Real World Economics Review — Modern monetary theory and its critics

Introduction: Whither MMT? 2The editors

Alternative paths to modern money theory 5 L. Randall Wray

Initiating a parallel electronic currency in a eurocrisis country – why it would work 23 Trond Andresen

An MMT perspective on macroeconomic policy space 32 Phil Armstrong

Monetary sovereignty is a spectrum: modern monetary theory and developing countries 46 Bruno Bonizzi, Annina Kaltenbrunner and Jo Michell

Are modern monetary theory’s lies “plausible lies”? 62 David Colander

What is modern about MMT? A concise note 72 Paul Davidson

Modern monetary theory: a European perspective 75 Dirk H. Ehnts and Maurice Höfgen

MMT: the wrong answer to the wrong question 85 Jan Kregel

Modern monetary theory and post-Keynesian economics 97 Marc Lavoie

Money’s relation to debt: some problems with MMT’s conception of money 109 Tony Lawson

The sleights of hand of MMT 129 Anne Mayhew

Tax and modern monetary theory 138 Richard Murphy

Macroeconomics vs. modern money theory: some unpleasant Keynesian arithmetic and 148 monetary dynamics Thomas I. Palley

MMT and TINA 156 Louis-Philippe Rochon

Modern monetary theory: is there any added value? 167 Malcolm Sawyer

The significance of MMT in linking money, markets, sector balances and aggregate demand 180 Alan Shipman

The political economy of modern money theory, from Brecht to Gaitskell 19 Jan Toporowski 

Articles can be downloaded individually at the link below. If you prefer, you can download whole issue.

 Real World Economics Review — 1 October 2019
Modern monetary theory and its critics 

John Christensen - ‘The Magic Money Tree:’ From Modern Monetary Theory to Modern Tax Theory - Updated

Modern Monetary Theory (MMT) has gained prominence since the global financial crisis. The rising star US politician Alexandria Ocasio-Cortez said recently we should be “open” to its ideas, and some mainstream economists have given it a (qualified) endorsement.  For many, it offers a powerful critique of the damaging austerity policies that were implemented in the western world since the global financial crisis, and an important plank of new progressive thought.  MMT also has many critics.

For the tax justice movement, however, MMT opens an important debate about the role of tax. One of the MMTers’ central arguments — that governments don’t need tax revenues if they want to spend money — seems to conflict with our argument that governments must tax rich corporations and crack down on tax cheating and tax havens in order to pay for roads, schools, teachers and hospitals.

To illustrate this clash, take the words of UK Shadow Chancellor John McDonnell during the Panama Papers tax haven scandal that “every pound avoided in tax by the super-rich is a pound desperately needed by our National Health Service, our schools and our caring services.”  We’d strongly agree with this statement — though Bill Mitchell, a prominent MMT economist, attacked it as a “dangerous and misguided narrative for progressives to engage in,” because it “fuels damaging myths” about how the tax and spending system works.

This blog asks some big questions about MMT.  Is it ”correct“? If not, how not? But if so, is it compatible with tax justice – and could it even be useful?  Is tax justice useful to MMT? We’ve given MMT a partial endorsement and suggest there is no real conflict between MMT and tax justice — that tax justice doesn’t especially need MMT, but without tax justice, MMT is incomplete. You can listen to a discussion here exploring these issues in this Taxcast Extra below: (our monthly podcast, the Taxcast is available here)

Tax Justice

John Christensen - ‘The Magic Money Tree:’ From Modern Monetary Theory to Modern Tax Theory

Modern Monetary Theory offers a powerful critique of the damaging austerity policies that were implemented in the western world since the global financial crisis, and it's an important plank of new progressive thought. BUT one of its central arguments — that governments don’t need to raise taxes in order to spend money - contradicts what we know to be true at the Tax Justice Network - that governments must tax the rich, and corporations, and crack down on tax cheating and tax havens in order to pay for roads, schools, teachers and hospitals. In this Taxcast Extra Naomi Fowler discusses Modern Monetary Theory, its contributions and its limits, with Professor of Practice in International Political Economy, City, University of London Richard Murphy (also of Tax Research UK) and John Christensen of the Tax Justice Network.

