Lies, Damn Lies, and Climate Discussions

Almost every day, I see false or misleading headlines on my Yahoo search page. Last year the Earth was the hottest it has ever been. Ever? Really? I am attaching a screenshot of a recent climate-related headline that demonstrates I do not exaggerate. Clearly, the intent is to persuade me that the Earth is warming (I am persuaded without the hyperbole) and convey a sense of political urgency (agreeing something must be done is not an agreement on what should be done). The problem is that committing fraud to create a sense of urgency undermines the credibility of the entire movement. Allow me to demonstrate the misleading nature of ‘hottest year ever on Earth’ through reversal.

What was the coldest year ever?

Instead of worrying about the hottest year, what if I said the coldest year ever on Earth was 1976? Coldest? Ever? That recently? Really? A reasonable person would scoff – and should scoff. After all, primates have wandered the Earth during several glacial maximums with mile thick ice sheets flowing as far south as New York. Although 1976 may have seemed like a cold year for those of us living in the northeast, it was nothing compared to living next to a mile thick ice sheet. Then again, I don’t know of any daily temperature readings from 25,000 BCE.

What would your reaction be to the following approach to fact checking? Under a headline claiming that 1976 was the coldest year ever, the article contains a lower paragraph explaining that 1976 was the coldest year “…since NOAA began keeping records?” Although there were precursor agencies, the National Oceanographic and Atmospheric Administration (NOAA) was formally created in 1970. A claim that 1976 was the coldest year “…since NOAA has been keeping records” is really a claim that 1976 was the coldest year since 1970. That may well be true; but does it support a claim that 1976 was the coldest year… …ever?

Maybe it is just a matter of tweaking the ‘records’ statement. What would your reaction be to the following fact checking? Under a headline that 1976 was the coldest year EVER, the article had a lower paragraph that said 1976 was the coldest year “…on record.” Although NOAA has an entire section explaining why it uses many different measures of Earth’s temperature in various data records, the article has chosen a data series beginning in 1970. Further research reveals that NOAA maintains other data which include many years with colder records than 1976, and some of these extend significantly back further than 1970. Some data series go back to the early 19th century include many years colder than 1976. But the article states that it uses the record series that only goes back to 1970. Would you consider the statement “coldest year on record” factual if they exclude other data series that go further back?

The basic problem with ‘ever’ is fundamental. If the intent of the authors is to lead the readers to believe that the Earth will be a temperature for which there is no record of life, then the statement is fraud. NOAA scientists have estimated paleo-climate data going back hundreds of millions of years. The terminology of these estimates includes “records.” Even if a publication relies on one particular data series to say that 1976 was the coldest year “…on record,” it doesn’t support the claim that 1976 was the coldest year… …ever. In the paleo-climate data are periods during which almost the entire Earth was frozen, so-called ‘snowball Earth.’ It would be scientifically invalid and a violation of journalistic ethics to rely on one post-1970 NOAA data series to report that 1976 was the coldest year on Earth, ever – even if NOAA put it on its webpage.

What was the hottest year… …ever?

OK, was 2020 the hottest year on Earth… …ever? Yahoo News put a Business Insider article in my feed saying that 2020 was the hottest year on Earth ever. I attach a screenshot. NOAA seems to agree on its webpage. NOAA seems like an authoritative source so should Yahoo News and Business Insider pass a fact check? No.

Saying 2020 was the hottest year on Earth ever is based on the same misleading methodology as saying 1976 was the coldest year ever. It relies on cherry picking what counts as a record and failing to disclose to the reader scientific observations that run counter to the claim. At least NOAA contains on its site the counter-evidence for those who look deeper. But Yahoo News and Business Insider failing to provide such context is a violation of journalistic ethics, in addition to being scientifically invalid. It relies on the same bias that would claim LeBron James and Magic Johnson’s triple doubles were unprecedented just because the year that Oscar Robertson AVERAGED a triple double was before the league kept official records labeled ‘triple double.’ No, 2020 was not the hottest year ever on Earth.

Fossil records, sediment records, and similar data estimate hundreds of millions of years hotter than 2020 inhabited by complex life. Furthermore, we are primates. According to the journal Nature, primates appear in the fossil record at least as far back as 55 million years ago. Relative to most of the period during which Earth has supported primates, 2020 was relatively cold, not hot. Earth temperatures have varied widely during those 55 million years, including much hotter and much colder than current Earth temperatures – and we are descended from some primates who adapted.

Furthermore, the change is not always slow. Primates similar to us have had to adapt to rapid global climate change in relatively recent geologic time. Fossils of hominids using tools in Tanzinia date back two million years. The supervolcano Yellowstone has had 3 mega-eruptions during that time, and there are more than a dozen other supervolcanoes, some of which are not dormant. The Earth has been hit by multiple large objects, such as recorded in Greenland near the Younger Dryas boundary. Patterns of rainfall and desertification have transformed huge swaths of continents, such as the greening of the Sahara and the jungle-ization of Brazil, multiple times – and we are descended from some primates who adapted.

Humans can live in a variety of conditions. The fossil record and the associated climate estimates are clear that primates aided by little more than fire, stone tools, and a sharp stick adapted to global climates much cooler and much hotter than the current Earth – and global temperature swings were at times rapid.

Earth is Warming According to Best Evidence

None of the above is a denial of climate change. Our atmospheric measurements and estimates show a trend of increasing temperatures. Modern estimates of the rise in ocean levels are confirmed by centuries of tide gauge readings (see link to NYC readings, for example).

Changing global temperatures and sea levels should be expected. NOAA points out that within a few generations the temperature of Earth will be significantly different from the temperature it was when humans first known complex architecture.

What NOAA characterizes as complex civilization is very recent. Complex human tool usage, sophisticated rock paintings, and consistent artistic forms go back 40 thousand years or more.

The current climate is nothing like the climate when humans learned to make clothes, communicate through symbols, use fire to transform materials, create boats, and live in villages. With such crude instruments, humans adapted to tropical jungle conditions, hot desert conditions, cold desert conditions, mountain conditions, arctic seaside conditions, and grassland steppe. There is no single global temperature or single bio-system niche which limits primates like us.

The Earth is Not Stable

Change is the only constant. Recall the advance and retreat of ice sheets. Almost all plant and animal species in the northern Eurasia and North America are invasive species. The same is true elsewhere. At the furthest back reaches of hominids, the Mediterranean Sea has completely dried up creating a superheated low altitude desert. During the much more recent limited time of Homo Sapiens, the Sahara Desert has been a grassland. Asia and North America have been connected, and Australia and Asia have been connected. If all humans died tomorrow, the Earth would continue to change, sometimes rapidly.

