In the last few weeks, I've been seeing a lot of buzz about Modern Monetary Theory aka MMT. And most of what I'm seeing is reductionist to the point of absurdity. When I see critics of MMT talking about it, they're mostly using MMT as a shorthand for saying 'unbridled fiscal expansion without any concern for deficits'. I think this has been a very poor and uninformed debate. My guess is that it's been sparked by the public policy views of people like Alexandria Ocasio-Cortez, given the objections some people have to her as a political figure. I could be wrong. But, as someone who's been following this evolving conversation for several years, I thought I'd tell you how I see it.
My introduction to MMT
Before I start in, let me tell you where I'm coming at this from. I have a lot of friends in the MMT community. And I have great respect for the leading economists. But, I am on the outside looking in.
About a decade ago, my friend Marshall Auerback introduced me to the MMT crowd. The first economist he introduced me to was Randy Wray. And the way I remember it, I was pretty rude to Randy about what he was saying. I've told Randy this subsequently. And he's told me he didn't think I was rude at all, which I appreciate. But, in my mind, what he was saying was a shock. And I was rude. It's only when I looked at what he was saying with an open mind that I began to process it and critique it objectively.
And I ended up liking a lot of what I heard. While I would never call myself an MMT adherent, I do think MMT does a pretty good job of outlining the various pieces of the macroeconomy and the constraints on fiat currency issuing governments.
My biggest criticisms of MMT are three-fold:
- I don't think MMT takes enough into account the political and legislative realities of using fiscal policy to control inflation. I know the trauma of the 1970s is long gone. But 15, 8, or even 5% inflation can really hurt people, especially if wages lag.
- MMT's adherents often sell MMT as a prescriptive school of thought rather than a descriptive one. They come out of the gate with all sorts of big spending policy proposals they say are based on MMT. Well, that loses half of the audience right from the start - even me! People need to understand how the economics fits together first. Then they can buy into the prescriptions. And even then, they may not buy the policy prescriptions MMT adherents hawk. For me, MMT is not about policy prescriptions, it's about a description of how an advanced economy works for a fiat currency issuer.
- Finally, its acolytes can be pretty 'rabid' in an almost cult-like way. It's disconcerting because, if you criticize MMT, a whole swarm of what almost seem like MMT groupies comes and attacks you. New Keynesians say they hate engaging with MMT economists, even though they share a Keynesian kinship, because the economists' online followers are often aggressive and mean-spirited.
So that's my beef. Here's my dummies guide.
Cerditwritedowns.com
6 comments:
MMT-Refutation for Dummies
Comment on Albert Edwards on ‘MMT for Dummies’*
Albert Edwards sets the frame: “MMT’s adherents often sell MMT as a prescriptive school of thought rather than a descriptive one. They come out of the gate with all sorts of big spending policy proposals they say are based on MMT. …
People need to understand how the economics fits together first. Then they can buy into the prescriptions. And even then, they may not buy the policy prescriptions MMT adherents hawk. For me, MMT is not about policy prescriptions, it’s about a description of how an advanced economy works for a fiat currency issuer.”
True. The problem is that MMTers do not know how the economy works. More precisely, they get the interaction of the macroeconomic balances wrong. The lethal blunder is in Wynne Godley’s contribution to MMT.
The FT’s Martin Wolf explained Godley’s insight this way…: “I look at this through the lens of ‘sectoral financial balances’, an analytical framework learned from the work of the late Wynne Godley. The essential idea is that since income has to equal expenditure for the economy, as a whole, (which is the same thing as saying that savings equals investment) so the sums of the difference between income and expenditures of each of the sectors of the economy must also be zero. These differences can also be described as ‘financial balances’. Thus, if a sector is spending less than its income it must be accumulating (net) claims on other sectors.
The crucial point is that, since sectoral balances must sum to zero, a rise in the deficit of one sector must be matched by an offsetting change in the others. It follows that if the fiscal deficit is increasing, the sum of the surpluses of the other sectors of the economy must be increasing in a precisely offsetting manner.”
Here is the short proof that economists in general and MMTers, in particular, get the elementary mathematics that underlies macroeconomics wrong.
(i) The elementary production-consumption economy is given by three macroeconomic axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
(ii) The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. X=O.
(iii) The monetary profit of the business sector is defined as Q≡C−Yw,
(iv) The monetary saving of the household sector is defined as S≡Yw−C.
(v) Ergo Q+S=0 or Q=−S.
The balances add up to zero. The counterpart of household sector saving S is business sector loss −Q. The counterpart of household sector dissaving (-S) is business sector profit Q. Both Q and S are measurable with the precision of two decimal places.
For the elementary investment economy holds Q=I−S.
For the elementary investment economy plus government holds Q=(I−S)+(G−T).