MMT Links

Here is my list of links for getting started in MMT:

• MMT Bloggers:

Marshal Auerback at New Deal 2.0

Peter Cooper at Heteconomics

Joe Firestone at All Life Is Problem Solving

Scott Fulwiller at Economic Perspectives

Mike Norman Economics

Modern Money Mechanics - MMT simplified

Money and Public Purpose at Daily Kos

Bill Mitchell at Billy Blog

selise at NetRootsMass

Warren Mosler at The Center of the Universe

Winterspeak

L. Randall Wray at Economic Perspectives

• Working Papers

There are a number of working papers by these and others writing in the field that are available (free) at:

The Levy Institute

Center for Full Employment and Price Stability

Centre of Full Employment and Equity (aka CofFEE)

EPIC

• Other resources:

Frank Ashe:

A kindergarten guide to modern monetary theory

Mathew Forstater:

Functional Finance and Full Employment: Lessons from Lerner for Today

Scott Fullwiler:

Modern Monetary Theory - A Primer on the Operational Realities of the Monetary System

John T. Harvey:

Inflation: What Really Causes It and What We Truly Have to Fear

Bill Mitchell:

Barnaby, better to walk before we run

A simple business card economy

Some neighbours arrive

A modern monetary theory lullaby

Functional finance and modern monetary theory

Deficit spending 101 – Part 1

Deficit spending 101 – Part 2

Deficit spending 101 – Part 3

Stock-flow consistent macro models

Warren Mosler:

7 Deadly Innocent Frauds

Mandatory Readings

Cullen Roche:

Understanding The Modern Monetary System

Neil Wilson:

How the government's super-platinum credit card works

Winterspeak:

Post Keynesianism in a Nutshell

L. Randall Wray:

Understanding Modern Money: The Key to Full Employment and Price Stability (1998)

The Federal Balance Sheet Is Nothing Like Your Household Balance Sheet, So You Shouldn't Freak Out About Debt

• Conference (with audio and video):

Fiscal Sustainability Teach-In, August, 2010

• Macroeconomic Balance Sheet Visualizer

A Macroeconomic Balance Sheet Visualizer is available at Thought Offerings for those who would like to play with the numbers to see how basic MMT principles work.

• Not MMT, but contributory to it:

Irving Fisher:

The Debt-Deflation Theory of Depressions

Wynne Godley/Marc Lavoie:

Prolegomena to Realistic Monetary Macroeconomics:

A Theory of Intelligible Sequences

Monetary Economics Palgrave Macmillan (2007)

Abba Lerner:

Functional Finance and the Federal Debt

Hyman Minsky:

The Financial Instability Hypothesis

********************************************

Richard Murphy — Why governments need to issue bonds despite modern monetary theory

I wrote this in June. In the light of my blog on modern monetary theory today and the comment I made in it that the government must act as the borrower of last resort I think it appropriate to republish it. I do so knowing it contradicts modern monetary theory. Political judgement and the needs of financial markets suggests that doing so is appropriate for the reasons I note. Modern monetary theory is not, in other words, the answer in all cases: it can just inform the process in which a government decides to engage…

While MMT holds that governments do not need to issue bonds, MMT does not hold that government's should not issue bonds. MMT only holds that bond issue is not necessary operationally for funding deficit spending. Therefore, bond issuance may constitute a subsidy for savers unless issuance can be justified on grounds other than funding. 

Some MMT economists recommend retaining bond issuance for reasons other than funding. For example, the issuance of safe assets contributes to the stability and operation of the financial system, and it protects ordinary savers, e.g., through pension systems. In the US, individuals can purchase Treasury securities through Treasury Direct. 

In addition, like the policy rate, the rates along the yield curve serve as benchmarks.

So, issuance of government securities plays other roles than funding. 

In short, safe assets bearing some interest reduce risk in the system to some degree. For example when the ratio of public debt to private debt is higher, systemic risk is lower. And owing to the safety factor, savers are willing to accept lower rates on public debt than private debt. This serves as a check on accumulation of private debt. This is significant in the financial cycle based on Minsky's financial instability hypothesis, for instance. 

From the operational standpoint, a government could choose to issue only settlement balances in the payments system and set the policy rate to zero. But this may not be the only factor or even the chief factor. It is a matter for debate whether a government is best advised to do this.

If iit is decided to issue bonds, then a governments should tie securities issuance to the deficit but rather issue securities to meet demand for safe assets. There is no operational need to limit securities issuance, and in spite of conventional views, bond issuance doesn't reduce the putative inflationary effects of government currency issuance through spending appropriations.

In the case of continued bond issuance, interest rates along the yield curve would have to be kept low enough not to compete with investment funding by encouraging saving over investment. That is, interests rates on longer term securities would have to be lower on average than the profit rate.

