Wednesday, July 25, 2012

Thomas I. Palley attacks MMT head on — "More on the spurious victory claims of MMT"

MMT is a mix of old and new. In my view, the old is widely understood by old Keynesians and the new is substantially wrong.
Read it at Thomas Palley
More on the spurious victory claims of MMT
Thomas I. Palley
(h/t Mark Thoma — Send Your Comments to ...)

Oh my, them's fightin' words. Another Post Keynesian squabble.

UPDATE: Matias Vernengo reposts the Palley hit piece at Naked Keynesianism. The fight is on and the knives are coming out.


Anonymous said...

Now Palley is trying to take credit for predicting the Euro. The fact is, none of you were the first to predict this. Palley was 1997:

Palley, T.I., "European Monetary Union: An Old Keynesian Guide to the Issues," Banco Nazionale del Lavoro Quarterly Review, 201 (June 1997), 147-164.

Charles W. Calomiris made one of the most accurate forecasts in his 1999 "THE IMPENDING COLLAPSE OF THE EUROPEAN MONETARY UNION"

Godley predicted it in 1992 as did Martin Feldstein.

Eichengreen said the EMU was suboptimal as early as 1994.

MMT was obviously also making similar predictions. LOTS of people deserve credit here. MMT didn't get it right "first" and neither did Palley.

Godley and Feldstein nailed it way before anyone else.

Bob Roddis said...

MMT...lacks an adequate theory of inflation, and ignores expectations and exchange rates. These omissions lead it to overstate the powers of monetary and fiscal policy.

And, of course, it completely ignores the actions of human beings, human exchange and the problems of economic calculation caused by fiat funny-money.

Furthermore, I do think there's a problem with MMT that cannot be confined to confusion.

The problem is as follows: MMTer are so focused on sectoral balances and the interaction between the private domestic sector and the public sector that they often downplay the intra-sector dynamics.

Finally, MMTers do not seem to fully appreciate the problems of ignorance and calculation that inform Austrian economics. They seem to recoil at even thinking about them because of the implications for the limits of political action. This also needs to be corrected.

Adam2 said...

Fiat could be soft or hard. Just like gold standard money.

How to make gold standard soft.... find a bunch of gold/devalue it.

How to make it hard... hoard it/ never devalue it.

MMT is a framework to use modern fiat money soft and hard enough to have both full employment and price stability.

The Euro is hard fiat. MMTers know why.

paul meli said...

"MMTer are so focused on sectoral balances and the interaction between the private domestic sector and the public sector that they often downplay the intra-sector dynamics."

Kind of pointless to focus on intra-sector dynamics if workers don't have jobs or money to spend.

Matt Franko said...

Right Paul,

By doing the wrong thing wrt fiscal and trade policy, the government sector can basically shut the non govt sector down.

Ten dogs after nine bones is strictly due to govt macro policy. Rsp

STF said...

1. The "Knives" have always been out. This is the sort of thing we've been dealing with for 15+ years, and people wonder why we get a bit defensive.

2. Yes, lots of people knew that the EMU was flawed. And some wrote about it before MMT.

3. MMT hasn't said they were the first. The WSJ said it, and Randy just reposted that. Perhaps he should have qualified their praise, but who knew all the PKers that are jealous of MMT's attention (by their own admission) would take it and run with it? Now who's being sensitive?

4. Did anyone else point out that the EMU would require the ECB to bail out the system to avoid national defaults and support national banking systems? That was the point Randy was making, by and large. Yes, others saw the problems with bond markets, but Randy said that to his knowledge nobody else had made that point as clearly as MMT did early on. This was the key point in terms of what was significant. Perhaps others said it, too. They deserve applause, as well, as does anyone that got it right.

5. Let's remember the context of these pieces by Randy that apparently started this. It was a few people claiming that MMT had stolen from Godley 1992, which is stupid on its face if anyone knows how Mat/Randy/Stephanie all shared space at the Levy Institute together and were influenced by each other's work. Randy was pointing out that there was more to MMT's diagnosis of the EMU's problems than what was in Godley 1992.

6. All of this from Palley, who thought the Fed might not be able to target interest rates as reserve balances fell in the early 2000s (speaking of a theory of interest rates) and still believes to some degree in exogenous money.

7. This is all divide and conquer type of crap that we always see among those struggling to create change. People like Thoma absolutely love that this is happening. There's far more that PK and other heterodox economists agree on and there's also a common adversary. For whatever reason, though, PKers like to slam MMT instead; note that for most of its history MMTers haven't wanted to waste our PK colleagues time with these sorts of things and have by and large not instigated these sorts of things and only critique our own PK colleagues in response.

8. I don't know if there'll be any MMT response. Perhaps so now that this went viral, but I hope not (or not much) as we're all engaged in serious research on the issues of the day, which is what really matters.

Tom Hickey said...

Thanks for the clarification, Scott.

If you have time to comment, have these objections been addressed anywhere in the MMT lit, specifically or generally? This goes over my head.

With regard to theoretical weaknesses, MMT lacks a convincing theory of interest rates, over-simplifies the economy by assuming an L-shaped supply schedule that ignores the effects of sectoral bottlenecks and imbalances, lacks an adequate theory of inflation, and ignores expectations and exchange rates. These omissions lead it to overstate the powers of monetary and fiscal policy.

Anonymous said...

@ STF,

The reason why no one likes MMT is because you and your fellow MMT thought leaders strut around arrogantly insulting everyone around you while implying that you "got everything right".

