Abstract
This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT’s construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT’s polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT’s oversimplifications of macroeconomic theory and policy.A critique of Modern Monetary Theory (MMT)
Thomas Palley
218 comments:
«Oldest ‹Older 201 – 218 of 218Tom, if all of Palley's points have been adequately covered elsewhere, then it might be useful to just have a short piece with links to/references to the relevant texts.
But I'm not defending any position. I'm asking you to explain why you think Palley should have cited the paper that you say he should have cited.
Because it was relevant.
I'm not sure how this is relevant. Is this why you think economists are all hacks?
Mainstream economists not only didin't foresee the crisis but still claim it could not have been foreseen, and their prescriptions for fixing the mess is leading to a deeper mess.
That doesn't seem very specific. What did he make up?
Pally made up a case addressing a strawman, which he would realized if he were familiar with the lit.
Mainstream economists just make shit up based on unrealistic assumptions and ignoring of previously addressed issues.
Tom, if all of Palley's points have been adequately covered elsewhere, then it might be useful to just have a short piece with links to/references to the relevant texts.
I would say that this is in the court of the MMT economists now. Maybe one of them will pick it up, but I tend to doubt it, based on Randy and Scott's comments at the beginning of this long comment thread. I take that their position is that they have set forth their position and will only respond to what they consider germane in advancing the debate and not every willy-nilly objection.
Because it was relevant.
I understand that, but *how* was it relevant?
Mainstream economists not only didin't foresee the crisis but still claim it could not have been foreseen, and their prescriptions for fixing the mess is leading to a deeper mess.
Most mainstream economists work in areas that don't have anything to do with these complaints.
Pally made up a case addressing a strawman, which he would realized if he were familiar with the lit.
Which case? What bit of the paper are you referring to?
Mainstream economists just make shit up based on unrealistic assumptions and ignoring of previously addressed issues.
You get bad economists, you get bad academics, you get bad people. I've not noticed that economists are generally worse than any other group of people.
I understand that, but *how* was it relevant?
As I said, no time. May someone else.
Most mainstream economists work in areas that don't have anything to do with these complaints.
Then they may be off the hook in that respect. But maybe not if they assume other things that don't apply, like ergodicity. See the Lars Syll post I just put up.
Which case? What bit of the paper are you referring to?
Addressed above. You are repeating.
You get bad economists, you get bad academics, you get bad people. I've not noticed that economists are generally worse than any other group of people.
Most other people aren't involved in policy sciences either. Economists are either part of the solution or part of the problem.
This is also true of most teachers, but it is certainly true of those that teach economics, since it is extremely influential in the way individuals make decisions and vote. Much of the present political morass is due to a failure to properly understand economics, and some of that is traceable to incorrect teaching.
which 'relevant' paper are you two talking about? Link?
"Most mainstream economists work in areas that don't have anything to do with these complaints"
Come on. Practically everyone failed to see that the ship was sailing directly towards an iceberg, and your response is that it's not their job to think about such things?
Come on. Practically everyone failed to see that the ship was sailing directly towards an iceberg, and your response is that it's not their job to think about such things?
You have to be kidding.
Some people got it right. like Godley, Pettifor, Hudson, Baker, Galbraith, and some others. But they were not the one's listened to.
which 'relevant' paper are you two talking about? Link?
Palley: This institutional issue has been raised by Lavoie
(2011) and Fiebiger (2012), and Lavoie terms it the “consolidation” assumption. Simple
T-accounting shows that the central bank must be willing to provide the government with
the initial money balances to finance its spending. In effect, that implies the fiscal
authority and central bank act as if they were a consolidated single actor.
6
6
Lavoie (2011) and Fiebiger (2012) focus on the fiscal authority - central bank relationship but there is also
the issue of monetary policy. Even when the central bank and fiscal authority are not consolidated, it can
look as if they are. The effect of budget deficits on the money supply and interest rates depends critically
on the stance of monetary policy. Thus, if an independent central bank decides to fully accommodate fiscal
policy that will produce an outcome that looks as if the central bank and fiscal authority are consolidated.
MMT therefore implicitly assumes both consolidation and full accommodation by monetary policy.
MMT doesn't assume formal consolidation but informal and explains what they means in terms of coordination of Treasury-Fed ops, which mid-level operations types doing the actual work have confirmed orally.
Hereis the response of Fullwiler, Kelton, and Wray.
which mid-level operations types doing the actual work have confirmed orally
For example, I am told that mid-level ops types have orally confirmed that the Treasury does run overdrafts at the Fed intra-day for short periods. That is an example of close coordination.
"Some people got it right"
Yeah sorry I was referring to "mainstream" economists. Vimothy seemed to be saying that most mainstream economists didn't see it coming because it's not their job to think about such things.
I don't see why researchers working in, for example, education economics can reasonably be blamed for not foreseeing the financial crisis. At least, no more than anybody else.
That's just a cop out, Vimothy. There are literally thousands of neoclaasical economists working in relevant areas, even tens of thousands, maybe. That I can't even think of five if them that saw the biggest crisis/recession in 75 years is truly amazing, particularly for a profession that professes to value the ability to make correct predictions. And that entire schools of thought outside of neoclassical economics, like anyone working in the tradition of Godley or Minsky as just two examples, did see it coming is still more damning.
I don't see why researchers working in, for example, education economics can reasonably be blamed for not foreseeing the financial crisis. At least, no more than anybody else.
I wouldn't "blame" most economists for not foreseeing the problem if they were not working in a field that was related to it, and especially if they had no policy role or influence. But they were and remain part of the problem instead of the solution in that they bought into a view that was largely discredited by events. But sufficient study and reflection should have alerted many that the models they were and continue to use are of limited use in assessing events or formulating policy. This is especially the case with educational economists, since a democracy depends on a well-informed electorate and much of the electorate has been informed. We really need to do better.
I will criticize my own profession, philosophy, over this also. The discipline has largely become irrelevant since the focus turned to rather abstruse approaches to logic. I know how easy it is to get involved in such pursuits, since they have a certain fascination for a certain kind of mind. But as a result, philosophy as the study of the great questions has largely lapsed and the liberal basis of a classical education lost. We are no longer debating the great issues but rather fighting over who is going to be taxed how much.
I come from a historical background in philosophy and at the time I was choosing a grad school, there were only a couple in the US that were offering a historical approach instead of specializing in contemporary symbolic logic. While I ended up writing my dissertation in logic, it was after I had a thorough grounding in the history of thought.
So I think it is important to understand the fundamentals of all approaches to one's field. It provides flexibility and the ability to see the same thing from different angles. One often discovers gems in areas that one had initially dismissed. No one has the ocean in their bucket, and the quest for knowledge is never finished.
much of the electorate has been informed should be misinformed.
Scott, I think that you and Y have jumped to a different conversation.
Tom's argument was that most economists are dishonest hacks because they didn't predict the financial crisis. But most economists do not work in related areas, so it's not an argument that goes through, as far as I can see.
On the other hand, mainstream economists can fairly be blamed for not predicting the crisis. But not all economists, or even most.
Treasury securities are issued for many different purposes. But the debt limit is computed as the aggregate face value of all those securities .
Average citizen thinks then that there is this horrendous debt in securities. But at least nearly a half of those securities are investor's time deposits backed by the money exchanged for the securities and kept at the Federal Reserve Bank. (If the Fed burns the actual money collected--as if it is all coin or paper--it still keeps a record of the transaction and can create the money anew out of thin air when demand for the money back plus interest comes due at maturity of the securities. Still the debt doesn't seem so large now, since the money for these investor's time deposits was not spent by the government from a Treasury account.
But what about money obtained from banks by selling them Treasury IOU's (securities, bonds) to fund deficit spending? The banks create the money out of thin air, then deposit it, then lend it to checking accounts, some of the money of which can leave the bank (to end up somewhere in the banking system. The Treasury takes the dollars and spends it, which ends up in bank accounts in the banking system. Is this really a debt? Don't confuse the government's debt to the banks with the liability of the government to honor it in accepting it in payment for taxes, fees, fines, etc.. But is it a debt if neither the borrower nor the lender expect it to be paid back, both agreeing to let the borrower perpetually roll over the debt by the borrower creating new IOU's with new future maturity dates (securities) and swapping them for mature IOU's (securities) from the banks. Of course, the borrow has the interest to pay the banks, but that can be handled by further issuance of securities to get the interest money to pay to the banks. That's how most deficit spending debt gets handled.
But suppose the banks don't want to continue the perpetual swapping of securities in roll-overs: What then? Suppose banks want payment for the securities, and the Treasury doesn't have the dollars to pay back raised in taxes. After all the deficit occurred when Treasury didn't have tax dollars to cover all of Congressional spending.
Well, in that case the banks can put the securities up at auction. I don't believe anyone will see any gain in buying mature securities at face value--except the Fed, which wants to collect securities for open market operations to manage inflation and deflation. The Fed will, if it wants, buy the mature securities used for deficit spending with money it creates out of thin air. The Fed being an agency of government, that means the government has redeemed the government's debt to the banks. The deficit spending money obtained with the securities now becomes debt-free (to the banks).
But the Fed needs new securities to sell to drain bank reserves of excess reserves. So, it swaps the mature securities it bought from the banks for new securities (this is legal, since no new money changes hands). The Tsy now has its securities back, and presumably can extinguish them or incinerate them, or whatever it wants to do with them (store them in a vault somewhere). That clears the government's liability on the mature securities. The Fed is not forced to buy those securities back, except the system could break down if banks could not get their money back (or new securities for them). But when it does that closes the gap between Tsy and Fed and accomplishes the same thing as if the Tsy issued the dollars in the first place without borrowing from the banks.
I failed to mention, that nowhere in all of this does taxpayer money enter into consideration in paying back the 'national debt'.
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