MMT economists recommend that the current monetary policy of raising the policy rate to "control inflation" by increasing yields toward the profit rate should be abandoned in favor of functional finance, pointing out that monetary policy is a shotgun approach while functional finance is a targeted one. In addition, monetary policy favors savers over borrowers and the current approach to monetary policy based on NAIRU uses the inflation rate as a target and the unemployment rate as a tool, disadvantaging workers.

Functional finance aims at achieving optimal growth, actual full employment and price stability using fiscal policy based on automatic stabilization and a job guarantee that also works as a price anchor. MMT economists have developed a considerable literature articulating this approach, which they admit is not original with them. Rather, it has been dismissed by conventional theory with conventional economists asserting that the methodological debate is over as justification for ignoring heterodox theories and policy proposals based on them.

Choices involve tradeoffs. In policy formulation, if options are divergent, it becomes a political question. Regarding bond issuance, there are arguments on both sides of whether to issue bonds. There is not unanimity among MMT economists on this issue.

My view is that if there would be a political decision to go to a no-bonds policy, then the policy should be implemented gradually to allow the system to adjust to the new rule.

Tax Research UK
Why governments need to issue bonds despite modern monetary theory

Richard Murphy

Pruning Shears — Why Modern Monetary Theory is a dicey bet for liberals

Political and economic elites have a pretty good track record of co-opting movements. One that has the enormous wiggle room of Modern Monetary Theory’s non-monetary theory components could be immediately put in their service, without even a brief period of progressive utility. 

That’s why I think it is better to make the case for liberal policy up front, instead of obscuring it behind a Rorschach test presented as a monetary theory. Make the case for a job or income guarantee, or better funding of social programs, or what have you, make that case directly. If anyone asks how to pay for it, MMT. But lead by arguing in terms of justice and equity. Modern Monetary Theory is the details, and details belong in the background.

Well, I'd say that the strategy is good but the tactics not well conceived. I'd rather lead with policy than the wonkiness of monetary economics. However, a major reason in the way of progressive policy being taken seriously is the belief in the false government as big household or firm analogy.

Without addressing the funding concern, progressive arguments are going nowhere. A lot of the political push for fiscal "discipline," getting the deficit under control, reducing the national debt, and, on the left, taxing the rich to pay for the welfare state, is coming from a public that believes that taxes and borrowing are needed to pay for expenditure. It's just not possible to have an intelligent policy debate without addressing funding concerns.

It's not a tough sell. Clearly in a fiat system, the government creates its funding through currency issuance. Anyone can easily see that. They can also see that the existing system based on funding specific programs with taxes, borrowing, or cutting other programs makes no sense.

It's true that the monetary description that MMT provides can be used by left and right. But at present only the top of the town knows this and is using this knowledge to its own advantage. The desire for at least some aspects of the welfare state are bipartisan at the popular level. It is the ruling elite that is frustrating the desires of the people and obfuscating by sophistry like the government as household analogy that even President Obama has used — the meme that America is going bankrupt.

This is designed to create fear, uncertainty, and doubt in order to bias the policy debate. MMT to the rescue!

Pruning Shears
Why Modern Monetary Theory is a dicey bet for liberals

Dan

TRNN - Modern Monetary Theory - A Debate Between Randall Wray and Gerald Epstein

There are four parts of this video.

The Real News Network

Modern Monetary Theory - A Debate Between Randall Wray and Gerald Epstein

PAUL JAY: Hi. Welcome to The Real News Network. I’m Paul Jay.

With the development of this concept of a Green New Deal, and there’s much more attention being paid to it now that it’s being talked about in the halls of Congress, especially people like Alexandria Ocasio-Cortez, the question of how to pay for a Green New Deal has become to the fore. And part of the Green New Deal is the idea of a full employment plan. These two things have been connected. And it’s of course not new, but far more in the spotlight than before. And one of the ways to pay for it that’s being presented, including by Ocasio-Cortez, AOC has hinted at this, is an idea that has been called Modern Money Theory or Modern Monetary Theory. And if I understand it correctly, essentially it recognizes what is clear, which is the government creates money when it needs it. And many times the government spends money, for example, this new military budget or a massive tax cut, without clearly showing that if you’re taking a dollar from here, you’d better find it from over there.

