Three levels of controversy over MMT
One thing I think worth pointing out about the recent MMT controversializing is there are (at least) three levels, related but distinct, at which these arguments take place.
The first is the argument that people mostly pretend they are engaging. Is MMT “good economics”? Is its characterization of the economy empirically accurate? Does it yield useful predictions that other perspectives on economic phenomena might not? If a philosopher king took an MMT economist’s advice, would the policy outcomes be virtuous?
This is definitely an important component of the discussions, but although it sometimes pretends to be, it is far from the only piece.
A second argument concerns the political economy of MMT, as opposed to conventional Keynesianism or other “left-ish” approaches. In this actual world where there is no philosopher king, but a restive public, entrenched elites, and a cumbersome political system whose arcane workings are determinative of policy, would characterizing the economy in MMT-ish terms, in the public and/or the technocratic sphere, yield better results or worse than other descriptions?
Obviously, this is related to the first question on the quality of MMT as “pure” economics. If MMT-ish views are politically potent, but the policies they recommend would bring catastrophe, that shouldn’t count as a point in MMT’s favor. But among the center-left to leftish groups among which this controversy rages, there is a fair amount of overlap in near-term policy goals. Most of these groups would like to see tax rates on the wealthy raised, as a means of addressing inequality, not (just) as a matter of public finance. Most support Medicare-For-All, or at least some reform of status quo ObamaCare that would be substantially more aggressive about universality and affordability. Most want, if not the Green New Deal, some form of much more muscular climate policy.
There are differences too, of course. The MMTers are famously supportive of a job guarantee or employer of last resort program, where others favor seeking full employment more conventionally by running the economy “hot”. Some on the left favor a UBI or universal dividend, policies towards which MMTers have been less than gently skeptical. Some worry that MMTers would discredit otherwise good programs by failing to tax sufficiently, causing high inflation or debilitating interest rates that could open the door to a crushing reaction.
Still, there remains a lot of overlap, and an important component of the debate is whether MMT or more traditional views will be better politically at delivering the goods that many of us can agree we want. MMT economist Pavlina Tcherneva’s riposte to MMT-skeptical Doug Henwood is extraordinary in this regard:
Henwood does not acknowledge that one of the most effective ways of engaging in this struggle is to render the wealthy obsolete — as in, we will stop pretending that we need them to pay for the good society. In a world with a sovereign currency and modern monetary and fiscal institutions, we never really did, and we sure don’t now. And the public needs to know it. That’s the MMT message.
For the record MMT, as Henwood acknowledges, has always argued for taxing the wealthy to address the problems of inequality and political power, but we also offer a different kind of empowerment — one that comes with lifting the veil of money.
I would say that Henwood (like other “tax-the-rich-to-pay-for-progress” lefties) is tethered to the wealthy by an imaginary umbilical cord that holds his progressive agenda hostage to his oppressors. To me, this is the definition of a self-induced paralysis.
Time to cut the cord. MMT has a profound emancipatory power and the Left would do well to awaken to its potential.
And here is MMTer Randy Wray:
Henwood wants us to believe that Government needs inequality. We’ve got to cater to the rich. They get to veto our progressive policies. If there weren’t rich folk, we’d never be able to afford a New Deal. We only get the policies they are willing to fund. If we actually did tax away their riches, government would go broke.
As [MMT economist Stephanie] Kelton puts it, people like Henwood think money grows on rich people.
For far too long left-leaning Democrats have had a close symbiotic relationship with the rich. They’ve needed the “good” rich folk, like George Soros, Bill Gates, Warren Buffet, Bob Rubin, to fund their think tanks and political campaigns. The centrist Clinton wing, has repaid the generosity of Wall Street’s neoliberals with deregulation that allowed the CEOs to shovel money to themselves, vastly increasing inequality and their own power. And they in turn rewarded Hillary—who by her own account accepted whatever money they would throw in her direction.
Today’s progressives won’t fall into that trap. “How ya gonna pay for it?” Through a budget authorization. Uncle Sam can afford it without the help of the rich.
And, by the way, they’re going to tax you anyway, because you’ve got too much—too much income, too much wealth, too much power. What will we do with the tax revenue? Burn it. Uncle Sam doesn’t need your money.
Me: tax the rich to feed kids and save the planet.