From this follows that (1) saving and investment are causally INDEPENDENT and NEVER equal, (2) all I=S/IS-LM models are false since Keynes/Hicks, (3) Keynesianism, Post-Keynesianism, New Keynesianism and all variants are scientifically worthless, (4) the foundational MMT sectoral balances equation (I−S)+(G−T)+(X−M)=0 is false because it lacks the balance of the business sector Q, (5) because profit is false, the whole of MMT is false, (6) because the theory is false, MMT policy guidance has no sound scientific foundations.#1
This holds also for Walrasianism, Keynesianism, Marxianism, Austrianism. Because of this, all economic policy debates are senseless.
Egmont Kakarot-Handtke
* Credit Writedowns
https://www.creditwritedowns.com/p/mmt-for-dummies
#1 For the full-spectrum refutation of MMT see cross-references MMT
http://axecorg.blogspot.com/2017/07/mmt-cross-references.html
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“What about someone who once thought MMT was ludicrous but has now come largely onboard, and yet still holds some criticism?”
When we are fed lies from birth, we need time to purge all the lies from our minds. This is why some people have only a partial understanding of MMT. For example, they grasp that monetarily sovereign governments (like the UK’s) do not run on tax revenue, yet they continue to think of money as physical and limited. Or they grasp that money is not physical, yet they continue to falsely believe that all money is created by banks as loans. Or they understand MMT, yet they continue to chant, ZIMBABWE!” out of sheer habit, or in order to please their peers.
We live in a consensus reality, such that that most of our beliefs have been fed to us by society. Therefore most of what we believe is “true” is in fact a HOAX. Most of our “objective and common sense facts” are a product of group-think. We deny this, of course, and thereby keep the hoaxes alive.
“In the last few weeks, I've been seeing a lot of buzz about MMT.”
The buzz is a push-back against the growing public call in the USA for nationalized health insurance. Private insurance giants are desperate to crush this. They are assisted by countless a**holes who seek to advance themselves at other people’s expense by attacking MMT. They chant ZIMBABWE! and How will you pay for it? and MMT will destroy the world! Or simply, “It’s a conspiracy theory!”
“My biggest criticisms of MMT are three-fold: I don't think MMT takes enough into account the political and legislative realities of using fiscal policy to control inflation.”
Let’s clarify something. Inflation is a product of the ratio of [1] the money supply to [2] the availability of goods and services. If the ratio is skewed, we have inflation. To correct the ratio, we must remove money from circulation and / or we must boost the availability of goods and services.
There are several ways to remove money from circulation. One means is via fiscal policy (spend less and / or tax more). Another way is to increase the interest paid by T-securities, so that people deposit more money into Fed savings accounts, rather than let the money circulate. Another way is to raise interest rates in general, so that banks suck up more money via loan payments.
“MMT's adherents often sell MMT as a prescriptive school of thought rather than a descriptive one. For me, MMT is not about policy prescriptions, it's about a description of how an advanced economy works for a fiat currency issuer.”
It is true that some MMT proponents spend too much time on prescriptive elements (e.g. the unnecessary and non-viable “Job Guarantee”). But let's keep in mind that one of the chief ways that a**holes attack MMT is to pretend that MMT is 100% prescriptive, when in reality MMT at its core is 100% descriptive.
“Finally, its acolytes can be pretty 'rabid' in an almost cult-like way. It's disconcerting because, if you criticize MMT, a whole swarm of what almost seem like MMT groupies comes and attacks you. New Keynesians say they hate engaging with MMT economists, even though they share a Keynesian kinship, because the economists' online followers are often aggressive and mean-spirited.”
This is partly a reaction to the pundits, professors, and politicians who CONSTANTLY LIE, IN CULT-LIKE FASHION, that there is “no money” for nationalized health insurance, for example.
New MMT converts are testy because they feel betrayed, having realized that they were lied to all their lives. Santa Clause doesn't exist. Jesus won't save them. They become angry at me when I question their “Job Guarantee,” or I disagree with their claim that “taxes drive money.”
We must be patient with them, knowing that we are going through a phase like the Protestant Reformation of the 1500s, which entailed many wars and extremists.
We must be patient with them, knowing that we are going through a phase like the Protestant Reformation of the 1500s, which entailed many wars and extremists. [Konrad]
Well said, Konrad. The similarity between New Keynesians wonks in their ivory towers and the high Latin priesthood of medieval Europe is indeed striking.
Descriptive / prescriptive : structural mechanism / legislative policy.
Exactly. Hiding the true structural nature of the system has created the conditions we have and allowed them to flourish, where the interests of a few far outweigh the interests of many. It's time to turn that upside down.
I see one has to pay for the privilege of leaving a comment after Albert Edward's article. My response to Edwards is, "P*ss off."
I'm constantly amazed by the number of publications that think I might actually be prepared to pay to read to nonsense they publish....:-)
It was close to bedtime when I dead he article. Albert Edwards isn't really that keen on MMT after all.
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