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

Brian says:



Bill,

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:

http://www.zerohedge.com/contributed/mmt-and-munis.


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: http://moslereconomics.com/2010/04/30/tea-party-protest-sign/


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.”




bill says:


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.http://bilbo.economicoutlook.net/blog/wp-admin/edit-comments.php#comments-form


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


bill