Randy Wray: “What will we do with the tax revenue? Burn it. Uncle Sam doesn’t need your money.”
Which makes for better politics?
me: “Fewer Lamborghinis, more bullet trains. Fewer Hamptons houses, more public housing.”
Wray: “burn their money”
On purely economic terms, this is a case where the MMTers clearly have the right of it. MPC (“marginal propensity to consume”) effects are real, not a mere artifact of an empirically invalidated Permanent Income Hypothesis. As Dean Baker reminds us, short of near wholesale confiscation, taxing the income at the gilded heart of America’s top inequality is a poor way to free up real resources that would otherwise be consumed. You’ve got to tax more normal people, whose spending is sensitive to changes in income. You can’t actually pay for bullet trains by displacing Lamborghinis. You want to tax the very rich anyway.
But “Fewer Lamborghinis, more bullet trains” is still a great slogan!
So, which is better as politics, the pop-MMT “Fuck the rich, yes we can, just do it!” or Henwood’s “Melt Lamborghinis, make mag-levs!”? I don’t know. But I think it’s an important question. Even if you think MMT economics is total bullshit (to be clear, I don’t), it may still, as Brian Beutler argues, be
useful because it’s a specific, articulable way of describing national finance that provides Democrats an answer to starve the beast… Democrats must either come to grips with the nature of their opposition, and prepare themselves—whether it’s through embracing MMT or just pure political grit—to use power on a level playing field with Republicans, or leave us stuck on the seesaw until, eventually, Republicans win. The left is either going to beat conservatives at the game of chicken they have forced us into, or it is not.
Tcherneva, the MMT economist, provocatively asks on Twitter:
Suppose a very progressive govt says “Yes, #MMT is right, we have all the financial resources we need” and starts working on implementing a #GreenNewDeal, #JobGuarantee, #M4A etc etc. What’s the worst that could possibly happen from the POV of all fervent Left MMT critics?
If you think MMT is good politics but bad economics, it may be worth asking whether there isn’t some tweak or reform that would render the economics acceptable and retain the good politics. And advancing that project of reform might, all things considered, be a more virtuous project than ostentatiously dissing MMT under the banner of your own economic views.
Or not! If you think that MMT is just snake oil, that the economics is so bad it will undermine and discredit any policy undertaken in its name, then ostentatiously diss away! We all have hard choices to make.
Which brings us to the third level of MMT controversializing. Economics debates are often passionate, and frequently become too personal. But MMT debates are stuck on infinite recursion, and they take place in a thunderdrome entirely their own. The depth of the resentments between veteran partisans is astonishing. MMT arguments escalate almost immediately to thinly veiled campaigns to publicly expose ones opponent not merely as mistaken, but as a fraud, an idiot, a hypocrite, or a traitor to some Left cause. Like members of hostile tribes doomed over centuries to share the same tiny valley, each side points to perfidies and massacres perpetrated by the other, the Twitter horde that harassed for weeks, the line taken out of context and publicly mocked. I’m not here to adjudicate those claims, to decide who started it or who is ultimately to blame. But at this point it is simply there, ubiquitous, on all sides of every MMT-related controversy.
Which does matter as you read this stuff. All persuasive writing is susceptible to motivated reasoning. But given the duration and the depth of resentments on both sides of MMT debates, I advise fresh readers to take the strength of writers’ assertions with boulders of salt. I urge seasoned readers to do their best to muster some openness and goodwill towards the side you think you disagree with. Often the disagreements are smaller than you think.
Love your enemy. Who is not your enemy, not remotely.
Update History:
- 3-Mar-2019, 10:35 p.m. PDT: “would
yieldbring catastrophe, thatwouldn’tshouldn’t count as a point…”; “groups amongwhomwhich this controversyis liverages“; “…infinite recursion, and in my experience theyaretake place in a thunderdrome…”; “MPCeffects(“marginal propensity to consume”) effects are real”
“Suppose a very progressive govt says “Yes, #MMT is right, we have all the financial resources we need” and starts working on implementing a #GreenNewDeal, #JobGuarantee, #M4A etc etc. What’s the worst that could possibly happen from the POV of all fervent Left MMT critics?”
