A credentialed economist should put a stake through the heart of the heart of MMT.
Two simple critiques:
1) Relative to a financial statement (i.e. budget), it is difficult to predict and measure inflation. This difficulty lowers the likelihood of government fiscal responsibility and increases the likelihood of devestating inflation.
2) A basic second-order effect: What happens when people realize transfer medium is being debased? They'll obviously try not to store value in that transfer medium. How will volatile inflation affect the use of the transfer medium? Why wouldn't users switch to a better store of value, like every single developing market that has ever lost control of its currency?
I am embarrassed for profession of economics that MMT is being entertained as a viable "new-old idea." Of course the government can debase the numéraire of the economy. Obviously, doing so transfers value from non-government to the government similar to taxation. The financial statement of the economy has to balance. This is merely a backdoor way of transferring assets in a deeply unaccountable way.
> A credentialed economist should put a stake through the heart of the heart of MMT.
MMT is, AFAICT, pretty soldily grounded recitations of facts about fiat money that are widely recognized.
It's been embraced by advocates of monetizing fiscal affairs because, well, it says that there is virtually unlimited short-term capacity to do that in a fiat-money system. But it's exactly that temptation in a fiat money system that motivated the strong separation we currently have between fiscal and monetary policy, which includes the whole structure of government financing operation g as if it were more like a normal participant in the economy.
OTOH, the entity charged with fiscal policy in the US has either been actively hostile to real needs or asleep at the switch for most of the last couple decades, and monetary policy alone, as currently structured, directs money initially into what is often the wrong place, though fiscal policy can help move it to the right place. The problem with the MMT driven “solution” is it involves concentrating both fiscal and monetary policy in the hands of Congress, and if Congress wasn't being completely worthless we wouldn't have the problem people are turning to MMT to fix.
If Congress were doing good work with fiscal policy but the Fed was screwing it up with poorly chosen or simply negligent monetary policy, then there would be a problem that the way MMT is being invoked would present a solution to.
MMT advocates want Congress to run the economy? Are you out of your freaking minds? They haven't even managed to pass an actual budget in the better part of a decade!
Let me tell you a secret, Congress ALREADY runs the economy. They just ACT like they don't. Notice they had no issue implementing tax cuts (increasing money supply) AND increasing military spending (increasing money supply). They act like they don't because otherwise, people might wonder "Hmm, if they can do that for the rich, and they can do that for the military, maybe, just maybe they can do that for me!". And then people might get strange ideas like, maybe we can afford universal health care, maybe we can have a system oriented towards their needs.
So Congress doesn't want the people to know they already control the economy, because otherwise, people might want them to do the job they elected them to do.
There is a good case for the exact opposite of what you suggest. Congress pretends like they have power over the economy, but at best they have minimal or random effects. They promised economic growth with tax cuts, but what are the real effects? hard to even tell.
I think this is also why you get certain peanut gallery members complaining - the way that MMT is being brought into the conversation is first at odds with a lot of ideology, so it is being misinterpreted for intention.
"A credentialed economist should put a stake through the heart of the heart of MMT" -- yet somehow all the critiques made by credentialed economists have been based on misunderstanding MMT.
"The financial statement of the economy has to balance." The heart of MMT is that the imbalance between money coming in to a powerful central government and money going out is the primary contributor to growth (or contraction) of the economy as a whole. When it is balanced, the economy is neither growing nor contracting. When the government increases the public debt in a sustainable manner (i.e. people are willing to buy all the Treasury bonds being offered) the economy improves.
"This is merely a backdoor way of transferring assets in a deeply unaccountable way." It's not backdoor and it's not unaccountable; it's tax policy.
It's tax policy that is designed to be non-transparent. When the government collects $20 dollars from my income I know exactly what kind of value is being collected. When the government prints $20 it's not transparent what kind of value is being redirected to the government.
> The heart of MMT is that the imbalance between money coming in to a powerful central government and money going out is the primary contributor to growth (or contraction) of the economy as a whole.
Only if our measures of economic strength are fundamentally measuring how much money is in it. If what is important is prudent use of resources then there is scant evidence that that is a good idea. And the reason we have an economy is to work out what 'prudent use of resources' means in practice. Governments have no advantage over private individuals in husbanding resources over the generations (look at how many governments make a pigs ear out of setting up pension, retirement systems and infrastructure spending).
Strategically, MMT theories that I've read seem to say that government is a positive, but if we can't be sure who is paying for it maybe nobody is, so the net impact is probably also positive.
That is clearly crazy, but also looks uncomfortably like an honest take on what a lot of governments do in practice. When the government takes on debt, it isn't obvious who is paying for it - the lender thinks they have an asset, so it isn't them. Identifying which taxpayers will pay the money back is as hard as unwinding who money printing is actually hurting.
This critique (and it is the by far the most common critique of MMT I've heard) boils down to this:
"MMT may very well be an accurate depiction of reality, but the problem is that if people start to see it as an accurate depiction of reality then inflation might go up."
That's definitely a problem for a certain class of people (creditors and investors).
MMT is controversial because, if true, it's undermining a lie that is supporting those interests ("keeping inflation as low as possible") over the interests of society as a whole.
This does not make sense as a rebuttal. The MMT'ers and the monetarists agree that runaway inflation is very bad. Essentially what you're doing here is confirming the misperception that MMT is just left-wing back-rationalized voodoo economics, which it is not.
Help me understand where I went wrong reading this. I read, paraphrased: "The problem with MMT is that if everyone believes in it, they'll do things that cause inflation to rise", and "This is a problem primarily for the investing class".
That's accurate. Note that I did NOT say that it would cause runaway inflation.
Runaway inflation (or hyperinflation, if we're being terminologically precise) == Inflation > 50% per month == Zimbabwe destroying its farmland and industry and having nothing useful to export and thus not having an economy that can support the current level of spending.
Rising inflation == The US deciding, according to MMT principles, in the next decade that "fiscal responsibility" is not a reasonable justification for preventing medicare for all and maybe seeing a percentage bump in inflation as a result.
MMT economists don't support inflation at any level, do they? They support alternative means of controlling inflation. Put differently, it sounds like you're using "MMT" as an incantation to dismiss inflation, which would be unfair to the MMT'ers.
>MMT economists don't support inflation at any level, do they?
MMT does not make normative judgements on inflation. It does state that taxation and fiscal spending are more effective control knobs to target inflation than monetary policy, but that isn't a normative judgement either.
>it sounds like you're using "MMT" as an incantation to dismiss inflation
I'd do it for the same reason for why I'd reference oil company profits in reference to global warming skeptics - because it's the responsible thing to do to associate the motive for spreading bad science with the bad science.
Naturally this gets abuse slung at me - with phrases like "left-wing back-rationalized voodoo economics" slung around for instance.
Can you source your claim that MMT doesn't make normative judgements on inflation? That's not my understanding, it's not what this article says, and it's not what Kelton said in her debate with Jason Furman on Ezra Klein's show. As I understand it --- once again --- MMT says inflation is bad, but that there are better ways to control it than monetarism and fiscal austerity.
The distinction between my understanding and yours is highly material, because in my understanding, an attempt to actually deploy MMT policies at the Fed in the service of (say) single-payer that resulted in rising inflation would be a problem and evidence of failure, and in your understanding it wouldn't. In my understanding, the MMT economists would say "here are a set of policy levers we should use to ensure inflation doesn't increase", and in yours MMT economists would say, essentially, "single payer is worth extra inflation".
The idea that inflation and deficits simply don't matter as much as conventional economists think it does is, as I understand it, a caricature of MMT that actually annoys MMT economists.
>Can you source your claim that MMT doesn't make normative judgements on inflation?
It's in the name - modern monetary theory. Much like the theory of gravitation does not posit that gravity is "bad" or "good", modern monetary theory does not posit that inflation is bad.
>That's not my understanding, it's not what this article says, and it's not what Kelton said in her debate with Jason Furman on Ezra Klein's show.
Much as your earlier posts massively misrepresented what I said, I strongly suspect you are misrepresenting what others said.
>In my understanding, the MMT economists would say "here are a set of policy levers we should use to ensure inflation doesn't increase", and in yours MMT economists would say, essentially, "single payer is worth extra inflation".
MMT economists might very well opine that extra inflation is worth medicare for all and at the same time set out a set of policy levers which can bring down inflation if desired. One is a normative statement; the other positive.
>The idea that inflation and deficits simply don't matter as much as conventional economists think it does is, as I understand it, a caricature of MMT that actually annoys MMT economists.
I think the personal feelings of many MMT economists is probably that a slightly elevated inflation doesn't matter that much. There are economists who are motivated by money and prestige who will naturally gravitate towards, for example, richly funded think tanks representing investor interests and there are economists who are interested in figuring out how the economy actually works.