In fact, the government kind of just makes up the money, the deficit grows, and sometimes austerity hawks scream about it, and other times they seem not to care about the deficit. So the idea of MMT, if I understand it correctly, is this same kind of concept can be applied to the Green New Deal, to developing what would be essentially a full employment program, and that the way to fund it is create the money, but within certain limits. When you start to reach full employment or when inflation starts to get above, say, six percent, one could argue about what the two limits should be, then you need to rein things back in again. But there’s a lot of debate. This theory is being attacked from a more conservative right position, and there’s also a lot of debate amongst left economists about MMT. So we are creating a series of interviews with people that are kind of pro-MMT, people that are critical, and we’re going to put them up and hopefully have some panels and debates, and people can decide for themselves what they think of this.

So now joining us is one of the, I would say, fathers of modern MMT, anyway, Modern Modern Monetary Theory, is Randall Wray, and he joins us. He is Professor of Economics at Bard College, he’s a Senior Scholar at the Levy Economics Institute of Bard College. He’s the author of many books, including Modern Money Theory: A primer on of macroeconomics for sovereign monetary systems. Thanks for joining us.

Michael Roberts — Modern monetary theory – part 1: Chartalism and Marx

Modern monetary theory (MMT) has become flavour of the time among many leftist economic views in recent years. The new left-wing Democrat Alexandria Ocasio-Cortez is apparently a supporter; and a leading MMT exponent recently discussed the theory and its policy implications with UK Labour’s left-wing economics and finance leader, John McDonnell.

MMT has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up budget deficits and public debt without fear of crises – and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.

So, in this post and in other posts to follow, I shall offer my view on the worth of MMT and its policy implications for the labour movement. First, I’ll try and give broad outline to bring out the similarities and difference with Marx’s monetary theory....

Can the Chartalist/Modern Monetary Theory (MMT) and Marxist theory of money be made compatible or complementary or is one of them wrong? My short answers would be: 1) money predates capitalism but not because of the state; 2) yes, the state can create money but it does not control its price. So confidence in its money can disappear; and 3) a strict Chartalist position is not compatible with Marxist money theory, but MMT has complementary features.

Let me now try to expand those arguments....

If you are already interested in MMT and Marx, this is obviously a should read. But if you are just getting interested, I can recommend London based Marxist economist Michael Roberts as a good entry point. He works in finance, so "money" is his thing. However, one also needs to be aware that there are different interpretations of what Marx actually said and that no one speaks for Marx. Be aware that Michael Roberts is not an expert in MMT. For an economist that is deeply familiar with both MMT and Marx, and sympathetic to both, see the work of Peter Cooper at heteconomist.com. If you are seriously interested in MMT and Marx, Peter is the go-to guy in my view.

Michael Roberts Blog
Modern monetary theory – part 1: Chartalism and Marx
Michael Roberts

"First, they ignore you..."

Pop quiz. Pick out what is correct and incorrect in the following criticism of MMT.

Now that MMT is a hot topic, MMT proponents should have their elevator speech ready and easy to understand rebuttals of common objections, which, by the way, are getting more sophisticated now that critics realize the fear mongering using slogans like "Zimbabwe" and "Venezuela" are not doing the job. Or at least many seem to be upping their game.

Have at it.

American Enterprise Institute - Economic Perspectives
Modern Monetary Theory and Policy
Stan Veuger

Seeking Alpha
You Can't Debunk MMT

Cullen Roche

CNN
Ocasio-Cortez Could Land Banking Post, How Will Stock Market Respond?

Melanie Kramaer

National Review
The Uses and Abuses of Modern Monetary Theory

Karl Smith

The Washington Post
The Uses and Abuses of Modern Monetary Theory

Megan McArdle

Business Insider
Wall Street should love the economic theory Alexandria Ocasio-Cortez backs — and that should worry the rest of us.

Linette Lopez

New Yorker — Intelligencer
Modern Monetary Theory Doesn't Make Single-Payer Health Care Any Easier

Josh Barro

Continental Telegraph
World Bank Insists Modern Monetary Theory Is A Load Of Old Tosh

Tim Worstall

Essays on money and banking by Randy Wray's MA students at UMKC

For the next few weeks we will be running a series of articles on monetary theory and policy. These are final essays written by MA students in my class this past Fall semester. I was very happy with the results—students indicated that they had a firm grasp of both the orthodox approach as well as the heterodox approach to the subject. Most of them also included some Modern Money Theory in their answers. I asked about half of the students in the class if they would like to contribute their essay to this series. 

Sometimes students are the best teachers because they see things with a fresh eye and cut to what is important. They are usually less concerned with esoteric academic debates than are their professors. Note that these contributions are voluntary and are written by Masters students. I told students they could choose to use their own names, or they could choose an alias. Comments are welcome, but please be nice—remember these are students. 

For your reference, here were the topics for the paper. The paper had a maximum limit of 6000 words.