Earth’s bio-systems attempt to adapt, with plant and animal species competing aggressively for niches. The range of plant species expand and contract with changing temperatures and rainfall. Herbivore and carnivore species change their habitats or migratory patterns. Certain species, like beavers and humans, attempt to transform their landscapes – creating and eliminating niches for other species.

But change could reach a biological tipping point, or not. The pace of warming could exceed known rates of species migration, as estimated from the climate, fossil records, and current observations. On the other hand, those paleo-records do not include humans aiding species migration – or hindering it.

Adapt or Die

There is agreement that the Earth is not stable and change is sometimes rapid. There is agreement that the current observed trend is warming. There is agreement that if this trend continues, the seas will rise and growing seasons will change in location and duration. What is to be done?

Should the emphasis be on stopping climate change? After thousands of years of a warming Earth and rising seas, the global temperature stabilized about 8,000 years ago. Should policy be directed at keeping the Earth within a few degrees of its temperature since about 6,000 BCE?

Should the emphasis be on adapting to climate change? Other than the most recent 8,000 years, the global climate has alternated between warm and cold periods – sometimes rapidly. Should policy be directed at facilitating the migration of species as global temperatures change – or at least not obstructing species adaptation?

Adapting species includes humans. Even if the net effect of a warmer Earth is longer growing seasons, a net increase in pollen, and a net increase in plants (see NASA estimates since 2000), regional effects are likely to be catastrophic. Hundreds of millions of people live in areas likely to be inundated by the sea. What would the process of migration to a newly green Greenland look like?

Don’t Forget the Counter-Warning

The climate record also contains a counter warning. The Earth is subject to rapid changes in direction of heating and cooling. Super-volcanoes erupt. Objects hit the Earth. Sub-ocean rifts release gases. Species, like humans, transform ecosystems and release new gases. The possibility of technology that can withdraw greenhouse gases from the atmosphere is no longer unthinkable. If people could invest on targeting Earth’s temperature and sea level, what temperature and sea level would they pick? Don’t be too sure that everyone would want the temperature and sea levels that generally prevailed from 6,000 BCE to the present.

No, the year 2020 was not the hottest year on Earth ever. My statement is not a denial of any climate research. My statement is a simple citation to paleo-climate records relied on by scientists to evaluate climate change, and during which primates walked the Earth.

End

Sample Sources

For example, see Pagani et. al (2014) “Carbonate isotope records, distribution of vegetation, and reptile fossils, as well as recent TEX86 values indicate a very warm early Eocene (55–48 Ma), particularly at high latitudes, although probably cooler than the extraordinary warmth of the middle Cretaceous.”

M Pagani, Yale University, New Haven, CT, USA, M Huber, Purdue University, West Lafayette, IN, USA, B Sageman, Northwestern University, Evanston, IL, USA, 6.13 Greenhouse Climates
2014 Elsevier Ltd. All rights reserved, https://people.earth.yale.edu/sites/default/files/files/Pagani/2014%20Pagani_TOG.pdf

https://www.nature.com/scitable/knowledge/paleontology-and-primate-evolution-135304123/#:~:text=Primates%20first%20appeared%20in%20the,back%20as%20the%20Cretaceous%20Period.

WASPs are 0-fer

WASP was a common term meaning White, Anglo-Saxon, Protestant. Between the Civil War and World War I millions of migrants from southern and eastern Europe settled in America’s cities and industrial towns. Like Irish Catholics before them, the Catholic, Jewish, and Eastern Orthodox communities faced bigotry and resistance from some nativist elements in the United States. These nativist obstructionists were often called WASPs, especially if they were relatively wealthy.

WASPs are now an 0-fer as measured by occupation of traditional positions of federal power.

With the inauguration of Joe Biden,

  • President = Catholic
  • Speaker of the House = Catholic
  • Senate Majority Leader = Jewish
  • Chief Justice of the Supreme Court = Catholic
  • 6 of 8 remaining Supreme Court justices are either Catholic or Jewish
  • the 2 remaining justices were educated in Jesuit (Catholic) schools

Fannie Mae and Freddie Mac May Keep Retained Earnings

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) which securitize mortgages related to residential housing. Their federally legislated charters grant them benefits (such as special lines of credit) and costs (such as unique regulatory requirements) which other financial firms do not have, and which limit the lines of business they may engage in. Prior to 2008, the firm’s charters specified that they were for-profit, stockholder-owned enterprises. The United States Treasury took over the firms and placed them in conservatorship during the residential housing and mortgage collapse of 2008. The terms of the conservatorship were later amended so that Treasury sweeped any earnings from the enterprises, effectively making it impossible for the firms to exit conservatorship on their own. Twelve years later, the final fate of the GSEs remains uncertain.

On January 14, 2021, the federal regulator for the GSEs announced that the enterprises may begin keeping retained earnings. https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-and-Treasury-Allow-Fannie-Mae-and-Freddie-Mac-to-Continue-to-Retain-Earnings.aspx Retained earnings is one way for the enterprises to begin to rebuild a capital buffer. The announcement also included a statement that the enterprises would be able to seek some private capital and that Treasury agreed to make further adjustments to its interests.

The Federal Housing Finance Agency (FHFA) is the day-to-day regulator of the GSE’s financial condition and housing mission. However, important conservatorship financial agreements are with the United States Treasury. Therefore, the ultimate fate of the GSEs is unlikely to be decided by FHFA alone. Janet Yellen, former Federal Reserve chair, will reportedly be nominated to be the new Secretary of Treasury. Her views on the role of the GSEs in providing liquidity to mortgage markets, but also as a potential source of systemic risk, will influence the ultimate fate of the GSEs.

I will be sharing my thoughts on the charters of the GSEs and related public policies in upcoming blog posts. I will even weave several issues together with my thoughts on Modern Monetary Theory. The important thing today is that after nearly 12 years of limbo, the fate of over $5 trillion in mortgage-related assets is likely to be under discussion again.

Attempts to Remove President Trump from Office Constitutionally

Many in Congress intend to remove President Trump from office. Find below some facts and some related Constitutional text.

Facts

On Wednesday, January 6, 2021, there was a violent attempt to overturn the results of the 2020 presidential election. Following a speech by President Trump, a large crowd gathered at the Capitol Building, menaced and injured officers of the Capitol Police, forcibly entered the Capitol chambers, menaced Members of Congress and the Vice President, and tried to prevent the Members from executing their official duty to record and certify the Electoral College results for the 2020 Presidential election. The gathering, forcible entry, and many acts of insurrection were broadcast over live television or recorded on phone cameras and later made public.

