Wednesday, November 11, 2020

John Weeks’s flawed criticisms of MMT. — Ralph Musgrave

His basic criticism is the not entirely invalid point that MMT is fine for large countries, but not so good for small ones. However, his article does have weaknesses.

He says, “funding expenditure via money creation…. the ability to do so requires that the currency be safe from speculation against the exchange rate. That requires either that the national currency serve as an international medium of exchange (reserve currency) or that the government possesses substantial foreign exchange reserves.”
Randy Wray addressed this criticism some time ago at New Economic Perspectives when it was still active.

See also Bill Mitchell

MMT economists do not claim that MMT is either a panacea or a carte blanche to spend. They emphasize that the real constraint is availability of real resources, which relates directly to financial constraints, including price stability and exchange rate. 

Economics and finance are aspects of a socio-economic system along with many other factors. The general case that MMT sets forth may not apply in the same way to special cases for a variety of reasons. Each case has to be judged on the basis of its own merits. But it is incorrect to claim, too, that MMT only applies to special cases like the US, with its huge economy and being the issuer of the global reserve currency. 

All countries can and do use MMT since there is no other option in that it is based on current institutional arrangements. If those arrangements should change, e.g., a return to the gold standard, then MMT would adapt its description of the current monetary system to those changes. As it stands, the world economy is functioning chiefly on a floating rate system even thought his doesn't apply to all countries equally, e.g., those that peg.

1 comment:

Plain & Simple said...

"All countries can and do use MMT since there is no other option in that it is based on current institutional arrangements." --> That's nonsense. You can't say MMT is in use just because some elements of MMT (such as issuing the sovereign currency) is "in use". All theories must have some correspondence with reality, otherwise they are immediately recognized as fantasies. If you understand MMT thoroughly, then you'd understand why MMT is incompatible with a central bank. MMT proponents already know I'm right, but funny how they don't mention such incompatability ... They prefer the sleight of hand in which they resolve the unstated incompatibility with the notion that the "true" purpose of taxation is to reduce the money supply to control inflation. Elementary economics tells us that when inflation threatens, the money supply will need to be reduced, and under an MMT regime that would be a disaster because when people tighten their belts (to pat taxes), output falls, which can cause an increase in prices.