These two groups will naturally have differing personal feelings about inflation precisely because the people who pay their bills do.
I think what pisses them off are the people who say that MMT is simply a theory that says governments can spend limitless amounts of money.
MMT is both a description of the current system, a system that is already in place, and a set of policy proposals. So "believing" in MMT may simply mean understanding clearly the process already happening.
I think the argument that MMT is non-normative with respect to inflation is simply false. I'm not an expert, but, like, I've read things other than this article, and in all of them (along with this article) MMT proponents are at pains to point out that "inflation doesn't matter" is a misconception.
As a neutral observer, it feels like if you’re right you could easily show it by literally finding 3 normative judgements on inflation by prominent MMT proponents, and pasting them here, rather than referring to “I’ve read things”
Well, your first would be this article, as I said.
Your second would be the debate between Furman and Kelton on the Ezra Klein podcast, as I said.
I'll dig up a third cite. Like, one of the things in my head is the Kelton vs. Krugman argument, which I read on Krugman's blog, but that's not the best cite, since you're getting Kelton secondhand through Krugman there.
Happy to help. If you'd like to help too, you could cite a source that says MMT'ers feel like inflation doesn't matter.
On the discussion with Kelton and Furman on the Ezra Klein show: I came away frustrated, because I felt that every time Kelton tried to delineate an ideological difference, Furman disagreed that it was in fact a difference. I found it a good discussion on economics, but no clear line-in-the-sand between MMT and orthodox economics.
I have Ctrl-F’d through the article for “inflation” and only see “excessive” inflation as being normatively judged. Which bit do you feel supports your assertion?
But FTA:
MMT rejects the modern consensus that economies should be steered primarily by the raising and lowering of interest rates. MMTers believe that the natural rate of interest in a world of fiat money is zero and that pegging it higher is a giveaway to the investor class.
So according to the article, MMT actually holds that interest rates are held too high under conventional monetary policy.
I have not formed an opinion on MMT, nor do I consider myself to have the right background trying to fully understand it or any other economic model, but even at my level of knowledge, the first four paragraphs of Sumner's rebuttal seem to be willful ignorance on his part. The views he cites as inconsistent easily fit into the MMT framework, which asserts that inflation is the only constraint that matters, and other factors (like large deficits) only matter if they affect inflation.
Later on he cites low overall GDP growth in Japan to counter Japan as an example of large deficits/low inflation. This:
1) Doesn't invalidate the point.
2) Totally discounts that Japan has had _some_ GDP growth even as an aging population has led to a _smaller_ workforce over that period.
> What happens when people realize transfer medium is being debased? They'll obviously try not to store value in that transfer medium.
Arguably, to some proponents of MMT/in some versions of MMT, this is a feature and not a bug. Economically speaking, stored value at rest isn't "interesting", it's a potential indicator of waste or inefficiency of resource utilization in current flows. I've heard the argument that the real "bug" here is the human psychological need to "hoard" stationary value/"keep score", which admittedly is a very hard problem to solve, but having hard problems to solve isn't necessarily a disproof of a hypothesis such as MMT.
I find the idea that private firms over-save and the way fix that is to print money to be disagreeable, and not an application of scientific or economical mindset, but the mere psychology of wanting to get results today at the cost of results tomorrow.
Some proponents of MMT strongly believe that we already live in a world where we fix private firm lending/saving problems by printing money, in the ways that for instance the US Federal Reserve makes 0-interest loans to banks. That certainly has economics and science studying that today.
A lot of MMT talks only about exploring better options for how that existing effort/flows is redirected, and if we would get testably better results from other more interesting configurations, not about creating some new tools out of thin air simply because they "want" to.
In my amateur economist models, I adjudicate over-saving as a symptom not the disease. It is clear that money issuing does not have a neutral effect (not the same as private firms investing, or private firms being taxed to fund a government project). In the end it comes back to the utilitarian-keynesian view that the government will be more efficient spending that money, or that such a thing would not have long-term effects on the exchange rate, savings, etc.
In my amateur economist models, I explore economic systems with modified electrical engineering diagrams. Money as we define it and subsequently many forms of savings/over-saving are nearly as useless as Instantaneous Voltage (in Joules) or ultimately as abstractly uninteresting as Ground in a working system. It is current flows and movement that are actually interesting/useful, and the not very well defined equivalents for money to its first and second derivative metrics (electricity's Amperes and Coloumbs, for instance).
I have no idea how many proponents of MMT find interest in such similar engineering-oriented views of economics, but general economic theories of inflation/deflation from that point of view seem so primitively useless versus what we know of, say, electric resistance, inductance, capacitance, conductivity, etc.
I cannot tell you if my armchair theories are any better in the long term than the status quo or your preferred models, but only that MMT at least seems to be one of the few areas of economic study currently attempting to address them (albeit indirectly in many cases). That is also not necessarily proof that MMT is correct, just as my models don't ipso facto disprove status quo "wisdom".
Many MMT proponents argue heavily for raising strong "floors" such as minimum current flows to/through individuals. The general goals are often to eliminate "risky times" as a category altogether as a general safety net for everyone. Then things like retirement and disability and sabbaticals are merely "special cases" of the general goal of eliminating "risky times".
Yes, it's a very different view of economics from a lot of traditional approaches. It's not a fundamental "give up on a lot of civilization", even where it is a general rethink of "what does it mean to be a member of a civilization", including such things as what should be an individual's guaranteed safety floor, it's still mostly just civilization as we know it today swapping what we today think of as edge cases (social security, medicare, et al) for more generalized principles (in theory at least).
Seems you incited someone to submit it [0]. I don't think it's unfair to say there wasn't any meaningful disagreement across the respondents at all. They only differed in how much confidence they had in disagreeing with the answer-begging question.
Right, it seems like the problem is more political than economic. Point 2 obviously flows from point 1, so the argument is whether point 1 is valid or not.
In theory there might be viable ways to control inflation via taxes and other ways of soaking up extra money supply that's created by printing/spending. The implementation will be difficult though, especially if it's driven by a political process. Even if you initially start with something that has all the correct automatic adjustments built in (assume this is possible), there's always the risk that a new gov't breaks it.
I think that for a change in paradigm like this to be successful you'd need stronger guarantees that things would stay in place long term (similar to UBI actually).
> This difficulty lowers the likelihood of government fiscal responsibility and increases the likelihood of devestating inflation.
I share this worry too, but it's not like there's currently any political appetite for fiscal responsibility. I wonder if the threat of inflation and currency volatility would actually serve as better stick, than what we currently have which is continuing to run up a massive debt which will be terrible for our children?
I think MMT is an interesting school of thought because the economy has been reacting in a way contrary to what the data suggests. We're in the tenth year of an economic expansion and wages are only just starting to increase -- and at a modest pace at that. The amount of inequality in our economy is not accurately represented in GDP or unemployment. You would think inflation would perk up this long into an expansion but since most of the gains have gone to the wealthy (who don't spend as much as their income as normal folk) the economy is not as dynamic as we thought it would be. Even with the recent tax cut the economy is only growing at 3%.
Combine these factors with the fact that there are at least three huge areas for government investment: health care, renewable energy, infrastructure. If you believe climate change is an existential threat to our society -- does it matter that we have a balanced budget while we try to tackle it? Especially if recent trends suggest that massive deficit spending WILL NOT cause an inflation catastrophe?
> You would think inflation would perk up this long into an expansion but since most of the gains have gone to the wealthy (who don't spend as much as their income as normal folk) the economy is not as dynamic as we thought it would be
This is exactly what happens when new money in injected at exclusive points. The upper class accumulates ever more financial power, while the lower class is kept fighting over the scraps. An amount that could be a major life changing expense for most of the country is presently a throwaway gadget purchase for someone working for the banksters in NYC or the surveillance industry in SF.
Financially, MMT is analogous to a kid not being stopped for taking money from their parents' wallets to buy candy, so they move on to taking larger sums - whether this is actually a problem entirely depends on how much their parents make. Financial deficits only work as long as they do not undermine faith in the issuer. For the US, this effectively based on energy (historically including Saudi Arabia) and military might. "Withdraw" at a rate faster than "depositors" will tolerate, and faith in greenbacks will collapse.
MMT is especially ironic because it's gaining political support in the name of "going green". But it's actually the same vein of consumerist greenwashing as that "third R" - recycling. Heating up the economy fundamentally causes more crap to be produced ("full employment" !). If you want to conserve earth's natural resources and leave that carbon in the ground, support simply letting natural deflation actually occur.
I will say however, that if MMT can end up justifying an alternative to just dumping most of the consumer-bound printed money into the housing sector, that alone could be a great thing.
Isn't Canada experience in the 90s an example of exactly that. Gov deficits ran out of control and the current collapse and finally the government had to cut services (raided the unemployment fund).
It’s immediately obvious that increasing the money supply and spending the money will result in inflation.
MMT says that the only constraint on spending is inflation, but also turns around and says that you can always print more money. That’s a contradiction.
Printing more money does not change the real wealth in the economy. You can’t create additional purchasing power with an increase in the money supply because prices will adjust to the new level.
> It’s immediately obvious that increasing the money supply and spending the money will result in inflation.
I'm not criticizing your logic, but I feel like my entire adult life (I'm 42) I've been bombarded with tales of EVERY proposal will "obviously result in inflation". During this time gold has also been upheld as the only safe investment, doom is always around the corner, Europe has been on the brink of financial collapse, etc
At this point, any argument, even those that might be completely correct, that something will "obviously result in inflation" is suspect. All I've learned in this time is (1) Economists and politicians speak different languages, (2) Economics has done very poorly when it comes to modeling the future - there's always SOME model that predicted some event, but no model that has been widely reliable, and (3) Doom has been falsely predicted a ton of times, but that real financial hardships absolutely CAN happen.
Which leaves me to conclude that I can't trust what I hear, that someone is probably right, and that I have no practical way to know who that is.
It will result in inflation, but that's not necessarily a bad thing. At its heart inflation is just a wealth transfer from creditor to debtor (god forbid, right? creditors are king).
The real issues are that:
* Inflation is treated as a bogeyman in the investor managed media rather than an integral and necessary part of a monetary system (you want real pain? try DEflation).
* Complete misrepresentation of the risks of hyper inflation and a total misrepresentation of why it happens (e.g. idiotically pretending that all zimbabwe/weimar/venezuela did was spend just a little bit too much on social programs).
I kind of wish inflation were kept in band between 7 and 12% via fiscal spending and taxation (as MMT says is possible). That would keep it below the level at which it would impact growth and above the level where wealth slowly gets hoarded by the 1%.
Not exactly. Wealthy people will just move their assets into something other than dollars. Low and middle income people (which probably have more of their assets in dollars) will have their savings constantly devalued. Interest rates in loans will skyrocket in order to offset inflation.
>Low and middle income people (which probably have more of their assets in dollars) will have their savings constantly devalued.
Low and middle income people tend to have little in the way of savings (40% of Americans are one paycheck away from poverty) and a lot in the way of debts - debts which will be constantly devalued in a high inflation environment.
The survey of economists that the article poo-poos includes the comment by one economist that a government can print to pay its own debts exactly once (because people loaning to the government figure it out quickly). This argument falls into the same boat: sure, the banks will change how they price loans, but for the lucky guys with loans it’ll be glorious!
> The survey of economists that the article poo-poos includes the comment by one economist that a government can print to pay its own debts exactly once
Which is true.
OTOH, MMT observes that the government doesn't actually need to acquire debts to pay for a gap between spending and revenue in the first place.
> This argument falls into the same boat: sure, the banks will change how they price loans, but for the lucky guys with loans it’ll be glorious!
Sure, and that's why
runaway inflation is bad. MMT doesn't favor more-inflationary policy, it just recognizes that inflation, not the availability of revenue, is the constraint on government spending.
>The survey of economists that the article poo-poos includes the comment by one economist that a government can print to pay its own debts exactly once (because people loaning to the government figure it out quickly).
The government can pay its own debts as many times as it wants.
It can also dial the interest rate up and down virtually at will through QE or raising interest rates.
It actually makes less sense to think of government debt as debt and makes more sense to think of it mainly as a publicly run savings account.
The government can also push private sector loan interest rates up or down at will through the setting of the base rate.
Somehow I managed to skip a word when I wrote the comment. It should have been “a government can print money to pay its debts exactly once.”
Obviously governments can pay off debts as often as they want, and there was a time when that was common. But a government that runs up big debts and pays them by making the currency worthless soon has a hard time finding anyone willing to lend it money.
But sometimes they manage. Russia is notorious for defaulting on its debts (which isn’t the same thing as paying with devalued currency, but should be a lesson to future lenders), but they still manage to borrow money. But they do have to pay higher interest rates than other countries to make up for the higher risk of default.
Yeah, the fatal assumption there was assuming that they need to have money lent to them.
As I said, it doesn't really make sense to think of the national debt as a debt. It's a government run savings account accommodating the private sector's desire to save money.
In the same way if maxlybbert printed maxlybbert dollars, spent them and then "borrowed" them back it wouldn't really be doing it because he actually needed them. He's providing a service.
I’m only focusing on the fact that a nation that prints its own money can end up printing too much and devaluing it. And when a country shows its printing presses are controlled by people who have no clue what they’re doing, people tend to stop buying their bonds.
I don’t really care whether it’s truly borrowing when a country sells bonds and promises to pay the bondholders back with interest. As long as the country feels it has an obligation to pay those bondholders, it has a temptation to pay them with devalued currency. Most countries don’t do that because they expect few people will buy bonds the next time the government wants to sell some.
And the idea is that it only has to do it once. If the goal of the government is 2% inflation but the economy doesn't reach this goal because of deflation then the government not only can step in to pay off it's debts, it has to step in to fix the economy.
At its heart inflation is just a wealth transfer from creditor > to debtor
That is one way to put it, but you could also say inflation punishes responsible people who work and save money, and rewards less responsible people who spend beyond their means.
> During this time gold has also been upheld as the only safe investment
This isn't true, or at least there isn't consensus around that idea all of the time
> doom is always around the corner
That's just the boom and bust nature of the economic cycles. It's true of any other natural cycle, from the fall from paradise to the fall of Rome. I recommend Georges Canguilhem "The Normal and the Pathological", though I must admit I didn't even fully understood that book when I read it as a teenager.
"It’s immediately obvious that increasing the money supply and spending the money will result in inflation."
The money supply has almost quadrupled in the last 10 years, yet inflation has been low.
MMT says that spending new money only causes inflation when the money is spent on stuff the private sector is also bidding for. Since that's pretty much everything that the government would want to spend money on, MMT & conventional economics are not in much disagreement here.
"MMT says that the only constraint on spending is inflation, but also turns around and says that you can always print more money. That’s a contradiction."
You can always spend more money, but only if you tax enough back to tame inflation. It's a constraint, not a contradiction.
"Printing more money does not change the real wealth in the economy."
Exactly. MMT doesn't create goods & services out of thin air, but what it does do is unlock idle capacity in the system. If Joe Sixpack is unemployed, he's a resource that the private sector is not utilizing, but he's a drain on society because somebody is paying for his food & shelter. MMT and the jobs guarantee would utilize that resource for good, and it won't affect inflation or the private sector as long as the jobs guarantee wage is at the minimum wage mark.
When QE was introduced, the US political Right went ape shit talking about inflation. Krugman (for one) predicted it would be fine because of interest rates, citing Japan as an example:
> Everyone knows about the infamous open letter warning Ben Bernanke not to engage in quantitative easing, lest he cause inflation and currency debasement; many are also familiar with the remarkable unwillingness of that letter’s signatories to admit, after more than four years of low inflation and a rising dollar, that they were wrong.
If the private sector is not spending, then the public sector (gov't) should to take up the slack in a lack of demand:
> The problem, of course, is that you can’t cut interest rates below zero (if you try, lenders will just hoard cash.) So the Fed simply can’t do what the rule says it should.
>
> This is why we need a huge fiscal stimulus, unconventional monetary policy, and anything else you can think of to fight this slump. Quite literally, the usual rules no longer apply.
There are a finite amount of resources in an economy, and when an "infinite" amount of cash goes after that, you start to big up prices: inflation. I don't think that mainstream (Left-leaning) are against deficit spending to boost the economy; it's just that many of them don't see MMT is adding to what they've already been saying.
>Crazy as it sounds, several of Europe’s central banks cut interest rates below zero in 2014, and then Japan followed. By mid-2016, some 500 million people in a quarter of the world's economies were living with rates in the red
> We now know that interest rates can, in fact, go negative; those of us who dismissed the possibility by saying that people could simply hold currency were clearly too casual about it.
Okay. I thought that was the case, and frankly, it's the only mechanism that even comes close to making MMT make some sort of sense, since that could act as a monetary black hole... I think.
Inflation only occurs when the printing of money outpaces real value. Real value in the last 10 years has skyrocketed, so it’s not surprising that inflation has not been strongly affected by the increase of money.
Warren Mosler is one of the advisers to our company for over a year now. I had a lot of discussions with him about these kinds of things and I originally reached out to him because we are building a crypto currency platform to allow any community, from a casino or festival, to a city or even a country, to issue its own currency. We are still looking for some Economists with other views to balance out MTA.