There have been over 60 court challenges to the state elections for president and the Electoral College results. Those challenges failed to change the results of the election as reported by the officers of the various state election administrations. I believe pro-Trump litigants lost all but one or two cases. They lacked credible evidence capable of affecting the results.

Even acknowledging that failure to find X is different from confirming the absence of X, it is a fact that Joseph Biden won the popular vote, won the electoral contest of electors, and won the court challenges to confirm him as president. In sports terms, the call on the field is that Joe Biden scored a touchdown, his opponent threw the challenge flag, but the replay officials let the call on the field stand. Touchdown Joe Biden.

The assault on the Capitol was a violent attempt to overturn the election of Joe Biden. As to violent intent, some people built a gallows and chanted ‘Hang Mike Pence,’ the Vice President of the United States whose duties include presiding over the certification of the Electoral College votes of each state. As to motive, some people held ‘Stop the Steal’ signs, referring to the allegation that the Electoral College results were somehow fraudulent. As to violent result, if anyone did not see it live, video recordings of the mayhem are easily accessible from credible sources.

Some other relevant facts are still uncertain. Who is responsible for what? To what extent, if any, were the acts on January 6, 2021 premeditated? Among the crowd, were there people who intended to merely exercise their rights to free assembly and to petition for grievances, but who were present during the violent actions of others? To what extent, if any, did people in positions of public trust aid and abet the acts on January 6, 2021? To what extent, if any, did public officials arrange security preparations in ways that enabled the insurrection? To what extent, if any, did public officials delay or obstruct aid to the Capitol Police once the insurrection started?

My standard comment on second-guessing applies. There was more than one way for an insurrection. Officials undertook preparations without the benefit of hindsight. Example – reportedly the Mayor and Police Chief of Washington, DC sent a letter to the army (controls DC National guard) for help, but requesting that guard personnel be unarmed and kept away from the Capitol building. In hindsight, this appears like a mistake.

However, just as there could be intelligence warning of pro-Trump efforts to instigate crowds at the Capitol, there could be intelligence warning of pro-Trump efforts to direct the chain of command for federal troops. For example, one credible potential strategy would be for pro-Trump agents to use a crowd to cause violence at the capitol, send in federal troops, and then have the army declare martial law. Even if we do not doubt the loyalty of the guard, the mayor’s request to keep the Guard away from the capitol might not have been unreasonable with the facts revealed so far.

Further investigation is needed and will occur.

Constitutional Methods of Removing President Trump

Investigation takes time, and many Members of Congress want President Trump removed now. Members of Congress are considering various alternatives to remove President Trump. One method would be for the House of Representatives to impeach the president and the Senate to convict. This method would also bar the president from holding public office in the future. Some argue that under the 25th Amendment, a majority of the cabinet along with Vice President Pence can remove the president for incapacity, although some others believe that the 25th can only be used if a president cannot function physically. Some argue that under the 14th Amendment, the president cannot continue to serve because he has violated his oath to protect the Constitution. Some others dispute the scope of the 14th Amendment.

Here is the Constitutional text https://www.archives.gov/founding-docs/constitution that addresses impeachment, presidential incapacity, and violation of the oath to the Constitution. For additional context, I recommend that readers see The Constitution Annotated by the Library of Congress https://constitution.congress.gov/ and commentary by The National Constitution Center. https://constitutioncenter.org/ (Note that the Archives preserves some spelling that today would be considered incorrect.)

Article I, Section 3
The House of Representatives shall chuse their Speaker and other Officers; and shall have the sole Power of Impeachment.

Article I, Section 3
The Senate shall have the sole Power to try all Impeachments. When sitting for that Purpose, they shall be on Oath or Affirmation. When the President of the United States is tried, the Chief Justice shall preside: And no Person shall be convicted without the Concurrence of two thirds of the Members present.

Judgment in Cases of Impeachment shall not extend further than to removal from Office, and disqualification to hold and enjoy any Office of honor, Trust or Profit under the United States: but the Party convicted shall nevertheless be liable and subject to Indictment, Trial, Judgment and Punishment, according to Law.

Article II, Section 2
The President shall be… …and he shall have Power to grant Reprieves and Pardons for Offences against the United States, except in Cases of Impeachment.

Article II, Section 4
The President, Vice President and all civil Officers of the United States, shall be removed from Office on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.

Article III, Section 3
Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.

The Congress shall have Power to declare the Punishment of Treason, but no Attainder of Treason shall work Corruption of Blood, or Forfeiture except during the Life of the Person attainted.

Amendment XIV, Section 3
No person shall be a Senator or Representative in Congress, or elector of President and Vice-President, or hold any office, civil or military, under the United States, or under any State, who, having previously taken an oath, as a member of Congress, or as an officer of the United States, or as a member of any State legislature, or as an executive or judicial officer of any State, to support the Constitution of the United States, shall have engaged in insurrection or rebellion against the same, or given aid or comfort to the enemies thereof. But Congress may by a vote of two-thirds of each House, remove such disability.

Amendment XXV, Section 4
Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.

Thereafter, when the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that no inability exists, he shall resume the powers and duties of his office unless the Vice President and a majority of either the principal officers of the executive department or of such other body as Congress may by law provide, transmit within four days to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office. Thereupon Congress shall decide the issue, assembling within forty-eight hours for that purpose if not in session. If the Congress, within twenty-one days after receipt of the latter written declaration, or, if Congress is not in session, within twenty-one days after Congress is required to assemble, determines by two-thirds vote of both Houses that the President is unable to discharge the powers and duties of his office, the Vice President shall continue to discharge the same as Acting President; otherwise, the President shall resume the powers and duties of his office.

https://www.archives.gov/founding-docs/constitution-transcript

Capitol in Crisis

We all have our method of grieving. Part of mine is history.

Here is a picture within view of the Capitol Building during a national crisis – the Great Depression. Desperate ww1 veterans had constructed shanty towns (trespassing) in DC demanding early payment of promised war bonuses. They became known as the Bonus Army and their encampments known as Hoovervilles. After a July 28, 1932 conflict with police in which there were two deaths, Hoover ordered the encampments cleared. Douglas MacArthur began forcible removal with tanks (Patton a tank leader) and fixed bayonettes. Ike was also in the military. Reportedly, Hoover regretted the decision after early reports and rescinded. Reportedly, MacArthur continued clearing anyway.

