Thursday, October 20, 2011

Smackdown—Bill Mitchell responds to criticism of MMT use of sectoral balance approach

From the comments at billy blog on You do not increase spending by cutting it

I’ve been following your blog, and MMT, for a little while now, and it’s fascinating stuff. 
I’m fairly green when it comes to economics, I’m ill-equipped to judge whether critiques of MMT are well-founded. I ran across the following critique of MMT (and you specifically) from a comment on your recent Harvard article.

The website at which this criticism (and others) can be found is:

The (incredibly rude) criticism, as posted by Dan Duncan, is as follows:

“Billy Mitchell…derives his justification from ‘The Fiscal Accounting Equation’. In this equation, he matches up ‘Sources of GDP’ = ‘Uses of GDP’. From there, he employs simple algebraic maniuplations to arrive at his ultimate conclusions…and the Holy Grail of MMT:

The only problem, of course, is that Billy Mitchell doesn’t understand simple math (or logic).

The issue is not that Sources of GDP = Uses of GDP. Rather, it’s that Sources of GDP cause (or allow for) Uses of GDP. Once this is understood, his pathetic algebraic manipulations descend into a nightmare of recursive circular reference.

Yes, once the books are closed, then Sources=Uses. But at this point, all you accomplish by moving the terms around is to make a statement about what already happened….

You cannot, however, move the terms around to affect policy. It’s too late for that.

Think of it this way: You own a business and run a household. Sales – CGS —>Mtg pymt+Groceries+Savings. Yes, at the end of the year, the LHS will = the RHS. But this does not mean we can move Savings over to the LHS of the equation and Sales over to the RHS. The Savings aspect was determined–in part–by Sales. We need to close the books, see what Sales actually were before we really know what the Savings were. Until the books are closed, Savings is really in a Schrodinger state of superposition.

If a+b causes x+y, you cannot just move the terms around. It’s not that simple. Yet, this is exactly what Billy Mitchell and the other MMT Morons do, when they attempt to justify this abomination.

Look at the Billy Mitchell explanation. I’m not making any of this up. It really is quite astonishing that MMT is taken seriously.”

Dear Brian (at 2011/10/20 at 2:05)

This person (Dan Duncan) clearly hasn’t read any of my work which repeatedly says that the sectoral balances of the National Accounts have to hold at each point in time (being relationships between flows) and it is national income movements which ensure that. The interesting thing is then what drives these national income movements and whether government action (discretionary) can influence the non-government aggregates.

We know that non-government action influences the budget balance (via the automatic stabilisers). MMT also considers that government spending and taxation influences aggregate demand and hence aggregate output which influences private saving, imports and through accelerator effects private investment.

I don’t think the critic has read any of that work otherwise he wouldn’t take that angle of attack. We (myself or my other MMT Morons) clearly understand that behaviour has to drive the accounting. The sectoral balances provide a useful check to ensure that goals are compatible. I think MMT is safe from the likes of Dan Duncan.

As an aside, the macroeconomics literature – mainstream or not – do not call the sectoral balances a “Fiscal Accounting Equation”. Using that terminology is not conventional and suggests that Dan Duncan is not very familiar with standard macroeconomics literary conventions. If you search Google for that term you will not yield anything about National Income accounting.

best wishes



Matt Franko said...

Saw that over there Tom. I hope this fellow Brian can understand Bill's answer.

Key misconception: "Yes, once the books are closed, then Sources=Uses."

What the opponents in this case apparently think, if I read them correctly, is that if tomorrow the Congress went in and first off, cancelled the automatic stabilizers, then second, eliminated all other govt spending, that we would have to wait until the end of the year to find out if Consumption had fallen as a result.

Tom Hickey said...

Matt, the same people jump up and scream "hyperinflation" when the monetary base increases, based on MV=PQ.

Identities don't say anything about causality or its direction. That's where economic explanation comes in.

mike norman said...

Notice the condescending tone of "Danny's" comments.

Tom Hickey said...

Mike, I'd say "MMT morons" isn't condescending but insulting. S.O.P. over at ZH, which is known for juvenile behavior.

Clonal said...

There was another criticism along similar lines by Karl Denninger - Cullen Roche: Smackdown Of The Day

I am usually reasonably polite in Tickers. (I am often less-so in commentary on the forum.)

This time, I'm not going to be particularly nice as I've about had it with the "MMT" look-alikes running around peddling trivially-provable false impressions through the use of half-statements and arm-waving.

So I'm going to do exactly that (prove the impression he wants to leave you with false) and in doing so issue a well-deserved smackdown to this author.

In the interest of full disclosure, I am not a particular fan of Ron Paul. I find his foreign policy prescriptions and view on immigration along with a number of other things to be entirely unworkable and some of his economic policies are frankly more than a bit twisted, with the largest part of that problem being his marriage to "hard currency." He seems to not understand that money and credit are fungible in the economy; we didn't get in trouble due to too much money (e.g. "printing") we got in trouble due to what amounted to a naked short on the currency run by the banks and shadow banks. Note that this is not stopped by the use of "hard currency", and in fact we have examples through history where there were utterly ridiculous valuation swings in the currency (in some cases 20%, 30% or even more!) in the space of a single year as a consequence of these machinations under gold-backed dollars in the US.

With the disease misdiagnosed the treatment is misdiagnosed too: Hard currency would not have prevented the bubble nor will it prevent the next one. Focusing there is in fact a negative sum game as it simply further concentrates the illegitimate places where this power is abused.

With that out of the way (in an attempt to deflect those who will, ignorantly, simply say I'm a "Paulbot" despite the several years of proof otherwise in my former writings including some aimed directly at Ron), let's turn to the subject matter.

GLH said...

Zero hedge is on the gold standard, an explination of anything has to be said in terms of gold or no one understands it. I wonder how that is working out for them now days.