So, I can tell you that Warren Mosler at least is formulating the theory a bit differently. He starts with the fact, or the claim, that taxes are the primary driver of demand for a Fiat currency. I argued with him about this point. Economists with other views to balance out MMT.
So, I can tell you that warren Mosler at least is formulating the theory a bit differently. He starts with the fact, or the claim, that taxes are the primary driver of demand for a Fiat currency. I argued with him about this point. But if you except it, then it follows that taxes create a scramble by many participants in the local economy to obtain enough money to pay those taxes. Then the government prints the very money that everyone is scrambling to obtain. Warren Mosler concludes by saying that the government is not constrained in how much debt it can take on because a dollar and a treasury bond for a dollar are just two different types of accounts that exactly balance each other. To me this is ignoring everything outside the system. It’s like saying a bank can leverage its reserves as much as it wants because every loan it gives are just assets and liabilities on different sides of the ledger. MMT always acknowledges inflation matters, but it seems to be lip service.
I have come to describe the macroeconomics of the USA very simply:
1. Every country fights to protect its exports because that’s what lets its citizens import everything they need. Russia will fight to export natural gas. And so on.
2. After Bretton Woods, our chief export is not even Music and IP, it’s DOLLARS. We print them, and for decades everyone arouns the world produced goods and services for us, in exchange for dollars.
3. Our dollars and treasuries are used as reserves by banks. Also we engage in petrodollar warfare. We used to buy oil from Saudis, and now we sell weapons to them for the same money we gave them. And so on.
4. The USA is unique in its immunity to inflation and printing. Most countries cannot sustain such high debt to GDP ratios without their treasuries becoming devalued. USA treasuries may eventually face competition from China etc. but we still have a lot of demand for our export, by the world banks and consumers.
5. Being able to print your own currency and run your own monetary policy is essentially the power to impose a flat tax on your local economic activity. When PIIGS countries had their own currencies, they could finance public parks etc. When they joined the Eurozone, they lost a lot of that power and their public infra got bought by German banks. Greece, the “originator” of DEMO KRATIA (power of the people) lost power to foreign capitalists. People and jobs emigrated, capital flight ensued. This also happens in the USA on a city level (Detroit) and state level (Illinois and Puerto Rico).
6. Conclusion: Having your own money supply allows you many chances to print your way out of debt, and also run monetary policy. That always leads to stronger local communities vs the foreign capitalists. But doing too much causes capital flight and an increase in money velocity, ie devaluation of your local currency from an outside perspective.
7. MMT correctly advocates, like Keynsians, issuing money to pay for infrastructure and Universal Health Insurance / Food / Basic Income. Because it can lead to more real economic activity. It’s like a startup that spends correctly on the things tht make it grow and provide a return on investment. More coins chase more goods and services so there is no inflation. In fact, it attracts real capital to the community. But if there is malinvestment and bad bets, too many of those cause inflation.
8. Inflation isn’t just redistributing from the lenders to the borrowers. It also makes the wage earners who aren’t immediately investing their currency into something else the losers. It makes a hot potato hotter and hurts those who don’t have great wealth management.
> Mosler concludes by saying that the government is not constrained in how much debt it can take on
It seems to me that’s kind of half-a-loaf MMT. Or, to borrow from The Matrix trilogy, it's the spoon-bending level.
Where the full loaf (“there is no spoon”) is: Government is not constrained to take on debt at all to finance an excess of spending the over revenue. The idea that, if the State chooses to create net new tokens in the economy (remember, the key points of MMT is that fiat money is created by the issuing government spending and destroyed by the issuing government recovering it), it must seek the permission of someone with a surplus of existing tokens willing to sacrifice them for a greater number of future tokens, after which the government's pet (but “independent”) token-issuing body will see to the issuance of additional tokens is kind of bonkers, but that seems to be how MMT would view the current relation between fiscal and monetary policy.
When more currency X is issued, the losers are people (including lenders) who are locked into assets denominated in X, if this leads to a devaluation of X relative to other things.
The status of fiat being legal tender for all debts is what makes lenders unable to demand other currencies but they can execute forward contracts of X versus a basket of commodities for example.
What if Joe Sixpack creates more value by being unemployed that by being formally employed? You do understand that some people can destroy value by doing work?
You're talking about in the government employ right? Obviously no commercial enterprise will pay Joe Sixpack to do anything if he can't create value.
So let's say that Joe Sixpack can't get a "real" job. Then society's choices for him are
1. Let him starve to death. Hope that if his alternative is starving then he will reform himself enough to get a job.
2. Give him money with no strings attached (currently various welfare programs, possibly UBI in the future)
3. Give him money but make him work a gov't job where he subtracts value (e.g. he is actively making things worse than if he was just not there)
4. Find some kind of gov't job where he creates less value than he is getting paid but is still creating positive value
If we ignore #1 (because if you believe #1 is always the answer then the rest of the conversation is pointless) then the question is who falls into bucket 3?
My guess is that you have two types of people, people who are not capable of doing productive work (which I'd argue are very, very few) and people who will choose to be unproductive because of the jobs guarantee (they know that they have a job no matter how badly they do it).
So maybe the jobs guarantee should be combined with a UBI with differing levels of support. Provide a UBI which covers basic needs and a jobs guarantee which provides a little more money. There will always be people who want to work just for something to do and there will be people who want to earn the extra money to improve their lifestyle. Then you don't force people into jobs where they create negative value.
I don't see why it has to be a job guarantee. If the government allocates 50000 jobs to correct inflation there is no reason why they can't hire people under any condition but limit the work contracts to 1 year and "fire" unproductive workers and extend the contract to productive workers. It's not like those jobs are supposed to be a life long career. The goal is to help people during the bad years.
> It’s immediately obvious that increasing the money supply and spending the money will result in inflation.
I think the MMT argument is that one can reduce the money supply through taxation. From the article:
> In MMT’s ideal world there would still be taxes, but their main purpose, aside from lessening inequality, would be as “offsets” to keep inflation under control. Taxes would drain just enough money from consumers and businesses so total spending in the economy won’t be excessive.
So currently Left-leaning people are labeled "tax and spend": you increase revenues, which you then turn around and spend on programs/infrastructure. With MMT it's the opposite (AFAICT): "spend and tax". Run the proverbial printing presses to pay for the programs, and then use (higher?) taxes to drain the 'excess' money supply.
MMT also (AFAICT) seems to make the central bank subservient to the finance/treasury people, instead of independent (which is the modern way of doing things). This control of interest rates is important for technical reasons:
> I think the MMT argument is that one can reduce the money supply through taxation.
The MMT argument is stronger: taxes only exist in a fiat money system to reduce the money supply (and, to create behavioral incentives with specific targeting.) Viewing them as “paying for” government spending in a balanced sense where you need $1 in revenue (or debt financing which you pay back with interest to a lender) to pay for $1 in spending is, through an MMT lens, wrong, and the result of applying commodity money thinking in a fiat-money world.
> MMT also (AFAICT) seems to make the central bank subservient to the finance/treasury people, instead of independent (which is the modern way of doing things). This control of interest rates is important for technical reasons:
It need not: a system which deeply incorporates MMT might retain a central monetary authority separate from the authority that makes spending and tax-targeting decisions (calling this a “fiscal” authority is perhaps no longer apt), exercising interest rate levers to manage inflation and employment levels as the Fed does today; it might even give it more tools by assigning it then ability to set the rates of broad, non-behaviorally-targeted taxes (like to control a parameter that is a factor in the rates of all income tax brackets), as MMT recognizes that general tax level is an important money supply lever and nothing else. The importance of public confidence in the money supply remains in MMT, and having technocrats insulated somewhat from the pressures of legislative politics primarily responsible for administering such policy under broad policy goals remains, as well.
It probably wouldn't be constituted the way the Fed is, which is driven by the desire of the government to give bankers confidence in the currency because the government will be going to the bankers to borrow debt in the currency to fund deficits.
Because what it would do is eliminate the practice of acquiring debt to finance “deficit” spending in the first place, which changes the constituency at which monetary policy is aimed.
> The MMT argument is stronger: taxes only exist in a fiat money system to reduce the money supply (and, to create behavioral incentives with specific targeting.)
I think this is like the image of the snake eating its own tail, and what you see may depend on whether you see start at the end-end of things or the tail-end. Or the optical illusions that change if between duck/rabiit, etc.
I think that you're correct using common terminology. The government takes in money as taxes, and creates money through printing:
spending = taxes + printed money
new money supply = old money supply + printed money
But, I believe that MMT is saying that taxes and spending could be logically separated by assuming that all taxes go to the shredder and all spending comes from newly printed money:
spending = printed money
new money supply = old money supply + (spending - taxes)
So it wouldn't be 'increasing spending by taxes', it would be 'reduce inflation by taxes'. The size of 'big-gov' should be measured as spending/GDP regardless of the actual tax rate. The tax rate would float depending on the current inflation target instead of on the current federal spending.
