about the context and how I got into this. So, um, some of you may know I debated Warren Mosler years ago. I think it was in 2013, but I might have that off. Um, at Columbia University, and you know, it was MMT versus the Austrian school. Warren Mosler is the godfather of MMT in case you don't know. And one of the things he said kind of almost as a throwaway line in that debate was that um with a soft currency Bob uh as opposed to like a hard currency like gold. He said with a soft currency the natural interest rate is zero and you know whereas you Austrians keep talking about you know boom bus cycles and the central bank screwing with things but don't you understand when a sovereign a monetary sovereign issues its own fiat currency where there's no cost of production it's like real resources have to be expended to produce more units of this thing you know besides like pieces of paper I mean now if it's all electronic like it really is the case that you know the Fed can create a trillion dollars with virtually no expenditure of any real resources whatsoever. He was saying, "Isn't it clear that the natural rate of interest, if that term means anything, has to be 0%." And so, what are you talking about? At the time, I was a little bit flatfooted because to me, the natural interest rate has to do with underlying subjective time preferences, you know, like present goods versus future goods and how people evaluate them. And so the mere incidentals of how the authorities print more units of money has nothing per se to do with that. And so you know I was thinking yeah you could certainly influence the nominal rate of interest but the natural what are you talking about? Right? So at that time I don't think I gave a great response just because what he was saying was nonsense to me. And so I want to be clear I still think that right and I'll and I'll go through that here. But now what what I decided to do in this episode is I wanted to go through and make sure I really understood where are these MMT types coming from when they say the natural rate of interest is zero so I can at least say okay here's what they mean and then here's now my response. So that's what I'm doing in this episode. Um and I I started out going through a formal paper by Matthew Forstater and Warren Mosler. So this is from the journal of economic issues of June of 2005. The title of which is the natural rate of interest is zero. All right. And they and they just go ahead and go through and make that point. Okay. And so but in so doing they made this off-hand remark to a buckaroo program that Randall Ray had uh created with his students. And so then I went to go read that and I realized, oh, you know what? this Randall Ray approach is much more fun, right? It's a real world thing that they did with students. And so I think it'll it's'll be easier for podcast form for me to go through Ray's description of what they did at his school and then I'll make my Austrian rebuttals with that as the foil as opposed to going through, you know, Mosler and Forestater's more technical paper. To be clear, I think, you know, the the Austrian response would work against the technical paper. It's not that I'm picking on the, you know, the dumbed down version cuz I can't handle the truth kind of thing, but I think for our purposes here on the podcast, it'll be easier for you folks, especially if you're at the gym or driving or something if I handle Randall Ray's explanation of what they did. Okay. So, specifically, and of course, I'll put links in the show notes page, folks, if you want to see all these things in the original, and I may write up my thoughts and responses to these guys papers um and have a a post there as well, but there might be a lag there that when this first episode first drops, I probably won't have the written version linked yet. Okay. So what I'm going to now take as my source of what's the MMT view on this stuff and why do they think the natural interest rate is zero with a monetary sovereign like the US or you know Japan issuing yen. I'm going to be taking as my source here. This is a piece by Randall Ray that was published on the World Academy of Art and Science and the title is how to implement true full employment. Okay. And the sort of abstract of the piece says, "We will briefly describe a program that would generate true full employment, price stability, and currency stability. We will show that this program can be adopted in any nation that issues its own currency. Our presentation consists of three sections. First, we briefly examine a pilot program at the University of Missouri, Kansas City. This provides the basis for the analysis in the second section." D okay. And so what again what he's doing is the point of this paper is to say how the United States or you know Japan or any other major government that has the privilege the luxury of issuing its own currency and where the debts that it borrow or if it wants to borrow it can borrow its own currency and that sort of thing like that's those are the components of something being a monetary sovereign in the MMT framework. So he's using this to make a real world proposal for a full employment program. Okay. But my point is he starts out by saying just to warm you up and to get you to see the contours of this thing, let me tell you about this program that we instituted at the University of Missouri Kansas City. All right. So that's what I'll focus on here and then I'll just talk about um the lessons. So, I'm going to read fairly extensively from his description because it is, you know, a light read. It's not that we're going to get bogged down, but also I want to make sure you understand where he's coming from. Okay. So, it's the Buckaroo program. In the United States, there's a growing movement on college campuses to increase student involvement in their communities, particularly through what is known as service learning, in which students participate in community service activities. Da da da da da. Okay. Um, so what they did at his school is we have chosen to design our program as a monetary system creating paper notes which are called buckaroos and he says after our mascot which is a kangaroo with the inscription this note represents one hour of community service by a UMKC student and denominated as one rue hour. So ru is r o because it's a buckaroo. Each student is required to pay 25 buckaroos to our treasury and he's got treasury in quotation marks each semester. Approved community service providers, state and local government offices, university offices, public school districts, and not for-profit agencies in the community submit bids for student service hours to the Treasury, which awards, and he has it in quotation marks, special drawing rights, or SDRs to the providers so long as basic health, safety, and liability standards are met. The providers then draw on their SDRs as needed to pay students one buckaroo per hour worked. This is equivalent to spending by our treasury. Students then pay their taxes with buckaroos retiring treasury liabilities. Okay. So again, just to make sure you get the the big picture, the students go into this school. Um and by the way, I this is what his proposal was. I I did like a followup, you know, working with Claude and Google and stuff to try to figure out did they actually do this. My understanding is I could be wrong here, but my understanding is in practice, it's not that the the whole originally Randall wanted his whole university to to participate in this, but that for various reasons they they didn't require this of every student. It was that each professor had the option to say, "Hey, you're taking my class. we're going to do money and banking or whatever and you got to take, you know, a midterm and a final and you're going to have to turn in a paper. Oh, and also