To be white in America in 1932 was to be cleared of the Capitol vicinity with tanks and bayonets. Got news for you – America was a racist country in 1932. Two things can be true at the same time. (1) America can be racist. (2) Some whites in authority can be willing to violently confront some other whites. Anyone who tells you different is either ignorant or a liar.  Haymarket riots. Rizzos Raiders. Kent state. Branch Davidians. On and on. The examples are not all 100 years ago.

So, now president Trump has encouraged treason and the Capitol building has been desecrated. We need an investigation into whether the treason was aided and abetted by people in positions of public trust.

Many important issues of racial inequality need to be addressed. Some see the access of the crowd to the Capitol as proof of general white immunity from police response. Excuse me – stop telling young whites that they can confront the police without consequence.

First, it isn’t true. There were more whites than Blacks shot and killed by police in 2020, in 2019, in 2018,… Blacks are disproportionately shot by police, which does not mean whites are not shot, nor does it mean whites are shot less often.

Second, relying on a false belief of immunity, whites hearing about white privilege might increase the amount of stupid $hit they do, which is a threat to everyone.

Hoovervilles in Flames in Sight of the Capitol – LOC and Archives

My Thoughts on Today’s Treason

Today, people being labeled protesters stormed the Capitol building and stopped certification of the Electoral College results. I lived next to Capitol Hill and worked for Congressional staff for more than a decade. Here are my thoughts.

My thoughts are with my friends, neighbors, former clients, and former co-workers on Capitol Hill who just try to do their jobs and live their lives. My thoughts are with the staff and Congressional members whom I have known who were shot in a grocery store parking lot, shot at in a practice baseball field, and threatened countless times. My thoughts are with the Capitol Hill police who try to protect all of the above and still allow citizens unfettered access to their representatives. My thoughts are with AOC who has been threatened credibly countless times. My thoughts are with the 6 police officers who regularly had coffee at the table across from me after their shift protecting AOC ended – and they were willing to lay down their lives for her even though 5 of the 6 disagreed with her views.

My thoughts are with the Republic, for which it stands.

Be well.

https://www.bbc.com/news/live/election-us-2020-55558355

RIP, Walter E. Williams

Walter E. Williams passed away on December 2, 2020. The economics profession, George Mason University, and public discourse in general have lost an important voice. I was once his student and have fond memories of Dr. Williams telling some parable before applying all the traditional economic models and statistical evidence. I remember him as the true champion of calling out and opposing systemic racism. I find it tragic that in this year known for its ‘racial reckoning’ that so many people who claim to be allies of Blacks, Indigenous, and People of Color (BIPOCs) have such deep misunderstandings of what Walter Williams stands for. I hope they rediscover Walter’s book The State Against Blacks and realize the contributions he has made to identifying historic systems that perpetuated inequality.

How did Walter Williams influence my life? Three decades ago, I was a know-it-all grad student taking Dr. Williams’s labor economics class. Later, he served on my dissertation committee, temporarily assuming a lead role while my chair was on maternity leave. He was a great classroom instructor and an insightful outside reader of my efforts. He was one of my favorite professors. I do not claim to have a professional relationship beyond that, but his influence on me has been pervasive.

I learned four important things from Dr. Williams. First, I did not know it all, or even close – and he did not suffer fools lightly. Second, Dr. Williams did not claim to know it all; he just claimed to apply the tools of microeconomics to individual choices amidst everyday problems. He really should have been the author of Freakonomics. Third, sometimes seemingly neutral government policies conceal systemic racism. Fourth, the unit of action is the individual. This individualism as method was the foundation of microeconomics at that time, but there is enormous social pressure to transfer the unit of action to groups, or to confuse methodological individualism with selfishness or rugged individualism. No group-think in Dr. Williams’s class.

Years later, Walter’s mode of analysis served me well when I went to law school – the unit of action in the administration of justice must be the individual. Justice involves an individual defendant on trial for his or her own actions. Individuals cannot be held responsible for actions by others who seem to share some similar characteristic. Groups cannot be held responsible for actions of an individual who seems to share some characteristic. Even class action suits rely on named plaintiffs to represent the class and merely attempt to aggregate cases with similar facts.

Walter’s influence goes well beyond my own education. The thousands of students whom I have taught are unwitting beneficiaries of Walter’s insistence on high standards, yet understanding that none of us not know it all. I attempted to pass on Walter’s focus on problem solving technique and reliance on evidence. Many academics claim to follow the science wherever it leads, but all too many wilt when the results they find are counter-intuitive or politically unpopular. Walter truly followed the evidence wherever it led. In Walter’s case, it often resulted in disagreement with what many people wanted him to believe.

The current anti-racism movement as led by formal trainers (eg., https://www.gse.harvard.edu/news/uk/20/03/what-makes-effective-anti-bias-training) claims to be uncovering implicit bias and healing the trauma caused by social systems that deliver inequality, even if beneficiaries were unintentional. Anti-bias trainers claim that whites harbor bias against BIPOCs, even if the bias is implicit, and all whites are beneficiaries of systemic racism even if they don’t intend to be so. Past Progressive heroes are being dismantled, and past Progressive housing policies are being re-evaluated because government used them to redline Black neighborhoods. Anti-bias trainers seem to acknowledge that other people may be wrong on policy, even when those other people have good intentions. It is my hope that a re-evaluation of Walter Williams could also lead anti-bias trainers to show some humility and acknowledge that they themselves might be wrong occasionally on what causes and perpetuates inequality.

Walter’s research demonstrated how several government policies disproportionately harmed many Blacks, including some examples intended to help Blacks. Before turning to race, let me offer a Walter-like illustration. There are some public policies that can be more effective without uniformity. Consider feeding the hungry. We do not need to eat in community soup kitchens to assure that poor people have access to food. Nor do we need to give the same food to everyone. But if government does approach the problem with soup kitchens or equal distribution, then government has to decide what meals to serve. Immediately, we run into both physical and cultural obstacles. Some people of Irish descent have blood conditions harmed by iron-rich food, while some other people need iron-rich food. Some religions have conflicting food restrictions. If government chooses to solve hunger by providing food itself, then there will be winners and losers – even though there doesn’t have to be.

Government decisions are not random. Consider decisions made by simple majority rule. If in the food example, there are five people, three of whom need extra iron but two that are sensitive, the two are going to lose systemically. It turns out that government-delivered equality can perpetuate inequality. In this case, there was never a need to have everyone eat the same food. Why adopt uniform food distribution? Maybe it was a desire to eradicate inequality. Maybe it was the belief that food was too important to be left to non-government institutions. Or, maybe lack of faith in individuals to choose their own food. But whether one of these reasons or some other, government equal food distribution can lead to unequal equality.