> MMT says that the only constraint on spending is inflation, but also turns around and says that you can always print more money. That’s a contradiction.
The article follows that up by saying:
>> As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment
and later on:
>> To stabilize employment, MMT would add a federally funded, locally administered job guarantee. Government would employ more people in slumps than in booms.
So I think the idea is that MMT recognizes that inflation would indeed occur if you kept printing money without a demand for that money, which they say will be supplied by government-sponsored full employment.
What I don't understand is: is there a situation in which full employment has already been achieved and the government just keeps printing money for new initiatives, and we're back to inflation?
Job guarantee is a stupid idea. Some people create more value by not working than by working.
Imagine you're trying to make a meal and some incompetent dummies want to do some work in the kitchen. It might turn out that someone competent does better work when dummies are not interfering with his work and instead are watching TV. It's called "Too many chefs in the kitchen". Full employment and job creation are not necessarily good for the economy.
It appears that MMT is meant to be a macroeconomic theory. I'm not here to defend it. But I would wager that an MMT advocate would claim to possess evidence that in the aggregate, a jobs guarantee would create more value than it would destroy because the pattern you describe does not apply to most people.
Again, I am not here to defend this theory. In fact, I have witnessed your anecdote myself and agree with the premise, at least on a micro scale.
> So I think the idea is that MMT recognizes that inflation would indeed occur if you kept printing money without a demand for that money, which they say will be supplied by government-sponsored full employment.
Nope, it's when too much money chases too few goods and services. Inflation is everywhere and always a dynamic process. The federal reserve can print 100 trillion dollars and credit it to their own account and it won't affect inflation at all until they start spending it or transferring it to parties that will.
Actually, printing money doesn't necessarily cause inflation because there are two sides to the equation.
If you have more money chasing the same amount of goods you get inflation. Yes. But if supply is currently in excess, or if production is well below production capacity, then inflation is much less likely. I'd argue that in today's international economy, there is actually a huge excess of supply capacity that is under utilized.
I mean the capacity to produce goods and services.
I am not an economist but it seems to me that factories will often run underneath max capacity. I also think that supply chains are more flexible than they were in the past. All cases of hyper inflation I know of always had a concurrent disruption to supply capacity (e.g. war, natural disaster, political strife). It seems ramping up production to meet demand is usually not an issue over the course of a year if there isn't some big externality preventing it (i.e.war). I'd be interested hearing from people who know more if this is the case.
Whilst it is obvious that increasing the money supply will cause inflation in an otherwise fixed economy, it is important to note that increasing the money supply will not cause inflation if productivity also increases.
If you believe that there is untapped productivity in the economy then, by increasing money supply and spending the additional money in those areas, it is possible to increase productivity whilst avoiding inflation.
> MMT says that the only constraint on spending is inflation, but also turns around and says that you can always print more money. That’s a contradiction.
No, it's not. And that's backwards: MMT says that because you can always print more money, the only constraint on spending is inflation, not revenue, and that taxation serves the purposes of creating incentives by specific targeting and limiting inflation by it's overall level, but doesn't actually “pay for” spending in the balanced sense this applies to participants in an economy who are not the sovereign money issuer of the primary currency.
The key upshot of this is that:
(1) the idea that an excess of spending over revenue must be financed by debt owed to some particular party is an artifact of structures which obscure the fundamental nature of fiat currency and try to mimic commodity-based currency; and
(2) the idea of long-term budget balance as a goal is bunk Ina fist money system; in fact, as base money supply is tokens created by government issuing and spending them and destroyed by government recovering them, having a money supply in such a system is synonymous with long-term surplus of spending over revenue.
> Printing more money does not change the real wealth in the economy
Correct.
> You can’t create additional purchasing power with an increase in the money supply
You can't create additional aggregate purchasing power that way, but you can create new purchasing power for the entity holding the newly-printed money (at the expense of purchasing power of those holding existing money of th same currency, and with three side effect of also tranferring purchasing power from all holders of assets denominated in the currency to all holders of liability denominated in th currency.
Inflation is MV = PQ... you are commenting only on the M which is money supply. You have to factor in the other variables, notably V or the rate of spending. If V remains low, then M can increase without significant inflation.
> Printing more money does not change the real wealth in the economy.
No, but you can create wealth with that newly printed money. Of course, as soon as you print it you are diluting the value of all other money which one might argue is unfair, but on the other hand is the rather arbitrary model of redistribution we happen to have landed upon right now completely fair?
And setting aside fairness, is the current economic model we've come to right now even roughly optimal?
Isn’t QE believed to have lead to considerable asset price inflation? Even if the price of a bottle of milk stayed the same, the price of housing, or stock, etc. have increased a lot.
> Printing more money does not change the real wealth in the economy. You can’t create additional purchasing power with an increase in the money supply because prices will adjust to the new level.
I think the point is more thatn printing money and transferring it to treasury coffers effectively is a tax on anyone holding USD. More government spending -> bigger deficits -> more money printed -> higher inflation (taxes). That's my understanding anyway.
You do not own the value of the dollar you hold in your hand...you just own the IOU. The value of the dollar is what other people deem it to be worth, and you cannot own that.
If I have a car, I own the car. If you break in and steal the car, then you have stolen from me. But if the car company that produced the car decided to overproduce so that there is an excess used car supply in the market (lowering prices), well sorry friend, but the car company didn't steal from you.
Macroeconomics is a sufficiently complex topic that trying to understand it or discuss it at a "beginner level" is almost pointless. At that level, all you need to know is that any theory that promises some certain knowledge of what's going to happen if this or that happens and that it's all very simple, is almost certainly wrong.
it's pointless if the plan is to learn at beginner level and stop there and then believe that you have a reasonable level of understanding to formulate opinions. If the plan is to learn it at the beginner level in order to keep learning and get to advanced level, then I agree it's not pointless
A good place to start is with a simple description that you can carry in your pocket: MMT proposes that a country with its own currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. So the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve goals such as halting climate change.
Today's inflation manifests itself, not in consumer price increases, but in asset bubbles. Asset bubbles always pop, usually uncontrollably.
The last major asset bubble nearly took out the US economy with it. The next one may finish the job.
Debt matters because the only politically palatable cure for the aftermath of a debt-fueled bubble is more debt. And more bubbles.
A fear of mine is that MMT gains enough traction to be implemented, but only partially. Similar to what has happened with the ACA. For argument's sake, let's just assume MMT is a sound theory. Regardless, if it's only half-implemented -- without all components for regulating taxes, inflation, and spending -- it could be an absolute disaster.
Additionally, there are concerns about having the government itself involved with regulating inflation and business cycles. An independent Fed, at least in theory, allows for the fed to take a longer view of the economy even if politicians have incentives to care only about the next election cycle. All it would take is one conservative majority congress to semi-dismantle any MMT mechanism and completely mess up any "controls" put in place by MMT proponents.
That being said, it is refreshing to have different ideas being taken seriously enough to enough mainstream conversation. I don't think the field of economics is "solved" (probably far from it) so I think good ideas that challenge the status quo are generally good.
> All it would take is one conservative majority congress to semi-dismantle any MMT mechanism and completely mess up any "controls" put in place by MMT proponents.
One liberal majority Congress could do the same. They might dismantle in a different direction, but it could be just as disastrous.
I see this problem with a lot of big policy. It's sold as a rewrite when in practice it has to be implemented as an incremental refactor. The two have different implications and trade offs. A partial rewrite is often the worst place to end up.
As far as I understand, MMT wants to optimize for full employment. Job guarantee is a possible implementation. We're at 4% unemployment rate. You can say we have full employment per the current standard.
For what it's worth, the ACA was pretty successful before it was slowly gutted by the current administration. Around 12M people signed up at its peak. Generally, incremental changes are better than a "perfect" solution that comes in a lot later.
I agree in regards to health care that incremental changes may be the only to achieve universal coverage.
However, the gutting of the policies by another administration is what scares me in regards to MMT. I'm not sure that incremental changes work with monetary policy. MMT in particular seems like it needs some big, systematic levers in order to actually function properly.
That being said, I'm happy to be wrong about this. MMT being viable would open a more clear path to something like universal health care.
I'm not sure if you need all of the parts in place to see if / how it works. The fed could start offsetting deficits to the tune of $100B to the treasury and see how the USD, bond markets react. If inflation goes up, it could in theory, be offset with a tax scheme inline with MMT. I'm not saying this would be terribly smooth, but I do think it is possible to test parts MMT in relative isolation.
Probably dumb question: if debt and deficits don’t matter and a country can just print money - how does that explain cases where countries have defaulted and other countries and their own citizens lose confidence in the currency?
I also don’t understand how the jobs guarantee is supposed to work. Presumably if we had work to be done we would have open positions for it. Now we have to magic up jobs, which means diluting jobs other people currently do and the income the currently derive from it, or make pointless “dig and fill” hole jobs. Won’t all this just make everything a hell of a lot less efficient? And won’t it worsen potential economic recovery? You’re depriving potential new industries or business from labour because that labour is working for the government. You’re also preventing government departments (or wherever those jobs go) from improving their own services. To pick a historical example, instead of moving to computerizing records taking away jobs it would now be necessary to continue to do things on a typewriter because you need to keep the jobs. This in turn removes money flowing from the government to computer industry, which helps to drive up and develop whole new businesses and industry that drive the economy. That is, is there not a risk that the way the jobs guarantee is described as helping during the downturns could actually hinder recovery and development of new industry? OTOH why I like UBI is it still leaves all those incentives to do new things in place.
> Presumably if we had work to be done we would have open positions for it.
I don't follow the presumption. There's no shortage of work out there to be done, we just don't have the means to PAY for it under the current system. Now, you might not think MMT does either (in real terms), but the world is NOT short of work to be done.
> Now we have to magic up jobs, which means diluting jobs other people currently do
...which doesn't follow if your first point fails.
> There's no shortage of work out there to be done
Ok, I have to agree with this to a certain point as it’s an argument I find myself making in change resisting organizations. But the implication here is that there will always be no shortage of low end minimum wage work and that the best way to discover and assign that work is via a centralized means. So with a jobs guarantee we have to invent a government system that identifies and assigns jobs that need doing in an efficient manner. No one has done that yet.
> which doesn't follow if your first point fails.
I’m not sure it’s entirely failed. Because although the ideal is “there is always more work you can shift to once this job is done” that is simply not what happens in practice. People and organizations don’t behave that way. Try working in an organization facing disruption, or an old developing world government department where people rely on it for their job, etc. It is full of resistence to anything that might put at threat peoples jobs. I’ve worked at places as recently as 2010 that still had telex operators who came to work and sat their doing nothing all day because the telex systems had been decommissioned. This is what you get with jobs guarantees.
> But the implication here is that there will always be no shortage of low end minimum wage work
I'm not following how that's implied?
I think the implication is that there's no shortage of work that has positive value but less positive value than people are willing to pay for it.
Anyway, the idea is that if the economy is in good shape and most people are employed then the gov't is providing fewer jobs. If you have more slack then the number of gov't jobs goes up as the gov't spends more money (i.e. pays the people it's employing) and so the balance between spending and production doesn't change, thus keeping inflation in check.
> how does that explain cases where countries have defaulted and other countries and their own citizens lose confidence in the currency?
Other countries cant issue dollars which is the world exchange currency. When you print out your countries cash, your currency exchange value drops and then you have to reduce your imports. Its easy for a country like argentina, for example, to keep a negative balance trade, run out of dollars and then it cant pay unless it devaluates the currency so much , outside money comes flooding in.
The US can print out its own money, but the major risk I perceive is that it wrecks its exchange rate. If the dollar loses value, first it actually adjusts the prosperty of the american people relative to imports/exports, but also risks its world-reserve status. It is often underestimated how profitable it is for the US to be financed by the entire earth on trade. If that changed..it would be a serious, irreversible economic damage.
> Probably dumb question: if debt and deficits don’t matter and a country can just print money - how does that explain cases where countries have defaulted and other countries and their own citizens lose confidence in the currency?
I think the idea is that deficits don't matter if you print money and offset any inflation (1) some sort of jobs program, (2) taxes which can take money back out of the economy and cool inflation, and maybe (3) more traditional ways of tweaking interest rates.
Assume someone with a biology PhD explained to you that the sky was actually purple because of a hidden extra cone your eye possesses that was perceiving light that your brain was canceling out. This somehow sounds plausible, and it's impossible for non biologist me to disprove but at the end of the day I can look up at the sky and say"no, I'm confident it's blue".
This is MMT. MMT says: "government debt isn't really debt and acquiring massive amounts of it that can never be payed off wont ever have consequences because of x, y, and z mental gymnastics".
You don't need a PhD in economics or to be able to disprove everyone one of the Arcane mental gymnastics performed to understand that "government debts are real and they can have consequences". You don't need any special economic training to understand that if you owe someone money, then next month you have a bit less money because you have a debt payment. There are a million caveats, and fifty people with 10$ words that you can't argue because you don't know what they mean because they don't mean anything will explain to you why you are the dumbest person on the planet for believing that "government debts are real and they can have consequences".
It's ok though because you can look up at the sky and know what color it is.
(don't take the sky example too literally, i know it doesn't really make sense).
The point is that the government doesn't need to borrow any money in the first place.
The government needs money only to buy the goods and services of the private sector in the service of the public interest. There is no other utility for money in the modern state.
The government no longer needs to keep stocks of gold, the government can create "digital gold" as needed.
Recall why the government needs to print money: because money is an abstraction, a fungible token that represents a constant fraction of the total real wealth in the the entire economic system. If we keep producing more goods and services, but don't produce more money, we enter deflation. To avoid deflation, the government needs only to ensure that the amount of money in circulation increases in line with any increase in economic output. As long as this is managed proficiently, the economic system will be stable.
The government increases the amount of money in circulation by purchasing goods and services from the public. To this end, the government can offer citizens money in exchange for labour that serves the public interest and fulfill both its economic and pro-social obligation.
What's the point of the government creating these abstract value tokens, giving them to us, and then demanding them back? And furthermore, why does the government need to borrow arbitrary amounts of similar tokens from other governments?
It doesn't. Our current system is a relic from the days of governments using a limited, fungible, physical resource (gold) which didn't linearly scale with economic growth.
The government no longer needs to borrow tokens, it needs only to create more of them, and should only occasionally need to remove tokens from circulation (taxation) as a way to account compel pro-social behaviour -- e.g. carbon emission taxes.
MMT isn't actually proposing anything, but rather is simply explaining how money in the modern economy of a country like America, who's currency is a fiat currency and effectively underpins the currencies of many other much smaller economies, behaves. That's all it does.
In essence, conclusions can be drawn about government debt from this. Politicians are doing this. MMT scholars and economists happen to agree with them because of what MMT shows. Scientifically or rather economically, MMT isn't much different from something like the Credit Theory of Money, in that all it's attempting to do is explain the real behavior of money as opposed to the fiction we create about money in order for our society to function.
MMT does develop this idea of a deficit dove vs. deficit owl, which is where all of this comes from. If you read the article I linked above, you'll see that MMT is mostly focused on deficit spending during a recession.
One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments1 have a very flexible policy space that is unencumbered by hard financial constraints. Not only can they issue their own currency2 to meet commitments denominated in their own unit of account, but also any self-imposed constraint on their budgetary operations can be by-passed by changing rules. As such, this type of government is not financially constrained in the way that non-sovereign units are, so that it can focus on issues such as full employment and price stability.
This reads very much like the articles on MMT that I've been seeing.
Explaining why "monetarily sovereign governments1 have a very flexible policy space that is unencumbered by hard financial constraints" seems a lot like a green light for deficit spending. Maybe not advocacy, but something that will be used by advocates. I see it as similar to the way a research article might say that leafy green vegetables are good for you without telling you to eat them.
Later, the article continues:
"... All these institutional and theoretical elements are summarized by saying that monetarily sovereign governments are always solvent, and can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints."
Saying a company is solvent to buy another doesn't mean that the writer is advocating the purchase, but it may be used by board members advocating the purchase.
Theories never advocate, they attempt to summarize a model of how something works.
Unfortunately, the model that MMT describes ignores very important details, such as the way that the implosion of debt-fueled asset bubbles interact with political systems to cause further bubbles.
> Explaining why "monetarily sovereign governments1 have a very flexible policy space that is unencumbered by hard financial constraints" seems a lot like a green light for deficit spending.
No, MMT is not a green light for deficit spending.
MMT is an explanation for why the entire fiscal model in which “surpluses” or “deficits” (and even moreso government borrowing and having “debt” to finance deficits) exists is a misleading façade when governments monetary power is considered, a holdover that only really makes sense with commodity—rather than same-government-issued fiat—money.
> Maybe not advocacy, but something that will be used by advocates.
Sure, every theory will be used by advocates of something; MMT isn't used to advocates of deficit spending, but by advocates of monetizing fiscal policy. (Though the latter can look like the former if you are stuck on the model of reality that MMT points out is flawed.)
> "... All these institutional and theoretical elements are summarized by saying that monetarily sovereign governments are always solvent, and can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints."
Sure, government can always confiscate everything that exists under its sovereignty. It can either happen via crooks going around with guns, or via "paying" for things by Kinko dollars. The end result is the same in both cases: products and services are not created, because what's the point of doing these, if they are confiscated anyway?
What's the MMT insight again? What does it say that's different than mainstream economics? What predictions it makes that are different than mainstream economics? Why it even has a name, and why are we even talking about it? Ah, I know, it's because it promises "full employment" and all other kinds of free lunches.
I'm not sure if you got through past the introduction or not but there's this really key piece here:
"Now they claim we have got nothing new. And, yet, much of the thought that we
integrated in MMT had been lost in the postwar period. Even the very best of the heterodox
thinkers—people like Bob Eisner—had got caught up in debates over just how strong “crowding
out” is. He took what we call a “deficit dove” argument, against the “deficit hawks”. The debate
took place largely on orthodox grounds, trying to find some “sweet spot” for budget deficits and
debts. Most of our critics remain in the “dove” camp, arguing that deficits in recession are fine,
but that if “too large” they become unsustainable. We developed the “deficit owl” position—a
position that indeed can be found in the work of those we follow, but a position that was mostly
lost by second and third generation heterodox economists."
They go on to explain what that is, and why it matters.
> His insight was that while any single household can dig itself out of a hole by cutting spending when its income falls, the economy as a whole cannot. One household’s spending is another’s income, so if everybody cuts back, no one gets paid. What you get then is a depression—a situation only government can fix because, unlike the private sector, it can afford to spend freely, putting money in people’s pockets and thus getting the economy back on track.
IMO this is a failing assumption that is designed to benefit politicians who make entitlement promises in the future (you can use inflation to undermine the truth of those promises)...
While thrift may initially lead to a stutter/halt in the economy, eventually people will get desperate enough to work for less or products will devalue to lower prices, debtors will accept lower interest rates or even less than principal.
I have long felt that America needs a strong depreciation period so that worker's wages can fall to reasonable values in the world wide scene. (The only reason a living wage is $15 an hour is because so is the price of a burrito w/ tip) ...
In addition, like most half-baked economic insights, it considers the economy of a country a closed system, as if other countries don't exist to buy products when prices fall.
The Bitcoin community ironically supports MMT in order to accelerate the decline of traditional financial institutions. I can't believe people take MMT seriously.
It occurs to me that the primary motivation for politicians to give MMT any attention is because it ostensibly enables their otherwise impractical spending plans, due to the scale of spending proposed in policies like Medicare for All (M4A) or Green New Deal (GND). The interpretation undertaken by these politicians is frightening, at least to me, since it seems like spending that is unchecked.
I can't help but think that rather than starting with a principled look at macroeconomic theory, this is really just politicians figuring out which theory or economic "camp" enables them, and then throwing their weight behind it. In today's age of populism both on the left and right of the American political spectrum, I am extremely wary of proposals for such widely-scoped and fundamental changes to be undertaken just because they have received wide attention very recently. After all, MMT is not new - it is a rehash/repackaging of principles that have been studied in economic theory before.
It seems that the risk here is more of the perception flavor. That is, the strength of the USD, has a lot more to do with peoples perception of the USD.
Similar to how the stock market reacts psychologically to perceived changes in companies management or performance, the USD, could easily be under the same influence - only staying stable as long as it has because Americans and foreigners view the Dollar as “safe”.
Considering most people don’t look into underlying phenomena, but tend to rely on surface level notions like governments printing money as needed = bad, I would say the public perception of the usd could go south.
No one, to my knowledge, has ever been taught that a government should print money as it needs.
If no one believes that is a good thing, then people will lose confidence in the USD as a store of value, which is when inflation starts to get out of control.
MMT seems to me like a plea to politicians to get rid of the independent federal reserve. MMT would create a situation where the goals of the Federal government and the Federal Reserve would be in direct conflict. I have no doubt that Federal Reserve would lost such a conflict but we'd all be worse off.
Recently a younger friend realized that if they wanted to major in Economics, the only option at most schools is a B.A. instead of B.S.
At first I thought it was a bit dramatic for schools to differentiate that specific field so much, since I would think it belongs firmly with other STEM fields, but it's definitely the right call.
That such a basic question like how inflation is created (is it when you print the money, or when that money is spent) is still a topic being debated really makes you want more from the field.
Is there really no way to experimentally test these questions?
So if I understand correctly, MMT says that, when the economy has slack (and therefore unemployment) in it, the government should print money to buy stuff until inflation appears, and then should collect taxes to quench inflation. I see three problems - two major and one minor.
First, spending and taxes are controlled by Congress. MMT would therefore ask Congress to manage the economy. That seems like an incredibly bad idea. If you think Congress has done a good job of running the rest of the country, it might sound reasonable. But given Congressional approval numbers, nobody actually thinks that.
Second, this assumes that following this approach will get us to full employment at the same time or before it gets us to inflation. That sounds reasonable... but what if it's wrong? What if, say, the constraint on the economy is physical stuff rather than people? We might be able to have the government hire people to do jobs that don't require any stuff... if they're watching for this kind of problem and respond appropriately. Again, though, it's Congress that's going to be controlling this. Do you really trust them not to mess it up?
Third, a minor note: When inflation starts, shut of the spending, don't just raise taxes. Otherwise, you have the economy hitting the limits, government using a lot of the output of the economy, and what's left for the non-government getting taxed. It would be better for the government to release some of the resources that it's using, and if inflation continues, then tax.
Mostly the economy has built in automatic stabilizers such as unemployment compensation. Recession = less tax receipts = more unemployment, food stamps, etc = bigger deficits untill the deficits are big enough to stimulate growth again.
It would be good to get rid of the debt ceiling which is a ridiculous prop. Congress can do that. Secondly it would be good to give the federal reserve or other independent policy makers the ability to control payroll taxes to stabilize the economy in a pro-cyclical fashion. When the economy is booming, and we want to curtail inflation , increase payroll taxes, when the economy soft, lower payroll taxes.
It seems obvious once you think about it that at the federal level taxes don't pay for spending. The fed can print as much money as it wants. Taxes only serve to remove excess cash from the economy and keep inflation down.
Or, even more abstractly, they serve as an alternative to inflation, which devalues money indiscriminately. Printing money and taxation both transfer value to the fed; but the latter can be crafted & targeted while the former cannot. In practice perhaps the most significant realization of this is that inflation is a tax on wealth while our system today is mostly a tax on income.
Eh, is that obvious? In some sense I don't pay for a burger with money from my job. I use my credit card to pay for burgers. So it's like I just print the money I need. Of course none of that is true. The fed could in theory print all the money it wants just like I could I theory borrow all the money I want. Both of us realize that there's a limit to how far that can take us.
Its one way of doing it, but think that tax policy you can control: you can make it progressive, or give credits, or do something else. Printing money affects all the currency, and has uneven effects of all kinds, including favoring the banking sector the most.
The mainstream way of thinking says "the government must tax in order to spend" whereas MMT says "if the government wants to spend it will have to tax".
I'm no expert on this, but I think that wording suggests that the government's goal is to tax, but it seems to me that a government really wants to spend.
My understanding of MMT is that it removes the direct relationship between the ideas of spending and taxation, instead tying them both to inflation. Spending increases inflation by adding currency into circulation, and taxation decreases inflation by removing it from circulation. Although I'm not sure how that fits into a one-liner :)
I was surprised to see a reference to "loans create deposits" in this article. I thought that concept was very well accepted and wouldn't have considered it to be part of MMT? Is the MMT part of this just that it also applies to the Treasury/Central Bank relationship and not just retail banks?
> MMT says that, contrary to appearances, banks don’t make loans out of deposits. Rather, they make loans based on the demand for borrowing, then the borrowers stash the proceeds in the bank. Anyone they write a check to simply makes a deposit in another bank. The bottom line is that loans create deposits rather than deposits creating loans. This is one aspect of MMT that even some conservative central bankers—including those at Germany’s Bundesbank—agree with.
A lot of MMT is just restating things Keynesians and Austrians already know and pretending it's some brilliant idea. For instance, they think it's a big breakthrough that the government can pay down debt by issuing more currency. We already know the government can do this, and we also know why it's a bad idea.
Countries can and have defaulted on debts issued in their own currencies. If you printed your way out of debt that would be a default in all but name. You would cause a collapse of credit and a collapse in confidence in the currency itself.
I quickly read, digested, and mentally analyzed the 52 page whitepaper you posted, and am ready to resume the argument from the exact same point of view.
This paper was discredited. It could not be replicated using publicly available data and it was eventually found that there were large scale computational errors: https://www.bbc.com/news/magazine-22223190
MMT supporters would agree with that statement, AFAICT. Some claim that their theories are more clearly descended from Keynes than conventional economics do.
"why it's a bad idea"
aka, inflation. Which MMT spends a lot of effort modelling.
> Some claim that their theories are more clearly descended from Keynes than conventional economics do.
The conventionals recognize this too:
> With everything else going on, I really don’t want to spend time arguing with the Modern Monetary Theory people; after all, we agree on basic policy issues right now, and they are never likely to have as much destructive influence as the deficit scolds. But the MMT people think they have an argument with conventional Keynesians like me, and as long as they’re out there claiming that standard macroeconomics is all wrong, I guess we need to respond.
The economy is like an (enormous) electrical circuit with, crucially, non-linear elements. Mainstream macroeconomics models that poorly which we've seen well demonstrated over the last 10 yrs although there were earlier demonstrations, e.g. stagflation in the 1970's. MMT, while as the article indicates heavily politicized, adds, I think, some insights. For one, money is not exogenous. That is, it doesn't come only from the Fed, banks also in effect create money when they write new loans. Also, what are savings (not necessarily a question raised by MMT)? They're an accounting identity in mainstream macro and supposedly investment = savings. Too simple. Why is there a 'savings glut' in E Asia at the same time that investment in China is remarkably high?
And so it goes. Some steps forward, how many back - don't know but the article does demonstrate just what a political football MMT has become - I'm sure AOC is great but I'm not sure she's an expert in economics. I'd like to see a better theory of non-linear dynamics in economics. The non-linear elements are basically feedbacks where feedbacks allow components of systems to adjust more quickly to changes elsewhere in the system. A forest fire (speaking metaphorically) clears an area of land? The first species to recolonize the land are those that get there quickest. You need to be quick when opportunity arises and feedbacks jumpstart you.
To go back to the electrical circuit - have we even adequately characterized the components (resistor, capacitor, etc.) that go into making up an economic electrical circuit? Also as regards China. China accedes to the WTO in 1999 and only 8-9 yrs later (2007-2008) the circuit blows itself out. Add a huge new power source without compensations elsewhere in the circuit and it will likely fry itself and here we are more than 10 yrs later with the smoldering wreckage still visible. Although if you've come of age in the last 10 yrs, this might not be visible to you. An interesting thing to study is global capital flows - something like the electricity of the system. There was something somewhere where Joseph Stiglitz said: we need a better theory of finance. That is, we really don't know how this shit works.
Im surprised that nobody mentions that the core communicational message has been done before: Milton Friedman always said that deficits are not a problem, because you can print them away.
He would then continue: "The problem is spending, thats what you have to cut". (MMT, however, took the exact opposite stance).
Just modern keynesians wanting to confiscate savings somehow, and what better way than to print money. But even then, MF would say "You print money, reduce your deficit and your currency devalues to match your import/export". MMT has less weakness in inflation as it has in the exchange value of the dollar.
You dont want to mess the dollar value because it might take away its role as a world reserve currency, meaning everything gets way more expensive for the us if that happens.
MMT is neither modern (its basically Abba Lerner's "functional finance" from the 40s), nor it's even a coherent theory. MMT fans don't like to draw up models that can be understood by other economists. With functional finance you knew exactly where Lerner stood and his claims were challenged with real-world data and the theory faded with relevance. With MMT if you try to challenge them in any way they will claim that they are misunderstood - the "not a true Scotsman fallacy".
This is why MMT is ignored in most academic circles - it doesn't bring anything new, and neither it does in a scientific way and understandable way.
There is also the question of politics - there is a perception that mainstream economists are right wing that is why somw turn to "heterodox" economics. Of course this is non-sense, and mirrors libertarian obsessions with Austrian school economists. Mainstream economics can inform both left-wing and right-wing policy making, just fine.
I found a critique of MMT, by another (seemingly) heterodox economist, which outlines the difference between MMT and some superficially similar heterodox perspectives. It worths a read, in my opinion.
MMT is a rationalization for unlimited spending & economic control. Do you really think AOC, Warren, Sanders actually understand the theory of MMT which they advocate (if not by name)?
The MMT theorists began with the conclusion they wanted and concocted a theory to get there. This is policy shaping theory at its finest.
It's also such a disingenuous name – "modern" monetary theory. To the layman, it automatically reads like a new and improved understanding of Economics, when in reality it's just another theory, and not even a very mainstream one at that.
Based on the names that you supplied, I'm guessing that you assume that MMT is a left-wing idea. I think the bigger reason to pay attention to it is because it has support on both sides of the American political spectrum. Read The Macro Tourist's post [1] for a pragmatic trader's take on the matter. He also suggests that Trump is already an implicit proponent of MMT, what with his increased spending and decreased tax revenue.
I get what you mean based on the dictionary definitions of implicit and proponent. What I meant was that his actions are aligned with MMT theory, even though he probably doesn't explicitly subscribe to the theory.
MMT has been getting a lot of press lately. I wonder what submarine[1] is responsible?
Here's the thing: MMT isn't a policy position. It's simply an attempt to accurately describe how the monetary system actually works from an operational perspective[2]. It was a reaction against the Krugmanite nonsense that has no basis in reality and describes the activities of no market practioners. Anyone curious should read the linked primer, but the core principle of MMT is that Taxes drive the value of money. The sovereign's power to impose taxes that can only be paid in the sovereign's liabilities creates an intrinsic demand for those liabilities, which is to say money. Even the gold standard worked this way. The government used to print gold certificates and use those to buy bullion from miners! And of course gold certificates were accepted to extinguish tax liabilities.
That said, a number of MMT theorists are in fact politically liberal and believe that the government should use its monetary sovereignty to interfere more in the economy. It's valid to object to claims like "every dollar of spending has to be funded by a dollar of taxes" because they are observably false. But you could be a hard money conservative goldbug and MMT would STILL be a theoretically valid understanding of how money works. The theory correctly describes the consequences of using a currency the sovereign cannot issue, be it gold, or another sovereign's liabilities.
One area where MMT does hand-wave a bit is on the importance of business investment in creating additional demand for the sovereign's liabilities. While from an authoritarian perspective the power to tax and imprison suffices to create demand for sovereign liabilities, in terms of having a society that isn't awful to live in it's really nice to have lots of businesses doing interesting things that can be paid for with those sovereign liabilities too. I suspect this is partially why proponents of the theory are so bullish on the sovereign controlling more of the economy, they fail to adequately consider the indirect consequences. Or they simply don't care or even consider a command economy a feature rather than a bug. I don't know.
So, please, don't confuse the factual descriptive theory with the subjective policy recommendations some people attempt to justify with that theory. The theory can only describe what government CAN do. What government SHOULD do is not dictated by MMT.
Edit: I discovered MMT during the first Greek debt crisis when lots of economists were going on about how America was going to be the next Greece. Farcical, but I guess it got clicks? This[3] is a nice overview of why the USA isn't like Europe. Of course this isn't really news, since Wynne Godley described the problem in 1992[4].
I think one reply to your concern about the importance of businesses who accept the currency is this. Businesses will basically want to trade their goods for any sufficiently liquid asset; government currency has no special status except that it is what they need to pay taxes. All US businesses might move over to bitcoin for some reason, but they’ll need USD for all their taxes, so government currency retains its value as compared to other conceivable private means of exchange. The theory is about sovereign money in particular, and the only essential reason businesses are interested in the national sovereign currency (when they could transact in any medium of exchange and store value in any valuable asset class) is taxes.
Not liberal, progressive. The submarine is progressive leftists using MMT as a justification for supporting progressive policies like tackling climate change or funding public education.
Another Central point which has not been mentioned here is that since government imposes a tax on a society in the base currency, then by definition it controls unemployment in that base currency. As a result, the government should offer or provide a job guarantee in order to close that gap. Note to socialist/alarmist types, this is a job that would put a floor on labor.
>What’s more surprising is how much flak the school of thought is taking from liberal economists who’d appear to be natural allies, such as Larry Summers
That's not in the slightest bit surprising. Larry Summers instinctively sides with the large banks and has essentially built an entire career off that.
He was also one of the advisors to the Soviet Union breakup who told them how to privatise in such a way that oligarchs captured most of the wealth.
Two simple critiques: 1) Relative to a financial statement (i.e. budget), it is difficult to predict and measure inflation. This difficulty lowers the likelihood of government fiscal responsibility and increases the likelihood of devestating inflation.
2) A basic second-order effect: What happens when people realize transfer medium is being debased? They'll obviously try not to store value in that transfer medium. How will volatile inflation affect the use of the transfer medium? Why wouldn't users switch to a better store of value, like every single developing market that has ever lost control of its currency?
I am embarrassed for profession of economics that MMT is being entertained as a viable "new-old idea." Of course the government can debase the numéraire of the economy. Obviously, doing so transfers value from non-government to the government similar to taxation. The financial statement of the economy has to balance. This is merely a backdoor way of transferring assets in a deeply unaccountable way.