during the course of this semester in order for you to get your grade at the end, you have to get 25 of these buckaroos. Okay, so the the point was that the professors could insist on this, but it wasn't like a universitywide thing is my understanding. But put that aside. What's the proposal here? What what is Rey talking about in this essay? The idea is all the students at this university as a requirement for them to continue in good graces with the registar every semester have to get 25 pieces of paper that says one buckaroo and where do those pieces of paper come from? It comes from the school. They have a deal. They have arrangements with all the local nonprofit agencies and you know like the government city services and things like picking up trash at the park or whatnot and they say hey we want to encourage our students at the university to do 25 hours of you know community service per I think semester. Yeah, it is per semester and you know your agency your your institution we think might be a good candidate to employ our students for this community service. So once you just convince us you got to fill out some paperwork that you know you're not going to put the students in any harm and you know you're not going to expose them to dangerous chemicals and things like that and that what they're doing in our view is something laudable and for you know the community. It's not just you're making making a quick buck or something off their labor. Then yeah, we'll go ahead and do that. And then what we'll do is you hire the students, you keep your books, and then you know, you tell us what you need, and then we will give you the appropriate number of buckaroos. Like, so we print up these pieces of paper that are hard to counterfeit and everything, and we give you these pieces of paper, and then for every hour that a student works for you, you give them one one of these pieces of paper. Okay? So that's the deal. And so he's saying that's analogous to the school like creates fiat money. You can just print it at will. And what gives it value? It's not because it emerged from a barter economy and you know what was divisible and homogeneous and stored of value and things like that like the reason gold and silver would be. No, the reason it has value is the students have to get 25 of these a semester on average or else they can't graduate. So that's why the students are scrambling. They have to now go somehow get 25 of these things per semester. And how do they do that? They have to go volunteer and work at these places. Okay. So that's where they're coming from. So I I'll keep now reading from Rey. Several implications are immediately obvious. First, the school's treasury cannot collect any buckaroo taxes until it has spent some buckaroos. Second, the Treasury cannot collect more buckaroos in payment of taxes than it has previously spent. This means that the best the Treasury can hope for is a balanced budget. And actually, it's almost certain that the Treasury will run a deficit as some buckaroos are lost in the wash or hoarded for future years. Okay, so let me just stop you right there and just make sure you're not losing him because again, this is the reason I love this example is it really showcases how MMT people think about government finance. And then we'll you know he's going to contrast it with the conventional view which is also true of the Austrians as well as you know the Chicago school or even the new Keynesians for that matter. Okay. So what he's saying there is what would be government expenditures? It would be the flow of buckaroos going out of you know they're printing up buckaroos and spending them by hiring labor you know via their proxies the nonprofits you know government agencies in the community that employ volunteer labor. So I mean I guess technically it's not volunteer labor they're getting paid in buckaroos but you get you get the point I'm making right so he's saying that's like government spending and he's saying so what would a deficit mean? Oh and then he said and what's the analog of taxes? Oh it's every student every semester has to pay a tax of 25 buckaroos to the school and the school's like the government right? So he's saying so in that context what would a budget deficit look like? It would mean the school is spending more buckaroos than it's collecting in taxes. And a government surplus would be the students are giving more buckaroos back to the go the school that semester than it it paid out in hiring, you know, student volunteer hours or or community service. I'll call I'll try to call it community service because that's less misleading, right? And so he so Ry is saying notice at the beginning the school has to run a budget deficit, right? because there's no buckaroos in existence. How could the students possibly pay them 25 of these notes if the school hasn't first distributed them? And so he's saying in general it has to be the case that the school at best is running a balance budget where during that period the amount of buckaroos flowing back in the form of taxes is equal to what they printed up. And he's saying, but also like in terms of the life cycle, lifetime history, on average, it's got to be that they run a deficit because it can't possibly, you know, he said in any given year or any given semester, they theoretically could run a surplus there, but that would only be if there had been a previous history of deficits so that the community could have stocked up on these buckaroos, right? So, you get the point he's making there. All right? And so you can see already the connection and why he thinks the standard way that you know fiscal austerians talk about government finance is nutty. That they think the responsible thing to do is for the government to either have a balanced budget or even run a surplus. And he's saying in general no that the standard default case has to be the government running a deficit. Otherwise, how does the public even have money? Okay. All right. I'll keep going from Ry. While it's possible that the Treasury could run a surplus in future years, this would be limited by the quantity of previously hoarded buckaroos that could be used to pay taxes. Third, and most important, it should be obvious that the Treasury faces no financial constraints on its ability to spend buckaroos. Indeed, the quantity of buckaroos provided is market demand determined by the students who desire to work to obtain buckaroos and by the providers who need student labor. Furthermore, it should be obvious that the Treasury spending doesn't depend on its tax receipts. To drive the point home, we can assume that the Treasury always burns every buckaroo received in payment of taxes. In other words, the Treasury does not impose taxes in order to ensure that buckaroos flow into its coffers, but rather to ensure that student labor flows into community service. More generally, the Treasury's budget balance or imbalance doesn't provide any useful information to the school officials regarding the program's success or failure. A Treasury deficit, surplus, or balance provides useless accounting data. Okay, so here, well, let me just explain what what he's saying to make sure you're following him and then I'll explain why he thinks that's so significant for the broader debates over, you know, economic analysis and government policy. So he's saying there's no constraint. The school can print up as many of these buckaroos as they want. That's not an issue, right? He's also saying it's not that, oh gee, if we want to hire, you know, if we if we think some students next semester should go pick up litter at the park and we want some other students to go to the uh, you know, hospice centers and and read stories to the elderly and we want these other students to go volunteer or to go work, I should say, at the local