Choose one of the following. You must consider and address both the orthodox approach and the heterodox approach in your essay. Where relevant, include various strands of each.

A) What is the nature of money? Given the nature of money, what approach should be taken to policy-making?

B) What is the nature of banking? Given the nature of banking, what approach should be taken to policy-making?

C) According to John Smithin there are several main themes throughout controversies of monetary economics, each typically addressed by each of the various approaches to monetary theory and policy. In your essay, discuss how each of the approaches we covered this semester tackles these themes enumerated by Smithin. 

— L. Randall Wray | Professor of Economics, University of Missouri at Kansas City

Nature of Money

1. Essays in Monetary Theory and Policy: On the Nature of Money by Vincent Huang
2. Essays in Monetary Theory and Policy: On the Nature of Money (2) by Matthew Berg 
3. Essays in Monetary Theory and Policy: On the Nature of Money (3) by Jack Wendland 
4. Essays in Monetary Theory and Policy: On the Nature of Money (4) by Kian Lua 
5. Essays in Monetary Theory and Policy: On the Nature of Money (5) by Samuel Ellenbogen
6. Essays in Monetary Theory and Policy: On the Nature of Money (6) by Andreas Lückert
7. Essays in Monetary Theory and Policy: On the Nature of Money (7) by Marilynne Meikenhou
8. Essays in Monetary Theory and Policy: On the Nature of Money (8) by Ken Yamat
9. Essays in Monetary Theory and Policy: On the Nature of Money (9) by Lukas Kaluza

Nature of Banking

1. Essays in Monetary Theory and Policy: On the Nature of Banking by Ryan M. Pope 
2. Essays in Monetary Theory and Policy: On the Nature of Banking (2) by Darren Prince

Modern Monetary Muddle — Michael Edesess

This is an excellent review and critique of Stephanie Kelton's The Deficit Myth. Michael Edesess lowers the boom in the first paragraph and then proceeds to explain it. Short and to the point, with quotes from many prominent MMT critics.

The debate over the much-touted and much-criticized modern monetary theory (MMT) is the murkiest I have ever been involved with, short of secondary school debates about the existence of God. But I finally see it clearly. Incredible as it may sound to nearly all observers - once they learn what MMT says - its basic economic tenets are agreed to by most knowledgeable economists. The dispute is not really over its core economic model; it is over fears of its perceived political implications.

Exactly, and this generates the perceived need for a "noble lie."

It's basically a distrust of democracy that has nothing to do with money & banking, finance or economics. 

econointersect
Modern Monetary Muddle

Michael Edesess, AdvisorPerspectives.com

See also

The criticism that David Glasner makes applies to a popularized version of MMT such as is presented in The Deficit Myth. Spending and taxation are not a binary as seem to be claimed, nor are inflation rate and employment rate. He is right that it is more complicated than this. 

However, his critique betrays ignorance of the body of MMT literature where the issues he raised are addressed in detail. 

I don't see this as a weakness in The Deficit Myth as a popular introduction to MMT. It does not pretend to be a sequel The General Theory of Employment, Interest and Money. And even the later has been criticized for being too informal and "popular."

But some MMT economist(s) should address this in terms of translating theory into fiscal policy as a guideline for government spending relative to balancing available real resource, and employment in particular, with price stability. 

This could be done in an academic paper or popular book based on simply providing documentation to existing literature that has addressed it, pulling it all together for reference. 

How should the US Congress conduct fiscal policy to optimize the trifecta of growth, employment and price stability using tools available to it? What would the role of the central bank and monetary policy be? Many such questions suggest themselves. They are also implicit in the post by Michael Edesess linked to above.

There is legitimate concern on over how to handle the purse strings once the deficit myth is debunked. One answer would be in terms of fiscal rules, which MMT economists eshew. Another is a "theory of inflation" complete with model. One doesn't exist yet, not for lack of trying.

The MMT answer is heavily dependent on automatic stabilization such as is already in place. The MMT JG would need to be added to this.

But inflation results from many different factors, both from the demand and supply sides. MMT economists have examined these factors, too.

Uneasy Money
What’s Right and not so Right with Modern Monetary Theory
David Glasner | Economist at the Federal Trade Commission

Also

Weak.

The Sydney Morning Herald
What is Modern Monetary Theory and is it THE answer?