I believe that Walter would have liked the food example, and would not be surprised if a similar illustration can be found in his voluminous writings. Certainly, I chose it to give readers a taste of his classroom style.

His academic writing was more practical. In The State Against Blacks, Walter identified several policies that he believed perpetuated inequality. One example was the taxi-cab cartel system common in many cities prior to Uber. Prior to the medallions, entrepreneurial people had relatively low cost to enter the taxicab business as independent operators. Taxi-cab regulation raised the cost of entry, perpetuating ownership relations at the time of formation. As a result, regulation often had the effect of perpetuating inequality.

Legal activists worked to challenge some practices Walter identified. For example, the Institute for Justice (IJ) teamed with local NAACP chapters to challenge local taxi regulations that had the effect of cartels. After fifty years of not licensing a new taxi-cab firm, the city of Denver licensed Freedom Cabs after pressure from the NAAACP and IJ in 1995. (https://ij.org/case/jones-v-temmer/) Denver’s blanket ownership denials seem race neutral on their face, but none of the taxi firm owners were Black when the city started enforcing the cartel.

He found similar tendencies for regulations for occupational licensing. Regulations to assure that tradespeople, doctors, etc. are fully qualified to perform their professions are common. However, some regulations in the name of consumer safety are thinly veiled attempts to protect cartels similar to the taxi example above. Again, there is an odd resistance among some Progressives to his insights. In 2015, the Obama Administration published its report on occupational licensing. The report pays very little attention to the potential for licensing to be used to perpetuate systemic inequality, although it does mention potential impact on immigrants. (https://obamawhitehouse.archives.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf). Perhaps the new racial reckoning can rediscover Walter’s work on how government licensing regulation can perpetuate inequality.

Probably most controversially, he also found systemic inequality in minimum wage laws. Walter dug through employment and wage data sources of the early twentieth century. He found that the gap between unemployment rates between whites and Blacks expanded with enactment of wage and unionization laws.

Context matters. Unionization was encouraged both by New Deal labor department policy and by government contracting policies. But, some unions were still openly racist and discriminated against Black workers during the 1930s. In some cases, New Deal labor policies had the result of firing Black workers and hiring firms with higher paid white workers. But a firm’s own profit motive would tend against such a move. In this setting, minimum wage laws had the result of removing the incentive of firms to switch away from unionized white workers. (see pages 180-181 of file:///C:/Users/Owner/Downloads/THE_NEW_DEAL_VOLUME_ONE.pdf)

Walter spent much of his later career translating the jargon-ridden work of economists for the general public. I regret not having the opportunity to debate hundreds of these topics with him. But most of all, I regret that he will not see first-hand the inevitable return to his research topics. I just hope that today’s analysts have the fortitude to follow that research wherever the evidence leads, even if some of their well-intentioned equity policies turn out to be wrong.

Walter Williams, I will miss your little chuckle that preceded your parables. RIP.

Election Results and Presidential Transitions

President Trump needs to cooperate with Mr. Biden’s transition team. Full stop.

President Trump does not need to show grace, although he should. He does not need to drop his legal challenges to election administration in selected states, although he should. He does not need to officially concede, although he should. But he does need to direct his presidential staff and agency principals to provide briefing materials, office space, and other assistance to Mr. Biden’s transition team. In kind, the media needs to accurately report administration transition preparations, not Trump tweets.

There is a difference between laws and norms. Both are important. Candidates conceding elections, showing grace, dropping challenges, and calling for unity are good norms that help make our republic more resilient. But none of those practices are law. Laws such as The Presidential Transition Act (PTA) provide a legal framework for continuity of operations. https://www.govinfo.gov/content/pkg/PLAW-114publ136/pdf/PLAW-114publ136.pdf

What is the current status of transition preparations? Back in April 2020, the Whitehouse directed agency personnel to prepare for an orderly transition. See Executive Order M-20-24. https://www.whitehouse.gov/wp-content/uploads/2020/04/M-20-24.pdf The executive order required compliance with the PTA with a deadline.

“Not later than September 15, 2020, and in accordance with subchapter III of chapter 33 of
title 5, United States Code, the head of each agency’ shall ensure that a succession plan
is in place for each senior non-career position in the agency.”

As a norm, the president should not challenge whether or not Mr. Biden is “an eligible candidate or president elect” within the meaning of the PTA. “(c)The terms ‘President-elect’ and ‘Vice-President-elect’ as used in this Act shall mean such persons as are the apparent successful candidates for the office of President and Vice President, respectively, as ascertained by the Administrator following the general elections held to determine the electors of President and Vice President in accordance with title 3, United States Code, sections 1 and 2.” https://www.law.cornell.edu/uscode/text/3/102

Readers interested in more detail are referred to CRS Report RL34722, coordinated by L. Elaine Halchin. https://fas.org/sgp/crs/misc/RL34722.pdf

Disastrous Transition – Hoover and FDR

Incumbent Herbert Hoover lost to Franklin Delano Roosevelt (FDR) in November 1932. Inauguration at that time was not until March 1933. FDR is generally given credit for gathering a range of experts in Warm Springs, Georgia to hit the ground running in March, such as this article in the Atlantic. https://www.theatlantic.com/magazine/archive/2019/03/fdr-herbert-hoover-big-government/580456/ What such articles often omit is that rumors of FDR’s intended policies roiled financial markets between November and March. Internationally, there was a run on the dollar because it was rumored that FDR would depreciate the value of the dollar. https://www.federalreservehistory.org/essays/banking_panics_1931_33 Domestic banks suffered a similar run both as domestic default rates soared and as their gold reserves were drained by worried counterparties. Upon taking office, FDR is credited with halting the crisis by declaring a bank holiday on March 6th.

But is it OK to ask if the panic subsided after March 6th because the system had already collapsed during the prior week? This is how the Federal Reserve characterizes the week prior to FDR’s inauguration.

“The Fed again raised discount rates and acceptance buying rates in February 1933, as it had during the fall of 1931, to help slow the drain on gold reserves. Interest rates rose across the board. But once again, the Fed did not increase its open market purchases significantly (Friedman and Schwartz 1963). In response to the large gold losses in New York, the Chicago Fed provided loans to the New York Fed on March 1 and 2, but refused the New York Fed’s request for another loan on March 3 out of concern for its own reserve ratio. The Federal Reserve Board then suspended the gold reserve requirement on March 3 (Wicker 1996). Rather than containing the panic, “The System itself shared in the panic that prevailed in New York” (Friedman and Schwartz 1963, 327), and even the Federal Reserve Banks were closed on March 4.”

