Most critiques of MMT take the form of a critic asserting "MMT says X." The response from MMT proponents is that MMT most definitely does not say "X". This situation is obviously confusing. This article attempts to explain why the online debates are confusing (and pointless)....Bond Economics
Wednesday and a short blog post. I regularly work for unions as an expert analyst/witness in their struggles to achieve wage justice with employers who are intent on paying as little as possible. Often these are private employers but at the moment I am helping a union with their campaign to win a reasonable wage increase against a state government. The logic deployed by the government in relation to their fiscal affairs and their wage setting behaviour is a classic demonstration of how neoliberalism has distorted any sense of reason and created self-fulfilling problems. So today, I will just introduce this issue – given how fascinating it is....Bill Mitchell – billy blog
When the governments in the advanced nations abandoned full employment as an overarching macroeconomic objective, and instead, starting pursuing what I have called full employability, they stopped seeing unemployment as a policy target (to be minimised) and began using it as a policy tool to suppress inflation. As mass unemployment rose, the politics were massaged by the mainstream of my profession who claimed that the level of unemployment that constituted full employment had risen (this was the NAIRU era) and so there was really no problem. Governments adopted the neoliberal line that they ‘didn’t create jobs’ and had to target fiscal surpluses to ensure their position was ‘sustainable’. The costs in lost income and human suffering have been enormous – most people would not have any idea of the massive scale of these losses that accumulate day after day. Now, it seems, the ‘sound finance’ school is going a step further. We are probably facing an environmental emergency in the coming period (years, decades) but the question commentators keep asking is not what we can do about it but ‘how can we pay for it’? So ‘sound finance’ has already destroyed the lives of millions of people around the world as a result of mass unemployment and poverty, now it is turning its focus on the rest of us. Madness. Paradigm change has to come sooner rather than later.
In this two-part series I will:
1. Consider the question as to whether fiscal policy is sufficiently flexible enough to provide an effective counter-stabilisation against the non-government spending cycle.
If a nation is heading into recession, can governments act quickly enough with discretionary spending changes?
If a nation is ‘overheating’ and inflation is threatening to accelerate, can spending and tax changes be implemented quickly enough to counter these tendencies?
2. Should fiscal policy be outsources to technocrats, who work independently of the political cycle and stop politicians from making political decisions that might not be economically sound?
3. Is MMT a flawed paradigm for policy development given that a progressive application of its principles, relies on politicians understanding the operations of the monetary system and the capacities that the currency-issuing government possesses and to use those capacities to advance the public interest rather than sectional interests or their own venal political survival?
Can we trust politicians?
These are all issues that have been raised in some of the critiques of MMT over time and warrant attention and response.
In Part 1, I will consider the first of the questions above – the flexibility of fiscal policy….Bill Mitchell – billy blog
After reading Paul Krugman’s attempt to grapple with Functional Finance, I happened to browse through Wendy Carlin and David Soskice’s macroeconomics textbook. This book, I should note, comes with the endorsement of Simon Wren-Lewis. I was surprised to find in it the mechanics of Functional Finance clearly explained in terms of the mainstream theory, specifically the ‘3-equation model’ — a version of the ‘New Consensus’ model....Alexander Douglas at Medium
This is the second and final part of this cameo set, which aims to clear up a few major blind spots in peoples’ embrace with Modern Monetary Theory (MMT). This is all repetition. I don’t apologise for that and it does not reflect a slack or bad editorial approach from yours truly as some critics have claimed. Repetition is how we learn. Reinforcing things in different ways (aka repetition) helps people come to terms with concepts and ideas that give them dissonance.
MMT is certainly about dissonance as the current level of hostility towards our work is demonstrating. It is also challenging existing ‘fiefdoms’ in the academy and beyond, which also creates aggression and retaliation. The problem is that most of the current criticism merely rehearses the same tired lines of inquiry. A stack of mainstream (New Keynesian) economists now regularly claim they ‘knew it all along’. The short and truthful response is – ‘no they didn’t. The standard mainstream macroeconomic theory cannot accommodate MMT principles unless it jettisons its core propositions and becomes something else.
At any rate, as noted in – Operationalising core MMT principles – Part 1 – I am happy to help clarify quandaries that newcomers have with MMT if they are genuinely trying to work out what it is all about. I have no desire to interact with ‘critics’ who are just defending mainstream macroeconomics in its death throes and have no genuine interest in really understanding MMT beyond the superficial and no penchant for reading the now lengthy body of work we have generated in the academic literature. Yesterday, I considered a typical inquiry about an important operational detail of implementing a Job Guarantee.