Jessica Irvine

From modern monetary theory to modern taxation theory: a debate to be had — Richard Murphy

I am aware that almost anything written on modern monetary theory appears to be contentious, and that there are those who to seek to belittle my own contribution. I should then add that Randy Wray has already written to me about this paper, welcoming it and the contribution it makes to MMT thinking. Those seeking to dismiss it because I wrote it should, then, tread warily I suggest.

That said, I am aware that I have raised difficult issues, but I hope without offending too many. Suggesting that one of MMT's major contributions is to reverse the understanding of the revenue cycle will, for some, be contentious: they will place the emphasis elsewhere. But that is not key to my argument....

Tax Research UK
From modern monetary theory to modern taxation theory: a debate to be had
Richard Murphy | Professor of Practice in International Political Economy at City University, London; Director of Tax Research UK; non-executive director of Cambridge Econometrics, and a member of the Progressive Economy Forum

See also

Tax justice and modern monetary theory

How to pay for saving the world: Modern Monetary Theory for a degrowth transition — Christopher Olk, Colleen Schneider, Jason Hickel

Highlights

• Degrowth and Modern Monetary Theory form a strategic symbiosis for addressing social and ecological crises 
• Public spending on social and ecological objectives is not constrained by tax revenues or GDP 
• MMT needs to incorporate ecological limits to production and productive capacity
• Targeted fiscal and monetary policies can ensure macroeconomic and price stability during a degrowth transition 
• Policy priorities include a job guarantee, credit regulation, price controls, tax reforms, and universal public services
• An MMT-informed degrowth transition requires more democratic control over monetary policy and financial system governance

Abstract

Degrowth lacks a theory of how the state can finance ambitious social-ecological policies and public provisioning systems while maintaining macroeconomic stability during a reduction of economic activity. Addressing this question, we present a synthesis of degrowth scholarship and Modern Monetary Theory (MMT) rooted in their shared understanding of money as a public good and their common opposition to artificial scarcity. We present two arguments. First, we draw on MMT to argue that states with sufficient monetary sovereignty face no obstacle to funding the policies necessary for a just and sustainable degrowth transition. Increased public spending neither requires nor implies GDP growth. Second, we draw on degrowth research to bring MMT in line with ecological reality. MMT posits that fiscal spending is limited only by inflation, and thus the productive capacity of the economy. We argue that efforts to deal with this constraint must also pay attention to social and ecological limits. Based on this synthesis we propose a set of monetary and fiscal policies suitable for a stable degrowth transition, including a stronger regulation of private finance, tax reforms, price controls, public provisioning systems and an emancipatory job guarantee. This approach can support broad democratic mobilization for a degrowth transition.

Science Direct

Ecological Economics
How to pay for saving the world: Modern Monetary Theory for a degrowth transition
Christopher Olk, Colleen Schneider, Jason Hickel

ht/ Naked Capitalism

 

Blair Fix - Why Isn’t Modern Monetary Theory Common Knowledge?

I still think my definition of what money is is the easiest one to understand, even if it's only me that can understand it. Blair Fix goes all around the houses, but the interesting thing for me is that he's on board for MMT.

I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.


Blair Fix - Why Isn’t Modern Monetary Theory Common Knowledge?

Dylan Matthews — Modern Monetary Theory, explained—A very detailed walkthrough of the big new left economic idea.

Modern Monetary Theory is having a moment.

The theory, in brief, argues that countries that issue their own currencies can never “run out of money” the way people or businesses can. But what was once an obscure “heterodox” branch of economics has now become a major topic of debate among Democrats and economists with astonishing speed.

For that, we can thank Rep. Alexandria Ocasio-Cortez (D-NY), who told Business Insider in January that MMT “absolutely” needs to be “a larger part of our conversation.” That was the most vocal mainstream support MMT had gotten, which for years had been championed by economists like Stephanie Kelton (a former adviser to Bernie Sanders), L. Randall Wray, Bill Mitchell (who coined the name Modern Monetary Theory), and Warren Mosler — as well as a growing number of economists at Wall Street institutions.
With AOC on board, a wave of denunciations from mainstream economists and others followed. Fed Chair Jerome Powell, Bill Gates, former Treasury Secretary Larry Summers, and former IMF chief economist Kenneth Rogoff all attacked the theory.

Or, more accurately, they attacked what they thought the theory to be. MMT is more nuanced than the “governments never have to pay for stuff” caricature it’s earned among other economists, and MMT advocates are famously (and often understandably) ornery when they sense they’re being misrepresented.