Simple: there actually ends up being a lot of inflation, contrary to MMT expectations. We get another “revolt of the bondholders” like in the 1970s. Capital refuses to lend except at punishing interest rates, and takes their money elsewhere. The MMT-inspired government responds by “running the printing press” (either literally or metaphorically speaking by adding zeroes to electronic accounts). More inflation results. Repeat. “Leftist” economics gets utterly discredited. We get another “neoliberal” backlash, this time on steroids.
Until MMT advocates can explain to me how, empirically-speaking, we can observe the co-existence of significant inflation and unemployment without invoking special ad-hoc explanations (it’s not just the 1970s. Look at the year 1990; Look at a counter-factual 2009 where the Fed did not institute interest on excess reserves), and why the same won’t happen under their tenure, I won’t be satisfied.
March 4th, 2019 at 5:18 am PST
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OK – I don’t really think this gets to heart of what I see as my issue with MMTers (rather than MMT as a theory). My worry is that they don’t worry enough about structural stability (in particular by not worrying about the balance of payments, and through their employment guarantee). People have a long but limited life and need to make decisions that have a long lasting impact on their lives. Coming into a world with dynamic but predictable structural design is useful and important to people. Thinking that unstable financial flows can just be just stopped up, is ignoring the real economy consequences. I’m sort of disappointed that the debate only concentrates on money. Money is always just a facilitator. We need to be more concerned with the real economic. Steve, you go some of the way there, but not far enough as far as I am concerned.
March 4th, 2019 at 10:01 am PST
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That last “economic” was supposed to be “economy”.
March 4th, 2019 at 10:15 am PST
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MMT is functionally the Supply Side Economics of the left, although not as hackish as that or Laffer’s Curve.
March 4th, 2019 at 12:44 pm PST
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I think the monetary part of MMT would work but I, like Josh Barro, do not think that it enables much more spending.
In MMT the government becomes like the banks in a free banking system, where if the value of their money start to rise against goods and services and other banks money, they can spend more, floating more currency but the amounts are modest.
March 4th, 2019 at 1:38 pm PST
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Oddly I disagree with Dean Baker or at least with you (roughly the first time for either)
It is not true that ” to free up real resources that would otherwise be consumed. You’ve got to tax more normal people, whose spending is sensitive to changes in income. ” It is true that to use taxes to free up resources that would otherwise be consumed, you have to tax normal people. But you can also free up resources by raising interest rates which causes reduced residential investment.
By standard NIPA terminology, the resources not expended on building huge houses are not “resources that would otherwise be consumed” because house construction is considered investment not production of extremely durable consumption good. But resources go into building houses and would be freed up with no tax increase at all if interest rates were increased.
Importantly, business investment is not very sensitive to interest rates. In standard macro models the Green new deal made possible by crowding out investment would be bad for workers because reduced capital formation would lead to reduced real wage growth. But standard models are crap for many reasons, one of which is that they ignore the housing sector entirely. The workers would suffer because they had to live in houses just larger than European houses not much much larger. Importantly, the higher interest rates are not a dead weight loss. They mean someone has high income (which can be taxed).
The full green new deal is green new deal + mortgage rates so high that people live in apartments not single family homes and don’t commute huge distances which is … oh quite possibly even better for the environment than the green new deal policies.
So go after their houses as well as their trucks and hambergers. But do it in a way that the Fed gets the blame.
I don’t really know much about MMT, but it doesn’t seem to me that they are right about the econoomics. They don’t seem to believe that resources need to be freed up. I mean at least in the recent discussion they seem to assume a huge output gap and that 4% is far above the natural rate of unemployment. Certainly the idea that the state can spend more without taxing more fits poorly with thought about freeing up resources.
I’m pretty sure that until a little while ago, they said the deficit should be increased until full employment reached. I think that means they should say there is currently no room for increased deficits. The idea that MMT says that government spending could now be increased without increased taxes is, I think, about a year or two old. Basically when there was high unemployment MMTers (acting as conventional Keynesians in disguise) said a higher deficit would be OK, because unemployment was high. Now they say that it is still OK as the fact they stressed 3 years ago doesn’t matter.
March 4th, 2019 at 6:53 pm PST
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Robert — I don’t disagree, and I don’t think Dean disagrees (though I won’t speak for him), that interest rate policy can (usually) be used as an alternative to tax policy in relieving real resource constraints. My comment that “[y]ou’ve got to tax more normal people” is under the restriction that we are arguing over taxation, as Henwood and the MMTers are. If you are taxing to relieve real resource constraints, a lot of dollars taxed from the Lamborghini set will translate to not-so-much relief.