You didn't get everything right. Some of you got big time predictions wrong. You weren't the first to point out a lot of the world's current problems either, but you say you were "right, but be magnanimous about it". How arrogant can you be? And then you and your supporters run all over the internet insulting everyone you ever interact with. You are a particularly bad spokesperson for MMT. Wray is just awful. So you bring all of this on yourselves. It's not "jealousy" or people wanting MMT's attention (MMT, by the way, doesn't get that much attention). It's that people dislike you and your style and enjoy pointing out how flawed and wrong your entire theoretical framework is.

STF said...

Thanks, FiDO. Always good to hear rants from someone who's obsessed with everything we do. And McCulley said "be magnanimous . . ." not MMT.

JK said...


Eric Tymoigne and Mathew Forstater have responded to Thomas Palley in an email that has been circulated amonst the economics department and students at UMKC.

It's not my place to post their comments/emails on a public website. But I think if you contact any of the UMKC economists, they'll forward the emails to you.

Anonymous said...

FiDO? I guess that's your way of referring to me as a dog. This is the problem with you people. Anyone who talks to you is immediately insulted.

And it was Wray who said:

"So, Paul asked, why not simply declare victory? Be magnanimous toward all those who got it wrong. No need to rub their faces in their mistakes and the mess they’ve made. Welcome them aboard.

We’re all MMTers now!"

You all need a serious reality check and a big slice of humble pie.

STF said...

"With regard to theoretical weaknesses, MMT lacks a convincing theory of interest rates,"

Natural rate of interest is zero by Mosler//Forstater
Setting Interest Rates in the Modern Money Era by Fullwiler (in which I critique Palley on interest rates, coincidentally)
Interest Rates and Fiscal Sustainability by Fullwiler
Beyond that, it's largely a blend of PK/Keynes/Minsky.

"over-simplifies the economy by assuming an L-shaped supply schedule that ignores the effects of sectoral bottlenecks and imbalances,"

We've absolutely never advocated anything of the sort. That's just incorrect. He's confusing quick explanations of effects of deficits with more careful work on supply side. Again, here we'd generally take PK research as given.

"lacks an adequate theory of inflation,"

Again, mostly take PK as given here, but Wray (Levy on CPI, early-mid 1990s), Tymoigne (see his NEP blog from July 2011), Wray/Tauheed 2008, Fullwiler/Allen 2007, and others have done some work on this.

"and ignores expectations and exchange rates."

Not true, but our focus has admittedly been on other fundamentals usually omitted by others, such as in Warren's "Exchange Rate Policy and Full Employment" (or something like that) at his EPIC site.

"These omissions lead it to overstate the powers of monetary and fiscal policy."

Weird that he would say we overstate the powers of monetary policy. Show how much MMT he actually knows.

Overall, it's important to note that there are about 2 handfulls of MMT economists. While the research output of these 2 handfulls compares rather well to most any other 2 handfulls of economists, it should be obvious that MMT is not a theory of everything. It should also be obvious that MMT works within the tradition of Keynes, Minsky, PK, which do have a rich literature on these topics; by and large MMT has never attempted to be an alternative to this literature. It is a blend of Minsky/Keynes/Godley/Lerner and a few others, together with detailed look at operations; I wonder if Palley would claim those economists suffered from the same shortcomings as MMT and therefore should also be put in their rightful places?

STF said...


You've never once been respectful of us, so you get the same back and shouldn't expect anything else. Even your "friends" find you embarrassing, so please spare me the stone throwing (though I know you won't) since you're the last person whose opinion I or anyone else would give any weight to.

STF said...

OK, I'm going to sign off on this lest it become more of a soap opera than it already is, which is exactly what people like Thoma and FiDO want to see.

Tom Hickey said...

Thanks for the references, Scott.

I don't take people like Anonymous above seriously, first, because he is ashamed to reveal his identity openly, and secondly, because it doesn't appear that he knows enough about economics let alone MMT to do anything but throw darts.

STF said...

And FiDO, even your quote makes it clear that Wray is relaying a statement from McCulley, not saying those words himself. Not that you care what the facts are.

STF said...

Agreed on FiDO, Tom. Well said.

STF said...

For a recent statement on bottlenecks, for instance, RAndy writes the following:

It’s always a risk, as with most any policy, that there could be a round of price increases after a fiscal stimulus, due to the institutional structure (i.e. bottlenecks) and level of aggregate demand (i.e. full employment of plant or labor). The key is to provide stimulus when it is needed, and to formulate and direct the stimulus in a manner that is least likely to cause price increases. As will be seen, we do not favor “pump priming”, old-style, Keynesian aggregate demand stimulus in most situations. We prefer targeted policy. A case in point is the job guarantee/employer of last resort program, which sets a fixed wage to COUNTER the fact that bottlenecks exist in many markets and as an alternative to traditional Keynesian pump priming precisely because of problems associated with bottlenecks.

STF said...

In other words, the JG is preferred by MMTers to traditional pump priming precisely because we view bottlenecks as a significant issue on the supply side.

So much for "signing off," I guess. :)

Tom Hickey said...

Thanks for the boost, Scott. This was beyond my ability to handle. The clarification is greatly appreciated.

Roger Erickson said...

another irrelevant economics spat

nothing here about getting on with testing theory against empirically changing operations - and doing so FASTER every year;

Palley sounds like an old General after losing a war;
"I was never proven wrong!" [fine, but irrelevant; we're moving on]