[Steve_American]

The US Fed has published a paper that agrees with my contention that MMT (Modern Monetary Theory) has shown that deficits don't cause inflation.

A Finance and Economics Discussion Series (FEDS) working paper – "Who Killed the Phillips Curve? A Murder Mystery" – published on May 20, 2022 by the Board of Governors of the US Federal Reserve System.

https://www.federalreserve.gov/econres/ ... 028pap.pdf

Once central banks start writing about things then MMT is entering the realms of orthodoxy.

I have years ago here posted a thread about how the Bank of England in 2015 rejected a key plank of mainstream monetary theory in a 2015 working paper. It was subsequently updated as Staff Working Paper No. 761 (published October 26, 2018 and updated further in June 2019) –
. . . The title was "Banks are not intermediaries of loanable funds – facts, theory and evidence".

The MMTer, Prof. Bill Mitchell analysed the Bank of England paper and what it meant in his blog post – "Bank of England finally catches on – mainstream monetary theory is erroneous" (June 1, 2015).

Anyway, last week the US FEDS publications put out the Phillips Curve paper (cited above).
The authors state at the outset:

First, the Phillips curve failed to predict the stable inflation seen in the aftermath of the Global Financial Crisis (GFC) during 2008-2009 period, dubbed the ‘missing deflation’ puzzle. Second, and more importantly, the Phillips curve failed to predict stable
inflation during the recovery from the GFC. In September 2019 in the U.S. economy, the
civilian unemployment rate fell to 3.5 percent, having fallen 6.5 percentage points since
October 2009, the largest drop seen in any economic expansion since 1950. And yet, the
inflation rate, as measured by the growth rate of core Personal Consumption Expenditure
(PCE) price index, has shown no sign of acceleration. Mirroring the missing deflation, this
has been called “the missing inflation” puzzle.
. . . The two puzzles together suggest that developments in prices and wages have been
disconnected with developments in real activity. A growing number of economists and commentators
of different backgrounds have gone so far as to declare the death of the Phillips curve.

A former Governor of the Federal Reserve Board summarized the difficulties in monetary-policy
making in a world without a well-functioning Phillips curve:
. . .“The substantive point is that we do not, at present, have a theory of inflation
dynamics that works sufficiently well to be of use for the business of real-time
monetary policy-making.[My emphasis] The sociological point is that many (though certainly
not all) good monetary policymakers who were formally trained as such have an
almost instinctual attachment to some of those problematic concepts and
hard-to-estimate variables” (Tarullo (2017), p.2).”

Effectively, that is what their paper is about – revealing the existence of a workable theory of inflation.
The problem for them is that those who work within a Marxian-Progressive tradition have known about this theory and used it for decades.
And it has been the prejudice and Groupthink of the mainstream that has prevented them from seeing that.
And like all instances where Groupthink dominates, the ‘clinical’ practice that is based on the dominance theoretical stance is typically very damaging to those that are impacted. (That is, the working class, specifically those thrown out of work to contain inflation with the wrong tools. As well as the nation as a whole that threw away their work by not letting them work.)

Franco Modigliani is one of the co-authors of the original NAIRU terminology.
In 2000, reflecting on what central bankers had done in his name, he said.

Unemployment is primarily due to lack of aggregate demand. This is mainly the outcome of erroneous macroeconomic policies… [the decisions of Central Banks] … inspired by an obsessive fear of inflation, … coupled with a benign neglect for unemployment … have resulted in systematically over tight monetary policy decisions, apparently based on an objectionable use of the so-called NAIRU approach. The contractive effects of these policies have been reinforced by common, very tight fiscal policies.

Essentially the Fed's paper above spends 36 pages developing a "conflict theory of inflation model", which they think has gained validity because of “structural changes in the labor market since the 1980s”.
But it is only the specification of the ‘model’ that has changed not the underlying causal structure. That structure is rooted in the conflictual relations of Capitalism and the battle between workers and capital for real income share. They fight that battle via their claims for nominal shares of national income and use their price setting power – workers bargaining for higher nominal wages and bosses pushing for higher nominal profit margins.
Inflation emerges and persists as these ‘price setters’ engage in what has been called the ‘battle of the markups’.

AFAIK, the above paper never suggests that the money supply or deficit spending has any effect on inflation. Nor does it mention supply chain failures that cause shortages. I think that this is a result of their focusing on accelerating inflation, like in the 70s and 80s.

In summary, this paper by the Fed is an admission that Neo-liberalism and Monetarists got the causes of inflation TOTALLY wrong.

► Show Spoiler

Note: much of the above is copied and pasted, then edited by me from a recent blog by Prof. Bill Mitchell.

[Steve_American]

In the OP above, I wrote:

"They fight that battle via their claims for nominal shares of national income and use their price setting power – workers bargaining for higher nominal wages and bosses pushing for higher nominal profit margins."

My takeaway from that sentence is that, perhaps the battle should be removed from the market place where retired consumers and investors in other things have not say, and move it into Congress where the corps, workers, retired consumers, and investors in other things shall have some (at least) some say.
. . . Here I'm assuming that we have already gotten money out of elections with total public funding of elections for Congress.

Congress could, for one example, introduce an excess profits tax of 99% on all profits over the figure that it has set.
The figure is set to give workers a fair share of the corp revenues and the stockholders and CEOs, etc. their fair share.
Now, the battle is in Congress, and not in the market place where it causes inflation, like it did in the 70s and 80s.

This just my 1st idea of how Congress could set such a system up.
One excellent result of this is that it would be plain to all when the percentage of profits that is "excess" is changed by Congress.
Everyone could easily know that the law was changed, and could try to change it again if they didn't like the result.

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[Steve_American]

The Founding Fathers of the US knew something very well that most readers of my posts here don't know. This was why they wrote every state's laws for forming corporations to specify that they had to operate in the public interest. Yes, this is true. Later, they also wrote laws that kept corps from making campaign contributions. These laws continued into the 50s or 60s because I heard about them as a kid then.

AFAIK, they knew this because corps had only been invented around 1600. IMO, they also knew that the states were giving corps a big thing when it protected stockholders from the debts of the corp. IMO, the Founders felt that in exchange for this immunity the corps and their stockholders should give the people of the state back something. That something was a requirement to operate in the public interest, not against the public interest.

Today, the system the Founders created has been replaced with a system that gives corps more power than the voters have. The Founders would be appalled.

So, my idea above to have the Gov. set the rate of excess profits would be in line with the Founders' view that corps had to operate in the public interest. The public interest includes the interests of the workers, retired consumers, and investors in other things. These 3 groups and others, don't want too much inflation. It hurts them, and currently they have little say in what the inflation rate is.

Of course, the current inflation is caused mostly by shortages mostly from international trade.

But also by excess profits. An excess profits tax of 99% would stop that part of inflation in its tracks. This would be so because setting prices to make excess profits makes a corp's prices higher than other corps, and so they sell less, and they only keep 1% of the extra revenue. So, they would not do it.

I have suggested that 1 way for the US and UK, etc. to deal with the current inflation is to give the voters a UBI that varies to cover last month's inflation. Then the people could pay the higher prices and the money would let the corps buy more from overseas to keep the store shelves stocked, etc.
. . . Peter Zeihan has predicted that by this Aug. or Sept., Pres. Biden will use his lawful power to stop all exports of oil. This will keep oil prices from inflating. He says that US produces enough oil to not need to import it.

Anyway, the current system of corps being only to do what is good or their stockholders over the next 3 months, it not the system that the Founders set up. Also, the current system of unlimited money to bribe politicians being spent by corps is not the system that the Founders set up.

Conservatives have not conserved the wisdom of the Founders in these 2 areas, and others. The result is the current mess that is the US and the US economy.

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[BlutoSays]

"This may be the most important thread I ever make. Big picture stuff about the major global collapse that is coming.

I will try to help you understand why the future is not what we’re hoping for. It's worse than most can imagine.

Our leaders know.

But what are they planning?" - Kim Dotcom, June 5, 2022

[Puffer Fish]

I'm skeptical. You don't think some political bias may be involved?

The Fed chair people have always leaned a little progressive Left.

[Steve_American]

I'm skeptical. You don't think some political bias may be involved?

The Fed chair people have always leaned a little progressive Left.

No, I don't think there is any "political bias" at the Fed in favor of progressive ideas.
It is likely that the bias is toward neo-liberal ideas, especially at the top.
Just like there is a massive bias in the MSM against MMT and in favor of neo-liberalism or New Keynesianism.
And, here on this forum, for that matter.

I'll post a link to video I saw yesterday from 9 years ago by Warren Mosler, a founder of MMT.
In it he asserts that when he or other MMTers talk to "appointees" at the Fed, aka the many governors and the chair about how Gov. finances work, "they haven't got a clue". However, when they talk to the staff at the Fed, they agree with the MMTers easily.

It follows to be likely true that the staff also are more open to new ideas, like where inflation really comes from.

All the papers put out by the Fed are written by the staff, not the appointees.

Skip to the 20 min. mark to hear how the Fed staffers know how it works, but appointees don't.

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