preschools, you know, the the governmentr run ones to uh, you know, just keep an eye on the kids and play games with them and stuff like that. and oh gee that's going to that's going to cost us a lot of buckaroos to motiv to implement all that all that labor activity and so uh yeah let's hope the tax receipts come in so we can we can afford that right you know we better make sure imagine if some students drop out or transfer to another school and they don't pay us the buckaroos next semester gez how are we going to how are we going to afford this how can we how can we pay for all the student lab you see how that would be nonsense to think like that no you just print them up it's not that the function of the tax collection is to then pay for government services, right? He's saying that's no. And and again, he's driving the point home saying you can imagine that every time the students pay the 25 buckaroos, you know, to the registar or whoever, they just literally take it, put it in the paper shredder to make sure somebody doesn't sneak in and steal them just to make sure they destroy it. because when they go to give buckaroos to the daycare centers and the hospice places and everything else and the you know people running the litter collection program they can just print those up new ones on laser printers like so what right so that's his point there um and then also he's saying in general if like the school had audits every semester and said hey we want to see is this buckaroo program good or are are you guys doing a good job with this thing? And he and his point is what you would want to know is like are you guys making sure that the students are going to places that are safe? You know, we we don't want you sending students, you know, giving special drawing rights to some place that's having the students go in and uh you know, pick up litter underneath an overpass where like a lot of tractor trailers go by and maybe a kid's gonna get hit if we keep doing that. And so that's one way of thinking. or, you know, is there some uh daycare center that's ostensibly having our students come to play with the kids, but really when they get there, they say, "Here," and they have them assemble a bunch of stuff that they're then packaging and sending out on eBay. And so really, they're just getting the students to do like a for-profit activity that has nothing to do with watching the kids, right? So that would be another. So that he's saying that would be the the type of analysis you would do to see are they doing a good job with this program? Are they ensuring that this machinery that's channeling real student labor hours into various activities? Do we think that that's a good use of the student labor? What you wouldn't do, he's saying, is say every semester, hey, did you run a what, you know, show me the finances? what did you run a surplus or a deficit and that oh gee we printed up more buckaroos than came in and they say hey that's that's a mark against you and you better get your act together otherwise you know eventually we're going to shut you down because you're being fiscally irresponsible. He's saying how you notice that would just be nonsense in this context. Okay. All right. And I'm sure this is obvious to you folks, but like this is very much analogous to like what Abel Learner said um in his famous article on what's called functional finance, right? So, you know, Learner was from back in the day, one of the guys participating in the socialist calculation debate on the socialist side, and he was saying that, you know, once you leave the vestages of a gold standard that um you know, the government spending and taxation, whatever, like it doesn't matter. These are all just accounting bits of trivia. The important thing is is government spending doing what it needs to to ensure full employment and things like that. It's not you know, oh, can we pay for it and are we being fiscally responsible that that's nonsense? Okay. Um, we'll keep reading from Ray. Note that each student has to obtain a sufficient number of buckaroos to meet her tax liability. Obviously, an individual might choose to earn, say, 35 buckaroos in one semester, holding 10 back as a horde after paying the 25 tax for that semester. The hordes, of course, are by definition equal to the treasury's deficit. So again he's saying in general in a given semester um some students might work more service hours in the community getting one buckaroo you know note per hour worked and they might earn more you know they might work 35 hours. So they get 35 of these notes the registar says you got to give us 25 to continue in good graces with us at this program. So now they have 10 left and you could carry that forward, right? They're saying the students are allowed to stockpile these things. But he's saying notice during that semester then if the students in general are accumulating more buckaroos than they handed back to the school, well then necessarily that means there was more quote government spending that period than tax collection. And so he's saying if you want people in the private sector to do the responsible thing and to spend less than their income or to go earn more than what they end up spending which is what you know what fiscal conservatives like people are being prudent and responsible living below their means and they're accumulating wealth. He's saying so in this context that can only happen if the school treasury is willing to run a budget deficit to spend more than they take in in taxes. Otherwise, it'd be literally impossible for the students collectively to accumulate more buckaroos than they spend. Okay, so again, this dovetales nicely with Stephanie Kelton's thing about their red ink makes our black ink possible when she's talking about government budget deficits. Okay, the Treasury has decided to encourage thrift by selling interest earning buckaroo bonds purchased by students with excess buckaroo hordes. This is usually described as government borrowing, though to be necessitated, though thought to be necessitated by government deficits. Note, however, that the Treasury does not need to borrow its own buckaroos, nor to deficit spend. No matter how high the deficit, the Treasury can always issue new buckaroos. In indeed, the Treasury can only borrow buckaroos that's already spent. In fact, that it has deficit spent. Finally, note that the Treasury can pay any interest rate it wishes because it does not need to borrow from students. For this reason, treasury bonds should be seen as an interest rate maintenance account designed to keep the base rate at the treasury's target interest rate. Without such an account, the natural base interest rate is zero for buckaroo hordes created through deficit spending. Note that no matter how much the Treasury spends, the base rate would never rise above zero unless the Treasury offers positive interest rates. In other words, Treasury deficits do not place any pressure on interest rates. Okay. So, he had a lot packed in there and this is one of the central things, you know, that I was interested in and why I got into this issue. Um, so let me just spend a minute to make sure you're understanding what he's claiming here. So, he's saying in this context, again, that's why I like just focusing on the school first because it gets if he's trying if he just directly started talking about the US government/ central bank doing this program, you might recoil because you're so used to the conventional wisdom. So here he's like trying to say, "No, no, let me push all what you think you know aside and let's talk about this hypothetical school program because they're, you know, you don't have your prejudices with you." Right? So that so he's saying here, he's saying, "Yes, some students are going to save buckaroos." Now, if you just put them, you know, in your piggy bank at home or, you know, put them in a in a safe or something in your closet, then how would that work? He's saying you would be earning a 0% nominal interest rate, right? If you, again, the example he was using, some student works 35 hours at the various, you know, eligible centers around the town during a semester. They pay him 35 buckaroos. He's got to turn 25 of those notes into the registar to, you know, stay enrolled in the program. So, he's got 10 left over that he could, you know, put them in a shoe box somewhere, right? because, you know, it's not like a bank or something is going to give him interest on that, right? So, he might as well just hang on to the thing. And so, the point is he's earning a 0% interest rate there, right? He can carry it forward next semester, but the 10 that he saved, those will just be 10 notes next semester. And so he's saying if the school wants to encourage thrift and wants to encourage the students, hey, instead of just doing the bare minimum and just working 25 hours every semester, why don't we encourage them to be farsighted and to work in general more? Because, you know, for all you know, next semester you're going to be sick or something or maybe, you know, something's going to come up. There's going to be a funeral in your family. you're going to have to fly back home and maybe it's going to be hard for you to squeeze in the 25 community service hours next semester. So, it would actually be good in general if you have the opportunity to work more than you need to this semester to kind of get ahead, right? And so suppose the school officials want to encourage that type of behavior and thinking then he said what they could do is they could offer their own bond program and they could say hey in addition to us you know printing up these buckaroos giving them to the local uh nonprofit agencies and whatever and then insisting that you pay us 20 each student pays us 25 a semester. In addition to all that, we're going to have this separate program that's completely voluntary and we'll just say if you give us buckaroos now, then we will give you uh 10% more buckaroos next semester. Okay? So that would be a pretty high interest rate. I'm just making up numbers just, you know, to keep them to keep the example simple, right? So if you give us 10 buckaroos this semester, we're going to give you a bond that says this bond can be turned back into the registar next semester for 11 buckaroos [clears throat] at that payable at that time. Okay. So the student now who does you know the responsible thing and works 35 hours this semester and has an extra 10 to show for it instead of just sitting on it, he can now buy a bond from the school that will turn into 11 buckaroos next semester. Okay. And so by doing that, that would encourage more students to engage in this thrifty behavior that presumably school officials think is something they would want to encourage at least a little bit. Okay. So that's so so far so good. And what Rey is saying though is notice here if they want to do that, if the quote government school officials want to do that, it's not because, oh man, we need to sell bonds this semester to raise money to cover our budget deficit. He's saying no, they can always just print the money, you know, they can always just print the buckaroos to pay for whatever level of community service they want to draw forth from the community. All right? Or if if like students really want to work and and and load up on those notes and the and the daycare centers and the you know park litter collection centers and everything run dry and they can say to the school, "Hey, we need no more of those notes. Print them up because these kids are lined up out the door. We could totally use them, but we we ran out of notes." And then school just print them up. It's not they say, "Oh, shoot. We didn't print." Quick, issue some bonds to get the the hordes out there who are sitting on notes they've accumulated before. They can turn their notes over to us so that we can deficit. You see how that's all completely unnecessary given this framework. So Rey is saying the function of government borrowing in this context is not because well if we don't collect enough in taxes we got to somehow cover our deficit and so we're going to issue. He's like no it has nothing to do with that. Okay. And then also he's saying notice it's not that oh gee the the more we want to borrow we would have to increase our interest rate you know and and so when you want to say well why did they pay 10% per semester this time and what might influence them on a differentam a different semester down the road and you're saying you wouldn't say well you know if they if the government deficit got bigger then that's going to put upward pressure on interest rates you know because the investors are going to really say well it's you the is the volume of saving is has to go up to move along that curve. He's saying no like the the only non-arbitrary rate you could talk about would be zero, right? That there's no intrinsic reason the government needs to pay interest at all. And if there is a positive rate, it's not cuz the government needs to motivate people to give it buckaroos so it can spend. It's just saying no. The only reason they would pick a number at all is that that's consistent with the amount of thrift they want to encourage for some reason, but it has nothing to do with the government's uh desired expenditures. Okay? So, you see you see how he's trying to flip on its head all the conventional wisdom when it comes to government finance that normally you'd say, "Oh, if the government spends more than takes in taxes, that's a budget deficit. They got to issue bonds to cover that." But the problem is if that gets too big and if that continues too long then you know that's going to put upward pressure on interest rates and that's going to crowd out private saving you know because people the higher interest rates required to you know suck money to the government and that's going to make interest rates in general rise and you know so that's a problem with government deficit spending is it pushes up interest rate he's saying no it doesn't okay at least not for a monetary sovereign okay so that's that and then let me just jump ahead to um his the full employment program he's just saying is um the government doing some version of this where it's like a a a backs stop or a buffer. So he's saying you can imagine the federal government now just saying okay just like your one buckaroo was like one hour like you could with our terminology like maybe you'd have to pick like $30 or something and just say the government is just going to have this standing program that anybody who wants to work for eligible outlets like again picking up trash or whatever or you know doing other building schools what whatever whatever it is that the federal government deems to be a worthy use of American labor. power and there can just be this backs stop program that says anybody who wants to come and work here will pay you I'm making this number this isn't a raised number I'm just making this up we'll pay you $30 an hour okay so the point is anybody who wants a job or who doesn't like their options like they could be employed working at McDonald's or you know working some stressful job on Wall Street what if you want to leave no there's always this back stop that you can go do valuable community service and get paid paid $30 an hour for that. All right. And he's again he's saying don't worry about where are they going to get the money. They just print the money. And he's also saying if you're worried that it's going to be inflationary, don't worry because the way this thing is works is it's a buffer stock. It's counteryclical by design. Let me just read a little bit from him and then I'll stop reading from him and I'll just explain, you know, more fully what my response is as an Austrian. Before concluding after he sets up his proposal for the real world, for the government, for a full employment program like I just described, he said, "Let's quickly address some general questions. First, many people wonder about the cost. Can we afford full employment? To answer this, we must distinguish between real costs and financial expenditures. Unemployment has a real cost. The output that is lost when some of the labor force is involuntary unemployed. the burdens placed on workers who must produce output to be consumed by the unemployed, the suffering of the unemployed, and social ills generated by unemployment and poverty. From this perspective, providing jobs for the unemployed will reduce real cost and generate net real benefits for society. Indeed, it is best to argue that society cannot afford unemployment rather than to suppose that it cannot afford employment. Okay, so again, he's saying um let me just read one more. On the other hand, most people are probably concerned with the financial cost of full employment or more specifically with the impact on the government's budget. How will the government pay for the program? Well, it'll write checks just as it does for any other program. That's why it's so important to understand how the modern monetary system works. Okay? And he goes on, um, in other words, just as in our buckaroo program, the size of the deficit will be market demand determined by the population's desired net saving. Okay, so again, he's addressing what I what I already said there. the point when he's saying can we afford the cost of this full employment because because it's full employment right if there is a recession and unemployment would jump to 10% normally with this full employment program sitting there waiting in the wings as a backs stop anybody who wants to who's unemployed can't find a job can just go and do stuff in the government approved sectors or channels and get paid $30 an hour in my example I made that number up right so there's no reason unemployment would go to 10% So he's saying if you're worried about the cost, if we're thinking about in terms of real resources, no, this is a good thing. Instead of those people sitting at home watching TV and living off of, you know, they're not going to starve. So somehow society is still producing enough food and everything for these people who are right now aren't going to work. Well, the the you know, the private sector would have them be unemployed. He's saying, how is that making us poorer? How is that quote costing us real resources to have them go do something useful instead of sitting at home? Right? So, you see his logic. He's saying again, don't worry about the accounting and well, geez, but we have to print up all this money to pay. Well, so what? We can print money up. That's not stopping us if if we have a, you know, a fiat system. Okay. Economists usually fear that providing jobs to people who want to work will cause inflation, right? That's probably your concern listening to this, right? If we're just printing up money and paying people $30 an hour, isn't that going to cause price inflation? Let's see what Ray says. Thus, it is necessary to explain how our proposed program will actually contribute to wage stability, promoting price stability. The key is that our program is designed to operate like a buffer stock program in which the buffer stock commodity is sold when there's upward pressure on its price or bought when there's deflationary pressures. Our proposal is to use labor as the buffer stock commodity. And as is the case with any buffer stock commodity, the program will stabilize the commodity's price. All right. So, how can that be? Uh, read one more paragraph. The program, the government's spending on the full employment program will fluctuate countercycl. When the private sector reduces spending, it lays off workers who then flow into the buffer stock pool working in the full employment program. This automatically increases total government spending but not prices because the wage paid is fixed. As the quantity of workers hired at the fixed wage rises, this results in a budget deficit. On the other hand, when the private sector expands, it pulls workers out of the buffer stock pool, shrinking government spending and thus reducing deficits. This is a powerful automatic stabilizer that operates to ensure the government spending is at just the right level to maintain full employment without generating inflation. Okay, so I'll stop there. I've obviously read a boatload from Ray's piece, but I thought it really did a good job of explaining the MMT position to people, right? So, you see how they think they're turning just a a bunch of traditional tenants of government finance on their head, right? Okay. And and that the standard objections people would have to a proposal like, hey, why don't we just have the government have this standing offer to pay, let's say, $30 an hour to anybody, you know, and we'll have to have some oversight, like make sure they're not going and doing corrupt things or, you know, just just working for government officials and driving them around and doing their laundry and stuff like that. Like like genuine things that are in the in the public interest, right? And so, who could object to that? And then he went through and tried to deal. And again, one major objection you might have is, well, gez, isn't that going to cause price inflation if we're just printing up money? Okay, so his point was no, because this thing by its design is counteryclical. And so if um the only time it's going to be used heavily is when the private sector has stalled. And so in his view, he has a you know very Keynesian view in this sense. What why is there a recession? It's because aggregate demand is insufficient to to have full employment for so for some reason total spending by the community and the private sector falls. So businesses aren't they don't have enough revenue to keep their workers employed. So they start laying off workers. And so he's saying that's the context in which more and more people would then opt to go over to the government guaranteed employment and get third the fixed $30 an hour. So yep, the government starts printing up more money as more and more people take them up on that offer. And so more dollars are being created that period than before flowing into the in the economy. But he's saying that's not going to cause prices to go through the roof because that's only happening when the private sector spending has fallen. So here the government's extra money printing is just filling that hole. And then you might say, well, what happens when it starts overheating? Well, when it starts overheating and there's just a bunch of spending going on, like all the workers getting the $30 an hour to go, you know, fill potholes and pick up trash and go read to senior citizens at the retirement homes and stuff like that. Those people are getting $30 an hour, so they're going out and spending. And so if more and more people are doing that and more money is flowing into the system, that's going to push up prices. the businesses now, the local restaurants and movie theaters and whatnot are going to see sales pick up from all the patrons who are getting the government paychecks. And so now they're able to hire, you know, they can say, "Well, gee, we'll pay you $35 an hour to come here." And so at some point they're going to start bidding workers back from what Ray's calling the buffer stock program, the fallback. And the private sector when it can offer more competitive wages eventually will suck workers out of, you know, those sectors and back over to, you know, the the private sector ones. And then when that happens, fewer and fewer people will be employed in the government programs. And so the government spending on that program will shrink. And so now, you know, the the net injections of money every period will shrink. And so you're that won't cause undue price inflation, right? So that that's what he means why he's thinking, what are you talking about? We're providing full employment. So that's what that's good from a real resource perspective. And it's only injecting a b boatload of money, right? When private demand is falling off a cliff. And then once private demand is is rising again, that's precisely when this program automatically winds down. So we stop injecting new money right when private sector spending is rising, which is right when you'd want it to to wind down. So what are you talking about? it's not going to cause hyperinflation. Okay. So that so that's his his deal. So now finally that I hope I've bent over backwards to show I'm trying to be fair here and explain where they're coming from. Let me just quickly go through here some objections. And I'm going to be quick here because um partly in the interest of brevity, but also again I want to keep this fairly light uh as a as a podcast episode. Uh, if some MMT person gets a hold of this and wants to respond, I certainly maybe in print, we'll go back and forth because I agree, you know, you could take these things to any desired level of detail you wanted. Okay. Right off the bat, again, just notice how the MMT's position utterly rests on coercion. And I know some people in the MMT camp think that's a silly little objection, like, you know, oh, you guys just it makes you squeamish. But I mean, that's an important point to make. In other context, if someone has this great vision that fundamentally rests bedrock on widespread coercion, that's kind of a point against it. So I'm saying here, notice how do you make this whole thing work is the authorities have to impose a threat on people and that's how the MTeers explain where money gets its value in their system. In contrast, people aren't in a in a market, people don't gravitate towards gold and silver or maybe Bitcoin in a more modern context because if they don't, bad things will happen to them in the sense that they somebody periodically is going to punish them unless they hand over enough ounces of gold or, you know, Satoshi's. No, people value gold and silver and Bitcoin for voluntary reasons. Okay, I'm not going to go into that. I'm assuming many people here are familiar with the standard Austrian story of how money gets its value in a market. Okay. Um, an analogy that occurred to me was, uh, I've used and, you know, I'm sure many parents are familiar with the system of, you know, when the kids are old enough that they start thinking ahead a little bit and you can, you know, you can do like a point system or, you know, you could give tokens or gems or something and just keep say, "Hey, you know, um, here's the things that you got to do every day. You got to pick up your room. You got to brush your teeth. You got to do that." and and you you could do it like a a punishment system and just say you better do that stuff or else you know you're in trouble you're grounded or whatever but most people think that you know positive reinforcement in general is better especially with little kids and so that you could flip it and just say hey if you pick up your room you get you know one token or you know if you have a dry erase board we'll put a check mark or something and then you know why do the kids care about that? Well, one thing is they just intrinsically like the parents to praise them and stuff, but even beyond that, you can make it more practical and just say, "Hey, if you get a certain number of tokens, then you know, you get a prize when we go to the store or whatever." You can, you know, you can pick the movie we're going to watch on movie night or whatever, right? So, you can do that. But notice so so there it's it's giving these tokens let's say you know it's it's inducing the children to value them even though intrinsically they don't have value if you want to use that kind of language okay and that superficially is kind of like what happened with the um Randall Ray and his students but it's actually quite different in an important and I think you know significant way morally significant way that in Ray's setting the reason the students want that is this extra duty was laid upon this extra threat saying you have to do this you have to give us these notes or else we kick you out of school as opposed to hey um we're going to print these things up and then you know the the student that that earns the most turns in the most of these buckaroos we're going to feature you in the student newspaper and say you know volunteer of the month or of the semester or whatever and you know you could or the school is going to then go and and use some of the endowment to go buy a I don't know a pizza party and give it to you and you can invite your 10 best friend whatever I'm making stuff up but I'm saying instead of doing positive reinforcement instead they're relying on negative reinforcement there now yeah you could say they have the right to do that because it's the school and everything but you get you get the point I hope that even at its base right out of the gate the MMT proposal always start with, let's say we have the ability to threaten everybody in a community, then that can induce them to want to hold this stuff as money and then look at all the stuff we can do with that. Look at how much good we can do if we start out with this big threat that's going to make everybody scramble to avoid the punishment we're getting ready to inflict on them. And I think that's worth emphasizing, especially since I think in general most MMT people think they're much more moral and caring people for societal welfare than those, you know, right-wing libertarians. Okay. The other thing is notice that whole approach of like the MMT are saying how does money get its value? Oh, it's because of the the tax basically that people know every year we have to turn in a certain number of these money units whether physically or you know electronic claims on it or else guys with guns come and throw us in prison, throw us in a cage. And so we don't want that to happen. So that's why we got to come up with these units of this, you know, government designated currency. And that's why we're willing to work our butts off at jobs and, you know, do other things if we own land to rent it out to people and we have coal mines and to sell the coal for these pieces of paper that intrinsically we don't care much about because we want to not have the guys with guns show up and put us in a cage. And they use that to be the bedrock foundation to explain where does money get its purchasing power from. But strictly speaking, and that's true here in this Buckaroo example, it really only works if there's a head tax. Right? So in this Buckaroo example, he said every student every semester has to hand over 25 of these notes or else they get expelled. All right? If instead the tax system said, "What you do is you give us a report every semester that shows how many of these buckaroos did you earn and then you you have to give us um 30% of those if you made more than 20 and you have to give us 50% for those that what you made above 50 and so on." And that's the way you did it. And you said, "Oh, and if you earn less than five, you don't owe us any." buckaroos. Just think through that would have much different consequences, right? And for example, everybody could just choose to not work at all to get those things if the rule were if you don't, you know, if you earn below a certain threshold, you actually don't have to turn in any at all. Okay. So, and then again too like having the higher tier ones and in particular um what you would see is it you'd lose the um the connection between like the value of the thing and the one hour of labor which you know which he thinks oh we're rigidly defining through this system that you know one buckaroo is worth one hour of labor that would break down if you had a graduated income tax like I just spelled out. Okay. So again, my point is, ironically, when the MMT explain where does currency get its value, they're implicitly assuming in general or in Randall's case here, they're literally advocating or describing a system that imposes a flat head tax on people. Right? So for the students here, whether a kid worked zero community service hours or whether the kid worked 75. And so in terms of income, the one kid earn earned zero and the other kid earns 75. So convention be like, "Oh, that one guy kid's in the 1%. He's a fat cat." And the other kid, wow, that poor kid, he he's down on his luck. He couldn't get a job. Geez, that's too bad. We should we should have programs to help that kid. What's going on, right? No. In Ray system, he's like Murray Rothbart. Like, no. The fair taxation is a head tax. Everybody owes 25. I don't care how much you earned. You know, what if some kids are just better at community service than what some kids in a wheelchair and it's really hard for him to work 25 hours? where some kid doesn't have transportation and it's really hard for him to get around. Ray doesn't care about any of that. No, you owe 25. End of story. All right. So, [laughter] I'm just saying that it's also ironic here that for the MMT system to go through, they typically talk about it as if taxes were a head tax. And so, you know, when they're worried when they say, "Yeah, the way we should reform the government to operate according more to MMT principle." Yeah, we don't we're not linked to gold anymore, but we should get rid of, you know, like the debt ceiling. That's a silly anacronism. It doesn't have anything to do with anything. You know, maybe we don't even need to issue bonds at all. Maybe we just have direct financing of monetizing the deficit all these things. But I never hear them say, "And we should replace our current tax system with a head tax where everybody owes just a flat $10,000 a year, period. Regardless of what your income is." I've never heard them say that, but that's actually more uh compatible with the type of system they describe. And I don't just mean isn't incidental. I'm saying the actual incentive effects when you try to think through and explain how it is that oh, owing taxes is what then gives money its value. Um it's a much cleaner story to tell if it's just a head tax. Whereas you start talking about no, the more you make, the more tax you owe, then it it kind of doesn't pin down the value of money then. Right. Okay. Um, I got two more main responses here, two more topics. Okay. So, as far as the natural rate, let me just hit that, which is again the original reason I was interested in this Rey and also Mosler, they are totally neglecting the subjective time preferences of the students. So I think so what I mean is just because the government or the school in the buckaroo example uh might refrain from issuing bonds that pay a positive nominal interest rate like in the example I went over where they say hey if you give us 10 buckaroos this semester we'll give you 11 buckaroos next semester right or we'll accredit it to your account right that's the way they could do it is if you give 10 this semester the next semester instead of you owing 25, you only owe 14, right? And instead of the you might think it was the 15. So they're they're making you um you're gaining that interest, right? So that's an extra reason you'd want to work more this semester is because you're more than one for one reducing your future tax liabilities in that in that framework. Okay. So again, what um Rey is saying is yeah, I mean, what what's the natural rate of interest in this world? Well, if if the if the school just says, "No, we're not doing that. If you give us 10, you know, we're not going to take more buckaroos than you owe us in taxes. So, just you sit on them." He's saying, "In that world, the risk-free interest rate would be zero, nominal, at least." And I would say, "Uh, I'm not sure why he's saying that." Okay. And I so here's so for one thing is there could still be private loans, right? There could be a student who for whatever reason because he's lazy or you know maybe he had funerals he had to go to or maybe it's you know a kid who's got a broken leg or something and he's going to be able to work a lot more community service hours next semester than this semester. And so maybe that kid's short. He was only able to earn 10. He needs 15. his buddy worked 40 community service hours this semester that he's got 15 extra and so maybe he said here I'll I'll lend you these 15 now but next semester you owe me 16 back and so they make that private deal so they could do that right so there's no reason that the market interest rate would still be zero in this setting and clearly you can see that interplay would have to do with you know what Austrians call subjective time preference it's influenced by objective factors but ultimately it would be people's, you know, demand and supply for loanable funds to use that terminology. So I think what Mosler and Forestater and Ry would say is, yeah, yeah, but we're not talking about market interest rates by people in the private sector because there's default risk there. We're talking about the risk-free rate which is like represented by Treasury yields for example that you know when I say even there just because we can't observe it that doesn't mean that the risk-free rate is suddenly zero, right? So in particular suppose that the the school in Ray's example did an implicit 10% per semester nominal what he would call natural interest rate right so they say you give us 10 buckaroos this semester next semester we'll credit your account by 11 buckaroos right so you earn a 10% return nominally um from one semester to the next so if that's what the deal is then clearly Like the kid in my example wouldn't lend 15 to his buddy to only get his buddy promising to pay him 16 back next semester. Because if you do the math, that's less than 10%. Plus, there's a chance his buddy defaults, right? That even though his buddy on paper owes him 16 next semester, maybe he won't actually pay it. So if you're going to So you could still imagine private loans of buckaroos among the students even if the school is officially offering a 10% per semester rate itself. But the student rates would have to be higher than that unless you're just you know giving a gift to somebody. But if you're just a rational investor and you're just looking to maximize your rate of return all things considered you're going to say if I give it to the school I get a guaranteed 10% per semester. I guess the registar could change the rules on you. You know, that'd be like the Treasury defaulting even though in the MMT world they don't ever need to, but theoretically they could. So, you could call it, you know, there's that slight risk that they're just going to change the rules even though they don't have to, but that's pretty safe. And then if your buddy says, "Well, but I I really need to borrow buckaroos. Let me I'd rather borrow those 10 from you." Then you're say, "All right, well, you got to give me I'll give you 10 this semester. You got to give me 13 back next semester. you got to promise to give me 13 back to compensate me for the extra risk. So there, you know, it would be like a 30% versus a 10. So you can say there's a 20 percentage point risk premium, right? So that's fine. But then um even if the treasury, you know, the government stops paying the 10%. Maybe that makes interest rates go down a little bit, but maybe your buddy and you know maybe the people in the private sector are the students instead of having to pay 30 to borrow buckaroos now only have to pay 25. Right? So to me that would say that still suggests the natural risk-free interest rate nominally is still 5%. Even though you can't observe that anywhere because the school isn't offering it anymore, right? If there's if there was a if that 20% differential 20 percentage point I should say differential was accounting for the riskiness the fact that that student might default then still there's the element of just deferring the the use of those buckaroos cuz because the other thing too is by the way you can imagine other people selling stuff right there would be a market you know assuming this thing was big and students are all flushed with buckaroos and some kids are working more than they're going to need and so forth. And so, you know, kids in previous semesters have accumulated some. So, in any given moment during the semester, there might be an active market where, you know, you want to buy a six-pack from your buddies at a frat party or something and you're all over 21, of course, right? Or somebody's selling a bicycle or whatever. Or somebody says, "Hey, um, geez, I I got to get to Cincinnati. Can somebody drive me? I don't have a car." Yeah. How much will you pay me? I'll I'll cover your gas and I'll give you 30 buckaroos because I really got to get to you know there's all kinds of stuff you could do like that too to spend your excess buckaroos even you know if you have enough to pay the registar and so I'm saying instead of you buying stuff in the present semester with your excess buckaroos you could choose to lend it to somebody and so I'm saying what the the na you know the the natural rate of interest is trying to isolate is is to say what is what is the the level at which like the pure deferment of consumption for a period. That's what that's trying to isolate. And you could measure, you could express that either in nominal or real terms. Okay? But I'm saying that's what the natural interest rate means to most economists. It's it's having to do with the trade-off between like consumption now and consumption in the future. And yes, that is riskless because it's trying to isolate the pure deferral of consumption. And then when you add on top of that, oh it's not only that you're refraining from consuming today but to to you know delay it for a period but also in practice you might not get any consumption down the road because the person might default on that loan but that's an extra thing on top of that. It's the the deferral per se you know the the what Austrians call time preference that is measuring the natural interest rate there. Okay. And I'm saying just because the school refrains from officially letting students turn in buckaroos now for them to give them more buckaroos down the road, that doesn't mean that we just wiped out that economic concept. The fact that besides the risk of default, there's other there's another reason students might on the margin rather consume now than give that money to give those buckaroos to somebody else for a promise down the road. And that's what the natural rate is. So again, you know, Mosler and Ray don't deal with that at all. They just flatly assert, no, what the natural rate is is whatever is on the government's bond offerings. And if they offer a 0% yield, then the natural rate zero. And I say, no, that's you're just using the term differently. Okay. Lastly, on the full employment stuff, I'll be real quick here. There's two things. one again just ignoring the real element that Rey is contrasting people sitting at home doing nothing, being unemployed or doing things that the government wants. But so that that's ignoring that even the thing that the government wants, they're going to be using other resources, right? It's not just the workers are probably going to be going around literally with their bare hands picking up trash. There's probably going to be using other resources. So there's that element as well. But even on its own terms, in general, at any given time, there are going to be more people working in the government program than would be the case in a pure lazy fair alternative, right? And so there's that cost that in general, we have no reason to suppose that politically determined outlets for where labor hours should be deployed is going to be better than the private sector doing it. Okay? So there's so there's that element. um that you know he they're not even dealing with. But beyond that, I think he's being too glib with his whole thing about oh no, this is counter cyclical, so there's no inflation because here's what would happen in practice is that yeah, there could be let's say there's a you know a boom and and then there's a bust and then the government comes in and says, "Oh, here we'll we'll print up new money to get people to come to our jobs and earn $30 an hour." Okay. So they do that and and prices and you know inflation picks up and it's you know 4% 5% but then oh as inflation's rising by which I mean consumer price inflation businesses are getting you know their sales pick up again and then eventually they they out bid the workers and they bid them all away. Okay. And that's why he's saying oh see so now the new money printing would would taper off and we wouldn't be in this position anymore. And okay, but then even there now we're at a permanently higher level of prices. And so I'm saying as that cycle kept happening, eventually the $30 back stop would buy you like a loaf of bread, even though right now today's price is $30 an hour. Yeah, that that's a you know, somebody who's unemployed and has to feed a family or something, they would probably take that. or somebody who's um you know working at a fast food place or something and their job is disgusting like yeah they would go take the government job. Okay. But I'm saying with each cycle more and more money keeps getting injected and so eventually over time $30 an hour seems like what to us would be $5 an hour. And then so at that so the only way to keep that going is that they would have to keep bumping up the hourly rate to keep making it as an acceptable floor. You know that people would want to go do that. Um and that would be a legitimate back stop. And so I'm saying he's not he's making it look like it would just be a you know oscillate up and then oscillate down. And I'm saying no it would just prices would keep rising across the board. And I'm saying on average with his system, I think price inflation would be much higher than if we didn't have that program in place. Particularly when you think about, you know, what is inflation? One way of describing it, by which you mean price inflation, is too much money chasing too few goods. So, especially when you take into account that in general people employed in the government sectors are going to be be producing fewer goods and services that the public actually wants compared to if they were if their labor were under the supervision and direction of private sector entrepreneurs over time. you're just going to have boatloads of periodic money drops happening in conjunction with on average more labor hours are going to be in sectors that are politically picked rather than market driven. So over time you have more money printing and less efficient output of real goods and services that the public actually wants. So of course that's going to mean more price inflation in general over time than would otherwise be the case. Okay, I'll stop there. I hope this has been helpful to you folks. Again, I'll put links for all these things in the show notes page. Thanks for attention everybody. See you next time. 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