Hoover and FDR did not cooperate between November and March while the financial system collapsed for the third time in four years. Accounts like those in the Atlantic believe Hoover intentionally undermined FDR in order to prepare for the 1936 election. What is absent from such reports is that FDR refused to cooperate with Hoover. FDR wanted Hoover to shorten the transition time by appointing FDR Secretary of State and resigning. https://www.newsweek.com/alter-what-obama-can-learn-fdrs-dodge-84987 Hoover criticized FDR’s rumored plans and wanted FDR to comment publicly because in Hoover’s view the run on the dollar and the bank runs resulted from lack faith in FDR’s commitment to the gold standard. Rather than take Hoover’s calls or make a public announcement, FDR responded that he believed that people were withdrawing from banks because they lacked faith in banks.

The Great Depression was already a disaster prior to the 1932 election. However, the presidential transition period saw the worst of the state bank failures and the international run on the dollar. One has to wonder if the transition off the gold standard could have been done with less financial collapse if Hoover and FDR had cooperated.

Lessons for Trump and Biden

Joe Biden has already signaled his willingness to cooperate. Donald Trump needs to cooperate with the Democratic transition team even if he defies other norms for concession, grace, and calls for unity. Presumably, the agencies began their preparations in April and executed the requirements of the PTA by September 15, 2020 pursuant to the Whitehouse’s executive order. President Trump can pursue his legal challenges (which I believe are doomed to fail) while preparing the new administration if (when) the challenges lose. Combative presidential transitions can make a bad situation worse. Year 2020 has been bad enough.

Modern Monetary Theory, Part 2: Colonial Dependents, Sovereign Money?

This is the second post in my mini-series on “soft money” Modern Monetary Theory (MMT) to the left, “hard money” Goldbugs to the right, and mainstream economists between. Mainstream economists worry that soft money economists lead their countries on the path to hyperinflation and sovereign bond default. MMT scholars argue that many of the examples used by mainstream economists are inapplicable because the governments cited were not sovereign money issuers. This post explores what MMT scholars mean by sovereign money – with a fun detour to the supposedly sovereign money of colonial subjects.

The MMT concept of sovereign money can be quite subtle. Today, we will see how some MMT scholars argue that British North American colonies in the 18th century were sovereign money issuers despite British mercantilism and colonial lack of what most people would consider sovereignty. Yet, those same states are no longer sovereign money issuers despite achieving independence and amending the new Constitution with the 11th amendment’s guarantee of state sovereign immunity against its creditors. Sorting it out will require revisiting an old debate in economic history, was there a money shortage in the English North American colonies?

Under English Mercantilism, the colonies had to return English coins to the mother country (England). As a result, other forms of payment circulated as the medium of exchange in colonial North America, including the Spanish dollar. Graphic 1 shows some North American money used during the colonial era. The colonies experimented with a number of paper alternatives. Many of these items were not designated money through a legal tender law compelling private sellers to accept them as payment; rather, they often circulated organically like the giant stones of Yap. (I apologize for the blurriness of the attached pic of colonial money from the Museum of American History.)

Reminder – The first post in this series used the giant stone money of the island of Yap to illustrate the standard “greater fool” theory of the origins of commodity money. The stone rai used on Yap demonstrated how an evolved commodity money can rely on a ledger to track money balances, not the commodity itself, even if the commodity sinks to the bottom of the ocean. Mutual ascent of the value of ledger balances replaces any intrinsic value of the commodity, if it ever had any. A working financial system can evolve money without real backing, but that doesn’t mean it did.

Randall Wray and other MMT scholars reject the commodity money framework as historical fact and as a framework to evaluate public policy. They believe that government power to spend and compel tax payments for redemption is the true origin of money. People willingly accept a government spending receipt as a medium of exchange because somebody will have to pay taxes, not just because it has been designated legal tender. Importantly, while MMT scholars say government spending receipts are money, they distinguish fully “sovereign money” from other government issued money. Therefore, some MMT scholarship is an objective assessment of the options available to a government that issues “sovereign money,” and the consequences of those options. Other MMT scholarship is a normative case for adopting the institutions of “sovereign money.” So, what do MMT scholars mean by “sovereign money” and what are some examples?

Sovereign Money Institutional Requirements

  • Government chooses the money of account in which money balances are denominated
  • Government imposes tax obligations denominated in its chosen money of account
  • Government issues currency denominated in its chosen money of account
  • Government accepts the currency it issues to satisfy its tax obligations.
  • Government obligations against itself (bonds) are denominated and payable in its currency.
  • The rate of exchange between this government’s sovereign money and other government’s sovereign money is allowed to float.

Some examples may help. The United States government is a sovereign money issuer. It chooses the accounting for money (the US dollar), imposes taxes in US dollars, issues currency denominated in US dollars, issues bonds denominated in US dollars, US taxes and US bonds are payable in US dollars, and the rate of exchange between US dollars and other currencies is allowed to float. The US government also has the power to determine the interest rate on its dollar denominated obligations.

The state of Illinois is not a sovereign money issuer. Illinois does not control the issuance or accounting standard for the currency used to satisfy its tax obligations or to redeem its bonds. The rate of value between an “Illinois dollar” does not float against the value of a “Nebraska dollar.” The state of Illinois cannot determine the interest rate on Illinois-dollar denominated assets.

Greece is not a sovereign money issuer. Greece is part of the European Union and relies on the EU currency, the Euro. Greece is more sovereign than Illinois in many ways, but Greece does not determine the value of the Euro just as Illinois does not determine the value of the US Dollar. Greece does not control the issuance of Euros. Greece’s bonds and tax obligations are denominated in Euros, not a currency it controls. Whatever its sovereignty in other dimensions, Greece is not a sovereign money issuer in an MMT perspective.

The case of Denmark is more nuanced. Denmark is part of the EU, but issues its own currency, the Danish Krone (DKK). At first blush, Denmark appears to be a sovereign currency issuer. It controls the accounting for DKK, issues currency and bonds denominated in DKK, and payment of DKK satisfies tax obligations and bond redemption. In theory, Denmark could regulate the interest rate of its obligation or let its currency float against other sovereign currencies. However, Denmark typically pegs the value of the DKK to the Euro rather then let its exchange rate float. Proposals for the EU to issue bonds always require addressing the rate at which Denmark and other EU members who do not use the Euro will be required to contribute to common bond obligations. Commitments by Denmark to maintain its peg to the Euro or to contribute to common bonds at a fixed conversion rate are not the hallmarks of a sovereign currency issuer.

Caution – it is a mistake to conclude that the general hierarchical relationship determines sovereign money from the MMT perspective. The United States participates in many multinational organizations, some of which it has ceded full or partial sovereignty over narrow policy areas. A treaty binding US acceptance of a UN or WTO decisions does not negate the US status as a sovereign money issuer unless it affects the six criteria listed above.

MMT scholars argue that many mainstream economic policy concepts do not apply to governments which issue sovereign money. First, acceptance for tax payment, not declaration of legal tender for private debts, creates money status. Private markets willingly accept the sovereign money because they can rely on someone having to pay tax obligations to accept them in return. Taxpayers create demand for money that satisfies the tax payments even for exchanges between two non-taxpayers for the same logic as the “greater fool” theory of commodity money. Issuers of sovereign money always have the ability to redeem and retire their bonds because the bonds are denominated in their own sovereign currency. Should government obligations be transferred to foreign hands, the floating exchange rate ensures the ability to redeem any amount of obligations.

Sovereign Money Consequences in MMT View

  • Sovereign Money Issuing (SMI) Government cannot run out of money
  • SMI Government interest rate policy, not bond markets, determines the terms of government finance
  • SMI Government does not face a budget constraint as conventionally defined
  • SMI Government can always ensure employment of its entire population
  • SMI Inflation is caused by demand for real resources, not the supply of money

Some critics of MMT issue dire warnings of financial collapse. Critics accuse the MMT scholars of believing that governments should (a) spend without limit, (b) act as if deficits don’t matter, and (c) operate government with unconstrained budgets. Critics argue pursuing the above three policies, which critics believe would require central banks to print money, would lead to hyper-inflation.

But MMT scholars deny the advocate for profligate spending. MMT scholars accuse the critics of conflating positive theoretical assessment with normative advocacy. For example, MMT scholars believe that mainstream scholars overemphasize a link between money creation and inflation. MMT is not unusual in believing that increased government spending during a period of high unemployment or otherwise slack economy does not necessarily cause inflation. More controversially, the MMT scholars deny that central banks need be the primary tool of money creation – remember that to an MMT scholar the receipts of government spending can circulate as money until they are redeemed as taxes.

Something about MMT seems wrong to people familiar with history. There seem to be too many examples of monetary basket cases and budget constrained countries to believe governments can’t run out of money – whether winners or losers in war, whether a developed economy or part of the developing world, whether in the modern era or long past history. Both victorious post-revolution America and defeated post WWI Germany experienced hyper-inflations. From Argentina to Zimbabwe, a variety of countries struggle with exchange rate collapse, inflations, and sovereign bond defaults.

MMT scholars are not blind to these historical events. In each case, MMT scholars attempt to identify an institutional feature that they say disqualifies the example as a sovereign money issuer, or find a catastrophic event in the real economy that they hold responsible for the government’s financial straits. Some MMT scholars may even suggest that developing nations are not yet ready for, or have not yet achieved, the ability to be a stable sovereign money issuer. This leads to the question of whether there are foundational conditions necessary for sovereign money.

It is easy to be misled into thinking that some level of economic development is the pre-requisite for issuing sovereign money. This is not the case. A sovereign money issuer need not have a powerful military, or issue the internationally recognized reserve currency, or closely regulate its banking system, or act as the central hub of a trade network. In fact, the government need not be the only monetary authority. Advocacy for issuing a parallel currency is not an uncommon application of MMT. Randall Wray believes that the American colonies illustrate the possibilities of a parallel currency and sovereign money even in the context of a dependent colony.

Monetary Experiments in the American Colonies, 1607-1787

Randall Wray relies on the work of economic historian Farley Grubb to describe the colonial monetary regime. https://www.nber.org/people/farley_grubb?page=1&perPage=50 Grubb’s work casts doubt on a relationship between money printing and inflation.

The quantity theory of money is applied to the paper money regimes of seven of the nine British North American colonies south of New England. Individual colonies, and regional groupings of contiguous colonies treated as one monetary unit, are tested. Little to no statistical relationship, and little to no magnitude of influence, between the quantities of paper money in circulation and prices are found. The failure of the quantity theory of money to explain the value and performance of colonial paper money is a general and widespread result, and not an isolated and anomalous phenomenon. https://www.nber.org/papers/w22192

Wray interprets Grubb’s work on colonial American monetary institutions as an illustration of MMT principles. The general policy of the British mercantilist policy in the colonial period was to accumulate currency in the mother country. Pursuant to that policy, British metal coinage was shipped back to England. When British interests favored colonial assistance against rival powers, the colonies were permitted to issue paper bills of credit to pay soldiers and acquire supplies. Colonies issuing and redeeming their own bills of credit became common, with outstanding paper bills forming part of the circulating money supply. An example from the 1690 Prince William’s War was printed with the following.

“This indented Bill of Five Shillings due from the Massachusetts Colony to the Possessor
shall be in value equal to money and shall be accordingly accepted by the Treasurer and
Receiver Subordinates to him in all Public payments and for any stock at any time in the
Treasury – New England, February the third, 1690. By order of the General Court.” file:///C:/Users/Owner/Downloads/historyo.pdf

Wray argues that colonial paper satisfies sovereign money. A Virginia Bill or North Carolina Bill was spent in units of Virginia or North Carolina pounds, and satisfied a corresponding tax obligation. Colonies could not rely on their bank regulatory authority to create money because of British review by the Board of Trade. Instead, the fact that a colony accepted its own bills for tax obligations encouraged circulation. The value of colonial bills floated against each other and circulated simultaneously.

MMT scholars place importance on the fact that these circulating bills of credit were government spending prior to being money or taxes. It was not unusual for these bills of credit to be destroyed upon redemption by the colonial government. In the MMT view, the colonial spending created money during the period of circulation. Redemption of the bills through taxation was effectively an inflation fighting move in their view. In colonial America, MMT scholars do not see the primacy of a commodity money magnified by banking balances.

Implications and Further Questions

The MMT scholars have invited us to revisit the origin, history, and nature of money. The seemingly obscure example of colonial North America has many implications for modern governments. For example, to what extent could countries in the Eurozone avoid a future crisis similar to Greece by allowing modern equivalents of circulating bills of credit? On the other hand, to what extent were colonial bills of credit effective because of an implicit relationship to the British crown, if any?