At the same, that caricature gets at what may ultimately be the most important effect of MMT as an idea: It could convince some Democrats to break away from the view that spending always has to be “paid for” with tax increases. How many Democrats buy that conclusion, and how far they’re willing to take it, remains to be seen. But some are already moving in that direction: While emphasizing that “debt matters,” Sen. Elizabeth Warren (D-MA) recently noted, “we need to rethink our system in a way that is genuinely about investments that pay off over time.”

The rise of MMT could allow Democrats to embrace the de facto fiscal policy of Republican presidents, who tend to explode the deficit to finance pet initiatives like tax cuts and defense spending, leaving Democrats to clean up afterward. MMT could be Democrats’ way of saying, “We don’t want to be suckers anymore.”

That would be a big deal. Getting comfortable with new deficit-financed programs would help Democrats overcome the single biggest impediment to their agenda: raising taxes to fund their programs. MMT could offer a way to justify passing big priorities like single-payer health care or free college without resorting to major middle-class tax hikes.

And if the idea behind MMT is wrong, that shift could be a false promise, one that offers short-term political benefits at the expense of hard to foresee economic costs.

So let’s dive into the wonky details of MMT. And I do mean wonky — this is a pretty technical article that gets into the nitty-gritty of why MMT is different from mainstream economics. But I think those details are important, and they’re easy for even very smart, very informed people to get wrong....

VOX
Modern Monetary Theory, explained—A very detailed walkthrough of the big new left economic idea.
Dylan Matthews

Robert Nielsen — What Is Modern Monetary Theory?

The crisis has given rise to a range of new ideas and theories to replace the discredited view of the economy. The newest and most imaginative of these is known as Modern Monetary Theory (MMT) and is one of the first theories to owe its growth to the internet. Without a doubt MMT is radical and completely turns established economic thinking on its head. If it is correct then it would change the way we think about the economy forever.

As surprising as it may seem to an ordinary person, economists rarely discuss money or banking, the two topics that most come to mind when one thinks of economics. This is because most of mainstream economics has its roots in the 19th century when the financial sector was tiny and money was not seen as important (to the extent that economists would imagine barter economies for simplicity). MMT is the first theory to recognise the importance of the massive growth in the financial sector and the fundamental role money plays in the economy (especially since it is no longer backed by gold). It addresses head on the idea that perplexes most ordinary people, how is that paper money with no intrinsic value of its own is so valuable and how are banks able to create money “out of thin air”?

What Is Modern Monetary Theory?
Robert Nielsen
(h/t Clonal in the comments)

Not a good explanation of MMT, but at least MMT is being recognized as a player.

Nor are higher interest rates a worry. This is because printing money increases the level of reserves in a bank which then has to offer a lower interest rate in order to lend out all this extra money. So contrary to a higher interest rate, MMT claims it would receive a lower interest rate and cites Japan as an example of a country with enormous levels of debt and low interest rates.

That a real howler.

Much of the posts is a summary of Nielsen's previous exposition of hyperinflation as unrelated to government spending or "money printing," with which MMT economists would agree, of course.

The closer is pretty good though. :)

Trying to understand Modern Monetary Theory is a bit like the first people trying to understand flying. No matter how many logical arguments are made, something in your gut tells you it can’t be true. How could an aeroplane possibly stay in the air despite weighing so much? How could it not crash despite going at such speed? Can we really trust the pilot not to make a mistake? How can the government print all the money it needs? Are taxes really that irrelevant in funding the government? Can we really trust the government not to mess up? In many ways MMT seems too good to be true. However, if it does work then it would be the miracle theory we have all been searching for. It’s so crazy, it might just work.

Tyler Mordy - MODERN MONETARY THEORY: THE BAR IS FINALLY OPEN

 What exactly is Modern Monetary Theory (MMT) and why is it getting so much attention?

An investor gets excited about MMT. As our economies fail, and Covid stresses it more, MMT may be just the ticket, says, Tyler Mordy, a Chief Executive Officer, especially as increased government spending since 2008 has failed to increase inflation, i.e, the quantitive easing and massive amounts spent on Covid relief. It seems that the old economic model was wrong. 

All of which brings us to today. Globally, almost USD $12 trillion in monetary and fiscal support has been pumped into the economy to fight the impact of Covid-19, leading to soaring budget deficits and public sector debt in all major economies. Have governments done too much? Apparently not. The world has been stuck with inflation stubbornly below official targets and bond yields at new lows.

With this backdrop, it is no surprise that a global policy debate has been sparked. Why does recent experience seem to totally refute standard macroeconomic theory? And what, pray tell, is the right policy mix for the times?

Enter Modern Monetary Theory (MMT)... 