Today, I consider a related topic. If a government is facing a situation where it needs to shift workers to the Job Guarantee pool to stabilise inflation, how does it do that? The ‘critics’ often claim we only advocate tax increases to fight inflation and because they are politically tricky to engineer MMT essentially fails to have an effective price anchor.
Today, I bring together many past blog posts to summarise the MMT position on counter-stabilising fiscal policy for those that might be struggling to put it all together.…[Paragraphing added.]
In most ways, Modern Monetary Theory—Functional Finance—is just macroeconomic common sense:
"Implicitly assumes"? I'll be interest to see what MMT economists think of this.So what can go wrong with MMT?
- We do not like high unemployment.
- We do not like excessive inflation.
- Thus the government should make it its first priority to use its tools of economic management so that we do not experience either.
- And maybe the government needs to be a little bit clever in how it uses fiscal and when and how it uses monetary policy to keep the task of financing the national debt from becoming an undue or even an unsustainable burden.
Three things can go wrong;
- MMT implicitly assumes that the debt market is efficient—that if the government debt gets on an unduly burdensome and unsustainable path, we will see that immediately in high interest rates. If that is not true, the government and the economy can face one hell of a mess should a bubble in government bond prices develop and then collapse. Cf. Greece.
- MMT implicitly assumes that wealth-owners react rapidly when they see trouble ahead—that when investors conclude that the government cannot or will not balance its books without ultimate high inflation, inflation will jump immediately.
- MMT implicitly assumes that extra financial leverage generated by the high values of collateral assets does not serve as a significant source of risk—that it is only on a small scale that investors will borrow foolishly just because they can....
An increasingly visible school of heterodox macroeconomics, Modern Monetary Theory (MMT), makes the case for functional finance – the view that governments should set their fiscal position at whatever level is consistent with price stability and full employment, regardless of current debt or deficits. Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is entirely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability. As such, the debate between them hinges not on any fundamental difference of analysis, but rather on different practical judgements – in particular what kinds of errors are most likely from policymakers.
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Brad DeLong: MMT is Abba Lerner's Functional Finance with bells & whistles & some confusions. Manipulate G to stabilize Y & Ï€, manipulate M to get an i to make debt finance sustainable, and rely on Ï€ to tell you if your policies are sustainable... If Ï€↑ need G↓
Suresh Naidu: Clearest exposition of MMT in a tweet. Fight me deficit owls!
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There are some people who like to suggest that modern monetary theory (MMT) suggests that a government can create money without limit. They go on to say that this has always resulted in economic disaster. The words Zimbabwe and Weimar Republic are never far from their lips. The reality is, however, that MMT does not say that governments can create any amount of money they like without limit. What it does say are two things.
The first is that as a matter of fact all government spending is paid for out of money newly created for the purpose and that this is then cancelled by taxation. I would argue that this is simple fact.
And the second is that this money creation process can be undertaken until such time as real physical constraints are met in the economy, after which if it continues then inflation will follow.
Far from being a prescription for inflation creation then, MMT does in fact provide both a very precise description of when demand-pull inflation might be created in the economy by suggesting that money creation should be curtailed when there is no excess capacity in the economy (this constraint being applicable to both government and private bank created money) and it provides two mechanisms for addressing that inflation. One is to stop the money creation, either by limiting government spending in that situation, or by limiting bank lending. The other is to tax that inflation out of the system.
MMT is then the friend of those who would like to control inflation....Tax Research UK
Everyone knows governments need to tax before they can spend. What Modern Monetary Theory presupposes is, maybe they don't.Surprisingly decent article on MMT considering the dismissive headline. Covers most of the bases.
A major point of difference between Post Keynesians (in the New Cambridge tradition – Cripps and Godley etc) and the original proponents of MMT (which includes this author) is that a currency-issuing government is not constrained in its capacity to generate full employment through appropriate fiscal policy settings....Bill Mitchell – billy blog
One pole of current debates about U.S. fiscal policy is occupied by the “functional finance” position—the view usually traced back to the late economist Abba Lerner—that a government’s budget balance can be set at whatever level is needed to stabilize aggregate demand, without worrying about the level of government debt. At the other pole is the conventional view that a government’s budget balance must be set to keep debt on a sustainable trajectory while leaving the management of aggregate demand to the central bank. Both sides tend to assume that these different policy views come from fundamentally different ideas about how the economy works.
A new working paper, “Lost in Fiscal Space,” coauthored by myself and Arjun Jayadev, suggests that, on the contrary, the functional finance and the conventional approaches can be understood in terms of the same analytic framework. The claim that fiscal policy can be used to stabilize the economy without ever worrying about debt sustainability sounds radical. But we argue that it follows directly from the standard macroeconomic models that are taught to undergraduates and used by policymakers.
Here’s the idea.…WCEG — The Equitablog