Though the MMTers are cagey on this (and I can’t speak for them either!), I don’t think they fully disagree about interest rate policy. I think they’d emphasize the contingency embedded in my “(usually)”, argue that interest rate policy is less reliable than we think, that there are circumstances under which the sign of its effect might flip. But mostly they’d emphasize normative concerns — that the mechanisms by which interest rate policy stimulates or relieves pressures are less than wonderful. You emphasize that high interest rates can reduce real resource pressure through a housing investment channel. Krugman jumped on Kelton for presuming a business investment effect, because it opened a normative argument that stimulative interest rate policy encouraged indebtedness and financial-fragility, and I think you are joining him, but oddly overall the MMTers are I think glad to concede commonly presumed channels of interest rate policy transmission are unreliable.
I share the MMTers normative dislike for reliance on interest rate policy as a stabilization mechanism, though I wouldn’t ditch it entirely and fix rates at zero (as some of the MMTers propose). I dislike relying almost entirely upon interest rate policy because I think it functions in practice much more via wealth effects (housing, stock, bonds) than effects on real investment in structures or anything else, and because I think low interest rates do encourage financial fragility — not through standard business investment and a hurdle rate, but through asset bubbles and financial yield-seeking (along with the financial sector’s ingenuity at meeting customer demand). I think the political economy problems of using interest rate policy relative to tax policy are too lightly treated. We just watched, in real time, our macroeconomic stabilizer do a 180 on long telegraphed stabilization policy because the stock market tanked. You can justify that, of course, on policy grounds. Roger Farmer tells us that wealth effects are the business cycle, so supporting the stock market is stabilization. But I’m not sure it’s any more credible in today’s financialized world that the Fed pulls a Volcker and destroys the value of the collateral against which all the world is levered, and destroys the wealth of our best enfranchised classes, even in the context of surging resource and price pressures. Interest rate policy can stimulate right down to the zero bound, but if we needed seriously to contract, we might quickly face a choice between tolerating inflation and financial armageddon. It’s worth keeping in mind that all these decades the economics profession has been celebrating the efficacy of interest rate policy, interest rates were trending down down down.
Anyway, I hope this is less unpleasant than some of your other recent conversations. (Your miseries show up in my feeds!) We Waldman[n]s must stick together and amuse one another.
March 4th, 2019 at 8:40 pm PST
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“And, by the way, they’re going to tax you anyway, because you’ve got too much—too much income, too much wealth, too much power. What will we do with the tax revenue? Burn it. Uncle Sam doesn’t need your money.”
But in the MMT framework, isn’t that what happens with all taxes from all sources anyway? That’s practically the whole point. But the other side is that Uncle Sam does need your money to not be in public circulation anymore to avoid inflation.
“MMT is functionally the Supply Side Economics of the left, although not as hackish as that or Laffer’s Curve.”
I think this is unfair to both MMT and the Laffer Curve. Both are basically true, but are also a framework that hacks exploit to make dishonest arguments for their preferred policy choices. For the Laffer Curve, it’s saying against all evidence that we are always on the right side of the peak, and so tax cuts will entirely (or at least mostly) pay for themselves; for MMT, it’s saying that because as a technical matter a country like the US (is right now) can’t be forced to default (true), and therefore we never ever need to pay for anything and won’t face repercussions.
March 4th, 2019 at 8:44 pm PST
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I actually understood that you (and Dean) meant if we are confining ourselves to tax policy.
On interest rates, I think you are discussing something different from what I had in mind. I wasnàt talking about stabilization policy. I was looking for something to crowd out so resources were available for bullet trains (I would write universal pre-k not bullet trains). So proposing constantly high interest rates to discourage home building.
Here (like Dean) I was assuming you need to reduce some spending to increase other spending — that is talking about policy with full employment. With high unemployment just spending more without taxing anyone makes sense). So not about stabilization policy.
Since the proposal was high interest rates, the problem with low interest rates are another reason to do it (rather than tax the non rich which is politically impossible).
On channels of monetary policy, she was considering only the business investment channel and asserting that monetary policy is ineffective (and nothing interesting happened in 1980 or 1981). Her view on monetary policy is very similar to Prescott’s.
March 4th, 2019 at 9:04 pm PST
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Robert,
now for once I disagree with you. I don’t high interest rates stop people building big houses, I think they drive the price of land down – at least in the medium long term, and it is the high price of land that encourages people to live in flats.
But probably like you and definitely like Adair Turner, I think the world would be better if people borrowed less money from banks to buy houses and the land that those houses are built on. I’m all for a public policy mix with some printing of money and higher interest rates.
March 5th, 2019 at 6:06 am PST
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Corrections:
1. Second sentence first clause – “think” is missing after I – Descarte would blush
2. Same sentence second clause – “medium long term” should I think be “longer medium term”
March 5th, 2019 at 8:36 am PST
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I wonder if Steve and everybody understood my first point.
See I think one area where economics has gone way wrong – is that it thinks maximum efficiency is an end in itself. But I think most people don’t care much about it (there is plenty of evidence that producing a little more doesn’t produce much extra happiness). What people (who are long lived creatures who are vulnerable for a considerable part of their lives) is stability. They want tomorrow to be much like yesterday. Mostly it is, but sometimes there are massive shifts. MMT makes exactly this mistake. It thinks people want any job. I think people want a familiar job, one that uses knowledge they already have. I think a job guarantee and ignoring trade deficits will encourage lots of people to remain doing fairly useless things and not adjusting towards sustainable situations when they should. And they would be very vulnerable to a change in policy (nepotism and corruptions are perhaps bigger dangers than they already are).
I think we need to worry much more about trade deficits (we need international financial reform), not less (I don’t like people being indebted heavily – it always ends in conflict). And I think a UBI would be better for people than a job guarantee because it would give people more long term prospects, which is what I think people want. I can’t see how a job guarantee doesn’t become a micro-economic mess.
March 5th, 2019 at 8:46 am PST
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Dude!!!
This is the best summarization of the issue I have seen.
I believe that need for MMT-like policy has been understood for a very long time. It was just kept on the back burner because neoliberal ideology was actually the most pragmatic option for the developed world to pursue WHILE globalization as we’ve known it for the last 40 years ran its course, and the developed world benefited from hegemony, and being the printers of the world’s reserve currencies.
Now, as that reality comes to an end for the developed world, all of a sudden, “respected” economists on the right and the left will put up a phony fight against MMT, and a viable policy that allows MMT to work in a mixed market economy will be “figured out”.
March 5th, 2019 at 2:27 pm PST
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[…] Three levels of controversy over MMT – interfluidity […]
March 5th, 2019 at 11:32 pm PST
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[…] levels of controversy over MMT” [Interfluidity]. “If you think MMT is good politics but bad economics, it may be worth asking whether there […]
March 6th, 2019 at 11:33 am PST
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Isn’t the entire reason to have MMT at all to emphasize that it is real resource constraints (human and material) and not fiscal ones that create the activity boundary?
And isn’t the point of eliminating the delusional, self-imposed fiscal restraints to put a stop to the labour wastage represented by the un-and-underemployment (and all of the pernicious social costs associated thereto) that plagues our economies?
March 6th, 2019 at 6:40 pm PST
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[…] Three levels of controversy over MMT Steve Randy Waldman 3 March 2019 – https://www.interfluidity.com […]
March 7th, 2019 at 3:03 am PST
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In the current debate MMT is seen as a way to make the GND painless by not having to sacrifice current period consumption. That seems dubious. The GND is not just about building new green infrastructure, it’s also about rapidly depreciating and stranding existing non-green capital. Surely that will have a wealth effect. It also means that current period consumption will have to fall in order to have more saving needed to finance not only new green infrastructure, but also the fact that existing non-green capital will be idle and on the sidelines. Idle capital means less consumption. One alternative would be to rely upon foreign savings, but that would also require the importation of real foreign resources (e.g., labor, machinery, etc.). But having introduced foreign savings, now you’re no longer operating in the closed economy environment that’s oftentimes a hidden assumption in MMT discussions. So now you have to believe that having the Fed create money won’t have an effect on the exchange rate. It also means that now you’re opening up a gap between GDP and GNP. It gets worse, because the GND is all about stranding non-green capital, it also means you widen the gap between GNP and NNP; i.e., a higher depreciation rate. And at the end of the day it’s really NNP that we care about because that’s the true measure of our long run welfare.
March 7th, 2019 at 12:50 pm PST
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Your division of controversy onto three levels — 1.) the ideal (Is MMT “good economics”?), 2.) the pragmatism of political rhetoric (are MMT descriptions politically potent?) and 3.) partisan resentment — begs to be turned around on mainstream economics.
Is neoclassical economics “good economics” in an ideal sense? Has neoliberal rhetoric been politically potent? Has neoliberalism had good policy results? And, finally, is the arrogance of economics justifiable?
Serious criticism of neoclassical economics as fundamentally flawed has been mounting in volume at least since the 1960s without much apparent effect on the pedagogy of Econ 101 — if anything, Mankiw’s textbook today is more dogmatic than, say, Lipsey-Steiner in the 1960s. MMT’s strongest claim to legitimacy is based not so much on the accuracy or sophistication of its own assertions as on the quite accurate claim that the textbook loanable funds model is complete and indefensible rubbish. Of course, critics who have been routinely ignored and dismissed since the Cambridge Capital Controversy are going to be resentful of those clinging to wrong doctrines with the same fervor that they cling to prestige and power.
It is one of the remarkable mysteries of practical policymaking and governance that the neoliberalism derived from neoclassical economics has been as effective and powerful as it has been for over 40 years, despite (or perhaps because of) the numerous and fundamental flaws of neoclassical economics as a social science theory and doctrine, judged by ideal standards of science or scholarly criticism. Economics, after all, has to serve as a coordinating device and common language for politicians, policymakers, administrators and businessmen across many countries and this, it does with remarkable effectiveness. The political potence of neoliberalism rests on acceptance of a policy consensus that has been notably immune to criticism or competition.
As for whether the level of partisan resentment obscures more than it reveals, that may be. In this most recent round, I thought Kelton in particular did very well in staying focused on the particulars of her rationale for certain analytic claims, against Krugman. But, I am not very sympathetic to Krugman, Summers or Rogoff even when they are playing liberals on teevee. As for Henwood, whether he suffers from Stockholm syndrome or simply shares Cersei Lannister’s insight (“power is power”), is more than a matter of judgment. It is tangled up inextricably with the technical hazards of policymaking, even though the rhetoric of professional policymaking may inevitably rationalize rather than lead the exercise of power, as you have argued.
But, the example of neoliberalism shows that arguably bad economics can serve as the foundation of potent ideology as long at the technical hazards of poor policy design visit suffering on the politically impotent while benefiting the patrons of the politically well-connected and the professional and technocratic classes most interested in politics as drama and vocation.
As a “fringe” academic doctrine, the advocates of MMT are almost forced to make radical and outlandish claims to attract attention. As examples, I am not much impressed by MMT claims to the effect that a marketable national debt is superfluous or that Treasury and Central Bank ought to be placed under unitary control of the legislature. I do not see how a Job Guarantee could be institutionalized without breaking the system of working for wages, but I do not see how a Basic Income could be sustained politically either. Reading the headlines on climate change and ecological collapse, I am inclined to think that the developed world needs desperately and soon to embrace constraints on economic activity and consumption — a regime change that will have to be quite radical if civilization is to long survive passing the inflection point at the apparent peak of the industrial revolution’s consumption of fossil fuels. So, perhaps I see MMT’s roots in Lerner and Minsky as archaic; what I have my eye on is whether Samuelson economics as Euclidean geometry will be toppled in time to save the world. In that, I suppose I see things as commenter Sukh Hayre does.
March 8th, 2019 at 10:38 am PST
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2slugbaits
I’m mostly on board with your views but:
” And at the end of the day it’s really NNP that we care about because that’s the true measure of our long run welfare.”
umm.. no its not.
GNP/GNI/NNI/NNP whatever are not measures of welfare. Increasingly so.
March 11th, 2019 at 9:29 am PDT
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Bruce Wilder,
I am intrigued – you wonder how a Basic could be “sustained politically”. I think once it is there, it would be very difficult to get rid of rid. I think the problem is to get it introduced. It seems you think the opposite. Why?
March 11th, 2019 at 9:34 am PDT
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One point that is overlooked by most MMT critics is that MMT advocates automatic fiscal stabilizers. We already have automatic fiscal stabilizers in the form of income taxes, welfare benefits, etc. These work well in helping people out in times of high unemployment, and in limiting income in times of high inflation. The proposed job guarantee would be another automatic stabilizer and, therefore, more politically feasible than alternatives such as UBI.
But that is a policy proposal which is untested and, thus, open to various opinions. The main body of MMT, as I see it, is just a description of how the current system works. As Keynes noted, the fallacy of composition is central to macroeconomics, and this is also central to MMT. Fiat currency is a fact around the world. Accounting based economics, recognizing sectoral balances, is clearly useful in understanding the monetary and economic reality that we live in. Financial instability is clearly something to worry about (see 2008 crisis), and MMT is built atop Minsky’s work in that area.
Please see my colorful diagram, Evolution of Selected Economic Schools, for an easy to digest summary of MMT in comparison to other schools, and please let me know if you have any comments or suggestions.
March 13th, 2019 at 8:01 am PDT
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I agree with the MMT suggestion that the policy interest rate should almost always be zero. I think measures such as a Land Value Tax, tenants’ rights and ample availability of social housing are a much better way to prevent land price inflation than interest rates. However I wonder whether it is worth keeping the option to increase interest rates for use in exceptional circumstances perhaps in the same spirit that central banks maintain gold reserves -just in case. Singapore overtly uses interest rates purely as a way to moderate currency exchange rates. I think that almost all of the time, currency exchange rates are best left to float as they will and almost all of the time that will be an automatic stabiliser. But perhaps some crisis scenario will throw up a situation where a currency slide becomes a vicious cycle and something such as interest rate policy and/or gold reserves are worth having. Given that, I guess it is then worth keeping the national debt largely in the form of bonds rather than bank reserves since positive interest rates with the national debt as bank reserves or T-bills would feed a fiscal deficit that could act against supporting the currency exchange rate. I don’t though see why there couldn’t be a policy of always pegging T-bond yields to never being >inflation. Maybe I’m just not understanding this though.
March 13th, 2019 at 9:53 am PDT
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#19 bruce wilders: “It is one of the remarkable mysteries of practical policymaking and governance that the neoliberalism derived from neoclassical economics has been as effective and powerful as it has been for over 40 years”
Of course was, yes WAS it effective. But that’s not surprising – no mystery! It’s also not surprising that meanwhile sand is getting into the neoliberal machine.
Practically unlimited credit money creation since over 40 years unleashed huge productive capacities and showed – to a certain extent – the truths of supply side economics. But – as you know – credit expansion boosts debt that enables the consumption that supports the supply side doctrine (originally US-specific: credit card based consumption).
Well, at some level debt gets unsustainable through reaching a global ceiling: a limit on credit-worthiness, down till the ‘praised’ micro loans in developing countries. Economic expansion will then drop to low levels, albeit we know that levels of prosperity growth until the seventies are NOT low -despite limited credit expansion at that time. To my opinion, this is related to former spending nature of the rich combined with their high taxation up to 91%. A pre-neoliberal prosperity era could be re-established only when top tax rates and spending of the wealthy people in general would compare to postwar figures.
March 16th, 2019 at 4:16 am PDT
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Rob Maris,
question – why do you think think “… and showed – to a certain extent – the truths of supply side economics”.
Besides thinking that supply side economics should always be written “supply side” economics, but it is not really supply side at all, I don’t think the evidence is in the data. Growth slowed, after the supply side revolution. Investment in western economies is down. Real supply side economics would mean more government investment (especially in infrastructure and basic science). In stead those things have been reduced.
I really feel like ranting a bit here.
If we want to talk welfare, should we stop ignoring the elephant in the room, distribution. The easiest way to improve the general welfare is to shift resources from those who have plenty to those who have little. No ifs or buts – it is an order of magnitude more effective than trying to grow the pie, when there is little evidence that we can actually do it, let alone sustainably.
March 17th, 2019 at 6:58 am PDT
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I keep wishing there was an editing button here.
Missing important words in both my last two comments.
.. how a Basic INCOME could be … in my reply to Bruce Wilder
… than trying to grow the pie FASTER, … in my last comment (most important) – and one thing the right continually obfuscates – they don’t just have to grow the pie they have to do it faster and for longer for it to just justify increasing inequality.
March 17th, 2019 at 7:03 am PDT
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[…] Three levels of controversy over MMT (interfluidity) […]
March 20th, 2019 at 4:59 pm PDT
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