A system of multiple sovereign moneys creates exchange rate risk for international traders, financiers, and travelers. Even if MMT’s controversial theories of taxation, money, and inflation are true, would multiplication of currencies be stable in an increasingly globalized world? Consider the following quote from 1741 colonial America. ““There certainly can’t be a greater Grievance to a Traveller, from one Colony to another, than the different values their Paper Money bears.” An English visitor, circa 1742 (Kimber, 1998, p. 52). https://eh.net/encyclopedia/money-in-the-american-colonies/

These first two posts have been focused on convincing readers that Modern Monetary Theory’s conception of money is different from mainstream economists in a fundamental way. Unlike mainstream economists, MMT scholars do not start with commodity-based payment system and then build a money multiplier through the banking system. MMT scholars start with the receipts of government spending, redeemed through taxes, as the foundation for the payment system. Using the mainstream framework to evaluate the policy suggestions of MMT scholars assumes the MMT scholars are wrong from the beginning. In order to assess MMT, it is better to approach their theories about government spending, taxes, and payment systems with the same critical mind of any other theory. Future posts will discuss how an MMT approach to macroeconomic policies would differ from current approaches and discuss legal obstacles and options to implementing MMT.

Modern Monetary Theory, Part 1: Stone Money

This is the first post in a planned series on Money, Banking, and Macroeconomics.  Woohoo!  Recently, mainstream economists opposed the nomination of Judy Shelton, a “hard currency” economist, to the Federal Reserve Board.  On the other hand, mainstream economists also oppose the growing influence of “soft currency” economists such as Stephanie Kelton who is a Modern Monetary Theory (MMT) advocate.  MMT is popular among Democratic Socialists like Bernie Sanders and AOC. Yes, I chose Judy Shelton and Stephanie Kelton as the opposing representative economists because it would be confusing.  The study of Money, Banking, and Macroeconomics is confusing, so it seemed fitting. 

In small chunks, this series will provide my initial assessment of (MMT).  What is money? At a minimum, money is the means of payment, also known as the medium of exchange. Money may also serve other purposes such as a store of value and standard of account. What better way to explore debates on hard currency and soft currency than an exhibit of stone money?

Stone Age Currency: Sophisticated Money

The Smithsonian Museum of Natural History exhibits a giant stone circle from Yap, an island in the Pacific.  The stone, called a rai, is taller than I am and is much too heavy and unwieldy for a person to carry around.  (See picture). Can not imagine putting one on a raft or in a canoe and shipping it among Pacific islands.  Yet, people across the Pacific used these giant stones as a medium of exchange.  Exhibiters say that a rai would be used for the transfer of ownership of land and certain other transactions and ceremonies, and a parallel medium was used for other transactions.  Although the rai system may seem primitive, it is actually quite sophisticated with many lessons for monetary economics.

Lesson 1: Greater Fools – Almost any token can serve as a medium of exchange for as long as sellers believe they can unload the token on someone else.  A seller need not have a use for the medium as long as there is a greater fool willing to accept it for desirable.  Characteristics often cited for a commodity evolving naturally to this function include something that is easily divisible, durable, easily transportable, and difficult to counterfeit.  What!  A giant stone rai does not seem to fit the bill, at least at first blush.

Lesson 2: Only Need a Ledger – Do we really need to carry around a rai?  Or silver shavings?  Or wampum shells?  Or metal badges stamped to assure their weight (coins)?  Badges?  We don’t need no stinking badges!  We only need a ledger.  Someone needs to keep track of who owns how much of the medium of exchange.  Maybe write it down in a ledger, or keep track with colored beads in pottery representing each person (I made up the beads/pottery example).  The point is, transporting a rai is unimportant if someone just keeps track of transfers of ownership.  If you think about it, your bank account is just a line in a giant ledger.  The use of “Dollar” coins dropped out of use for many transactions with the rise of checks, long before the rise of debit cards.

Apocryphal Story: That Guy – An economic historian of money tells a rai story in Money Mischief.  In general, the giant stones were not physically transported; islanders just kept track of who owned them.  But every society has “that guy.”  Someone insisted that a buyer ship him his stone.  A storm came and sunk the that particular rai to the bottom of the ocean. Since everyone agreed on the transaction, and on the existence of the stone, the “ledger’ was adjusted just as if the rai had been transported.  Even if this story is fanciful, its lesson is real.  Once there is a ledger, there need not be any actual commodity medium of exchange.

MMT Proposition 1: Tax obligations create a medium of exchange –  Some MMT economists such as L. Randall Wray object to the ‘greater fool’ story of the evolution of commodity money.  He believes money evolved from tax obligations.  An authority that has the power to compel tax payment necessarily has the power to create money.  Some people will have to pay the taxes; therefore, even people who don’t have to pay the taxes can count on someone who does have to pay the taxes being willing to accept the announced token as a medium of exchange.  Among the evidence, Wray and others point to archaeological and historical evidence linking tax obligations and the development of writing systems. 

MMT Proposition 2: Government IOUs are Necessarily Redeemable – Wray and others assert that if there is an authority with unlimited ability to compel tax payments then government cannot go bankrupt.  If government accepts its own IOUs in payment for taxes, then any apparent surplus in IOUs can be redeemed.  A corollary of this view is that government causes inflation through its demand for real resources – displacing non-governmental uses – not by printing too much money.  Excess money can be soaked up through higher taxes.

Question: Was a Giant Stone the Chicken or Egg?  Wray emphasizes the history, law, and accounting of money.  He emphasizes the assertion that government spending precedes money, with the obligations themselves serving as the credible medium of exchange.  Which came first, the spending or the money?  If economist Wray is correct, then the giant stone rai in the South Pacific were government spending prior to money.  But does it really matter? The seas are 150 feet higher than when humans built monumental structures like Gobekli Tepe in modern Turkey. Would a finding by underwater archaeologists that showed commodity money preceded taxes negate MMT’s insights, or the reverse confirm them?

Complications – MMT scholars do add more sophistication to this overly simplistic story.  What if there are multiple tax authorities over the same people?  What if people in one taxable location want to exchange with people in a separate taxable location (exchange rates)?  What if there are Constitutional restrictions on the ability to tax?  What if the tax authority cannot set the rate at which obligations can be redeemed?    

Preview: Sovereign Money – My next ‘soft currency’ post will be on MMT conception of what they call sovereign money, and what they say is not.

Correction – The Turkish archaeological site originally referred to Catalhoyuk, which dates back to 7k BCE. It has been corrected to read Gobekli Tepe, which dates back to 10k-8k BCE. Point remains the same.