The usefulness of Stock-Flow Consistent (SFC) models is that they allow us to illustrate concepts in economics without relying solely on verbal descriptions.
In this article, I will discuss my interpretation of some of the ideas floating around in Modern Monetary Theory (MMT). I will note that these are my interpretations of statements made by others, illustrated by an extremely simple model. The key is that even simple models can be used to clarify our thinking.
This article is only a partial response to an article by Gerard MacDonell. He is unhappy about some of the writings of Professor Bill Mitchell, one of the leading MMT economists.
I am not going to argue on Mitchell's behalf, rather I just want to offer some analysis that touches on some of the technical issues Gerard made. He noted that Federal taxation and spending are roughly similar, so how does that square with MMT pronouncements about the independence of taxation and spending? This outcome is not surprising, as it is exactly the sort of thing that is predicted by SFC models -- and MMT mathematical analysis of the economy uses SFC models.
For those if you who are not fully up-to-date on post-Keynesian factionalism, please note that SFC models were meant to be a mathematical lingua franca for post-Keynesian economics. In other words, MMT economists use SFC models, but they are not exclusive to MMT.
Since I want to work with my Python modelling framework here, and it currently cannot support full business cycle analysis (extensions will be added later), I cannot do complete justice to Functional Finance. Therefore, I have to just focus on a couple of more basic ideas about fiscal polictBond Economics
I will address these here in turn....
- there is little relationship between taxes and spending; and
- governments cannot control the budget deficit.
SFC Models And Introductory MMT-Style Fiscal Analysis