*****

The [MMT] policy potential is near limitless. Kelton imagines a lofty and near-utopian world where millions of people have access to improved healthcare, advanced education, better pensions and world-beating infrastructure.

Ask Forstrong

https://forstrong.com/ask-forstrong/ask-forstrong-modern-monetary-theory-the-bar-is-finally-open/

What We Need is a Theory of Why People Misunderstand Money

A propos our recent discussion of whether MMT is a theory, a dogma, or a description.

I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.

Understanding this act of money creation is trivial — much like understanding the creation of a traffic light. Just like we define the rules of traffic, we define the rules of double-entry bookkeeping. We then use these rules to regulate our behavior, creating money as we please.

What’s interesting, though, is that few people misunderstand traffic lights. We all know that traffic lights can be put anywhere we want them, and that they’re based on an arbitrary social convention. Yet when it comes to money, the same is not true. Many people fundamentally misunderstand money. To them, it’s not an arbitrary social convention that can be created/destroyed at will. Instead, they perceive money as a scarce commodity — something that, like water in a desert, must be guarded and conserved.

What we really need, then, is not so much a theory of money, but a theory of why people misunderstand money. 

 Economics from the Top Down -- Why Isn’t Modern Monetary Theory Common Knowledge?

Blair Fix -- Political economist. Blogger. Muckraker. Foe of neoclassical economics.

Robert Nielsen — What Is Modern Monetary Theory?

The crisis has given rise to a range of new ideas and theories to replace the discredited view of the economy. The newest and most imaginative of these is known as Modern Monetary Theory (MMT) and is one of the first theories to owe its growth to the internet. Without a doubt MMT is radical and completely turns established economic thinking on its head. If it is correct then it would change the way we think about the economy forever....

Trying to understand Modern Monetary Theory is a bit like the first people trying to understand flying. No matter how many logical arguments are made, something in your gut tells you it can’t be true. How could an aeroplane possibly stay in the air despite weighing so much? How could it not crash despite going at such speed? Can we really trust the pilot not to make a mistake? How can the government print all the money it needs? Are taxes really that irrelevant in funding the government? Can we really trust the government not to mess up? In many ways MMT seems too good to be true. However, if it does work then it would be the miracle theory we have all been searching for. It’s so crazy, it might just work.

Robert Nielsen · Economics, Politics and Religion
What Is Modern Monetary Theory?
Robert Nielsen

(ht geerussell via email)

Some glaring errors in the representation of MMT, but Robert Nielsen is a student and just exposed to MMT, so cut him some slack if you comment over there.

Vincent Cate — CMMT - Cate's Modern Monetary Theory

This CMMT model is just a slight correction to MMT or Modern Monetary Theory. While they have #1,#2,#3 above they are not consistent in how they treat bonds and do not have #4,#5. They say all government spending is from new money but then also have the government spending money from bonds. They say all spending is from new money but also say new money is not spent to pay off bonds. These errors make standard MMT far more complicated and not match reality. In particular, hyperinflation really happens but in MMT there is no reason for it. They have to say that the cause of the hyperinflation of money is outside their theory of money. This is just silly. With this little fix hyperinflation is easily explained. So CMMT is a big improvement over MMT. CMMT also stands for Corrected Modern Monetary Theory. :-)

FYI

Seeking Alpha (free registration required)
CMMT - Cate's Modern Monetary Theory
Vincent Cate

Bill Mitchell — Modern Monetary Theory – what is new about it? – Part 2 (long)

In yesterday’s Part 1 of this two-part blog – Modern Monetary Theory – what is new about it? – I introduced the idea that a major new contribution of Modern Monetary Theory (MMT) to economic theory was in its treatment of inflation and the Phillips curve. This is part of a keynote presentation I will be giving at the International Post Keynesian Conference – which will be held at the University of Missouri – Kansas City between September 15-18, 2016. The keynote presentation is scheduled for Friday, September 16 at 17:00. The topic of my keynote presentation will ‘What is new about MMT?’ and will challenge several critics from both the neo-liberal mainstream and from within the Post Keynesian family that, indeed, there is nothing new about MMT – they knew it all along! I contest that when they say this they are lying and doing so to cover up the inadequacies of their own failed analytical frameworks whether they be mainstream or Post Keynesian.

Actually, it's not all that long. This is a great series and important for understanding the contribution of MMT. Don't miss it. If you don't have time now, read it on the weekend at the beach.

Bill Mitchell – billy blog
Modern Monetary Theory – what is new about it? – Part 2 (long)
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia