Warren Mosler, one of the founders of Modern Monetary Theory (MMT) has a white paper (link) that acts as a summary of MMT. It is brief (1300 words), and does meet the objective of offering an overview of the question "What is MMT?" for more advanced readers. The brief nature of the paper means that not everything is covered, so I would point out that it does not represent all of MMT.
In this article, I will summarise the contents of the white paper, discuss what I see as the main legitimate critiques of MMT that arise, and note some of my reservations about the paper. I will conclude with comments aimed at readers looking for an academic discussion. I expect to cover certain topics in follow up articles, such as a longer discussion of critiques, as well the implications of the discussion of the price level theory.
Another point to note about the white paper is that it is extremely terse. There may be a lot of information hidden under the use of catch phrases. Since I am familiar with the arguments, I can easily follow the logic, but others might be tripped up. All I can really do is add some background information....Bond Economics
MMT Primer: Mosler's White Paper
Brian Romanchuk
20 comments:
Warren Mosler has made a big contribution to economics and deserves a Nobel prize, but I’m not sure about his claim that “The price level is necessarily a function of prices paid by the government’s agents when it spends…”.
If govt and central bank were to create and spend far too much new money, prices would rise REGARDLESS of what “government’s agents” decided to pay for various goods and services. I.e. if inflation was excessive, and govt tried to pay the same for steel, oil, coal, you name it as they were paying five years previously, suppliers of those goods would just stick two fingers up at government.
Where would they get the financing for the steel, oil or coal Ralph?
Bank of Mars?
Nobody pays cash or barter...
"If govt and central bank were to create and spend far too much new money,"
Ralph youre making the same Monetarist mistake as the "deficit too small!" MMT people, those increased "money supply!" measures are increased savings... its bearish...
Ralph - your argument is not really contradicting Mosler’s point. If the government is running a large deficit, it us normally buying things. If it decides to pay the market price -which people assume the government has to, but that assumption is faulty - then yeah, it’s inflationary (“all else equal”). But if the government refused to pay higher prices, it would not be able to fill orders, and so the actual deficit would be smaller than planned, and so fiscal policy would be contractionary.
Since you phrase it as “money creation”, there are two corner cases.
- If the private sector is booming, and there is a policy of required reserves, then there would be inflationary pressures, and the monetary base grows. But that is not telling us anything about fiscal policy, and is reliant on an anachronistic system (bank reserves) that is only used in backwater countries like the US.
- If government expenditures are transfers, they are the equivalent of negative taxes, and have no linkage to setting the price level.
But is this a complete theory of inflation? Not really. That’s one of the limitations of the white paper - which I pointed out in my discussion.
" anachronistic system (bank reserves) that is only used in backwater countries like the US."
Every developed nation has Reserve Assets in their regulatory Accounting systems...
Here they are required under the latest Basel 3 international compliance standards:
https://www.investopedia.com/ask/answers/062515/what-minimum-capital-adequacy-ratio-must-be-attained-under-basel-iii.asp
"Basel III Capital Adequacy Ratio Minimum Requirement
The capital adequacy ratio is calculated by adding tier 1 capital to tier 2 capital and dividing by risk-weighted assets. Tier 1 capital is the core capital of a bank, which includes equity capital and disclosed reserves. "
All nations use Reserves in their regulatory accounting...
Even the commies use this abstraction in their regulatory accounting:
https://www.bloomberg.com/news/articles/2020-01-01/china-cuts-banks-reserve-ratio-to-boost-economic-growth-in-2020?srnd=economics-vp
"But is this a complete theory of inflation? "
Not even the Art Degree morons who created the figure of speech "inflation!" in the first place have a complete Theory of 'Inflation!"...
Cross-posting
Ahmed Fares
You say: “For a closed economy, such as the global economy as a whole: Government Deficit = Non-government Surplus.”
This is false.#1, #2 The axiomatically correct macroeconomic relationships read with increasing complexity and simplified notation:
(1) Q=−S in the elementary production-consumption economy,
(2) