At long last, my paper modeling the MMT theory of price level determination has been published! 🧵
MMT says that the price level should be based on the prices that the government pays when it spends. From @wbmosler, "every time the government pays more for the same thing, it is redefining its currency downward." In this paper, I build a mathematical model of that mechanism.

I’d like to respond to 2 critiques of the “inflation as distributional conflict” view. Those critiques are: 1) inflation is actually just “money chasing too few goods.” 2) Distributional conflict can’t explain deflation.

Responses below…🧵 1) “Money chasing too few goods” isn’t an alternative to distributional conflict, it *is* distributional conflict, by definition! If you have 11 people trying to buy 10 units of product, then those people are locked in a fight to not be the one who will be disappointed.

I wanted to do a more detailed thread on my paper draft that formalizes the Chartalist theory of the price level using individual optimization, and I'm thinking I better do it before Twitter implodes, so, here goes... 🧵

Paper is here: papers.ssrn.com/sol3/papers.cf… The theory comes from Modern Monetary Theory (MMT), and this paper is a follow-up to an earlier paper that had mathematized this mechanism, which was here: levyinstitute.org/publications/m…. What the new draft adds is that it uses orthodox intertemporal optimization to drive behavior. /2

When people do Econ 101 against price controls they often invoke the graph on the left, but the reality is that you need price controls for the situation on the right. When you have a necessary good (inelastic demand) and constrained supply, do price controls and rationing. Supply is constrained so higher prices don't elicit more output; you would get higher prices only because sellers are exploiting their position of privilege to extract rents from buyers. For necessary goods, distribution shouldn't be based on who can pony up the most.

Framing student loan payments in terms of inflation control is terrible defeatism. Starting from a blank slate, if we had an inflation problem and needed to impose costs on some group to deal with it, we would not single out “people with student debt” to be that group. 1/4 Saying “we need to resume student loans to control inflation” is then a tacit assertion that actually-good policy on inflation will not be forthcoming, so let’s take this nonsense, unjust approach because it’s the best we can get. 2/4

This short piece by John Kenneth Galbraith from 1941 on the inflation problem is a must-read for today, as it bears so much resemblance to today's situation. A thread... jstor.org/stable/1927509 First, Galbraith gives the rationale for acting fastidiously on inflation, noting the memory of uncontrolled inflation during World War 1. "It has been agreed that next time - i.e., this time - prices must be kept under better control."

Our painful memory is the 1970s/80s.

To reply to Jo here... What Jo offers as the issues at hand are in my view the wrong questions🧵

https://twitter.com/JoMicheII/status/1530199032630497280

Here is what Jo is pointing us towards, and he suggests that the first answer is an obvious 'yes,' while the second question avoids more important issues.

https://twitter.com/JoMicheII/status/1530199221432877056?s=20&t=8e_vcueyH_6VpP7IoU18UQ

In my experience, a lot of the debates around MMT ultimately boil down to differing views on the following 3 questions:

1) the substitutability of money and Treasury bonds
2) the determinants and effects of interest rates
3) whether the economy tends toward full employment 🧵 1) Just how different are money and bonds? MMTers see them as quite similar, so the gov issuing one vs the other ultimately doesn't make much difference, at least as far as inflation is concerned. Nor would it make much difference if we later replaced one for the other, as in QE.

Here's a chance to clear up a basic misunderstanding about MMT.

Does MMT say that taxes are the go-to tool to fight inflation?

No it does not. It's a case of people hearing what they want to hear and not what MMTers are saying...🧵

https://twitter.com/ne0liberal/status/1518996800295907328

What MMTers have said is this: taxes function to prevent inflation. This is a descriptive statement. Not a recommendation.

As in, if we didn't have taxes, then all else equal, inflation would be much higher.

The taxes are *functioning* to prevent inflation.

Paper thread! My new Levy Institute WP is entitled "Modeling Monopoly Money: Government as the Source of the Price Level and Unemployment." In it I build mathematical models to illustrate several MMT concepts. /1 levyinstitute.org/pubs/wp_992.pdf The first draft of the model appeared as a blog post here medium.com/@slevey087/mon…, but this paper expands it, in order to demonstrate two particular claims of MMT, which I'll take in turn. Both relate to the monopoly nature of state money. /2

I made a few diagrams representing some Modern Monetary Theory concepts. Here they are, explained in more detail below... The first is a simplified world that you might argue is MMT's theoretical 'base case.' The government only issues currency, not bonds, and it hires anybody who wants to work, i.e. a Job Guarantee. In this case, gov spending will be determined by the markets, according to 2/8

** No, MMT is not "the new supply-side economics."

The message below by Professor Ricardo Reis (@R2Rsquared) is receiving a lot of attention but... it is not a good thread.

I'm an MMTer, so let me offer some corrections for the record.

https://twitter.com/R2Rsquared/status/1362386627616780289?s=20

/1 But first, if you're an economist, where can you go to find MMT literature, so that you can read before forming an opinion and back your commentary with citations? Here's a resource: deficitowls.wixsite.com/mmt4mainstream… /2

Let me try to clear up a point of confusion on MMT's "sectoral balance" approach.

In the equation (S - I) = (G - T) + (X - M)... why is it "S - I"? What does this mean? Why do we care about this rather than just "saving" S? Here's a thread on how I think about it 1/n What we want to look at are deficits and surpluses. "Deficit" = spending more than your income, and "surplus" = spending less than your income.

If we split the whole world into parts, then it's only possible for one of those parts to be in surplus if some other is in deficit. /2

The language of "sticky prices" implies that "flexible prices" are the base case and sticky ones are a deviation, but I think really the opposite makes more sense.

When you buy something, the starting assumption for the price is always "whatever it was last time." It seems (1/4) like there's an extra step involved if the price changes. In a business, somebody came and changed a posted price, an additional action compared to just selling you a product.

So maybe better language would be that "stable prices" are the norm and "volatile prices" a deviation?

A thread of polls on the assumptions of "Perfect Competition."

1/5: "Perfect Competition" implicitly assumes the existence and well-functioning of some sort of auction-like mechanism. 2/5: "Perfect Competition" implicitly assumes the existence and well-functioning of institutions that transmit information about the product (such as product details and quality).

To distract me from studying, here's a thread entitled "What Did War Bonds Actually Do - For the Layperson"

Tl;dr: the goal of war bonds is to get you to stop spending your money at the store. /1 The basic problem of wartime economics is this: workers are getting paid to produce war goods that are not available for them to buy. This is money that's burning a hole in your pocket, but that doesn't correspond to any real goods/services that it can be spent on. /2

@FrancescoNicoli thinking more about your claim that perfect competition isn't limited to using an auction as a market mechanism. Sounded reasonable at first, but more I think about it, I don't think that's right. If the "price-taking" firm can sell any quantity at the market price, how is that possible unless there's some sort of auction mechanism? I was reading you to be saying that PC might be close enough in the case of the firm announcing a price but severely constrained by competition (eg. a farmer's market). But if the firm announces

Mainstream economics says 2 different things about gov debt sustainability. In this thread I'll look at the more common view.

It says that it must be bad if the debt-to-GDP ratio goes to infinity. A little bit of math then shows that for a given size primary deficit (the part /1 of the deficit before interest payments), the debt won't go to infinity if the interest rate on the debt is less than the growth rate of GDP

This whole concept is bad because it neglects feedbacks from the debt to the primary deficit. A gov deficit implies /2

In a break from the ordinary, here's some wild existential thoughts I've been pondering. (I'll return to economics tweets tomorrow)

"You" are indistinguishable from a perfect mathematical model of you. Like you, the model would be a black box that receives inputs and produces... output. With a sophisticated enough model, it really would be indistinguishable from you - it would answer all questions the same way, and like you it report that it "feels" and has an introspective experience. (This is related to Attention Schema Theory, which argues that if our

@HRBlackburne @Noahpinion @remindmetweets Well, no. You don't actually need "money" to make transactions, and indeed a huge number of transactions don't use money at all - just mutual credit.

Second, as surely you know, there isn't a mechanical link between the money stock and prices - firms setting prices don't call @HRBlackburne @Noahpinion @remindmetweets up the Fed to ask what the latest measurement of M2 was before they post a price.

Rather, the theory goes, if we just gave money to people, they would spend it on goods. That's an increase in demand. An increase in demand when supply can't be expanded *itself* is an improvement

@HRBlackburne @Noahpinion @remindmetweets Probably not just 1 tweet but I'll keep it short.

Practically by definition, price-setting is an exercise in social conflict mediation: I want a higher price, you want a lower price, we don't agree. When the price gets set somewhere and stays there, that indicates that the @HRBlackburne @Noahpinion @remindmetweets conflict got resolved - one of us got what we wanted (or we compromised somewhere in between).

Stable prices are an indication of resolved conflict. We're either all happy with the price, or, the people who are unhappy lack the power to challenge it.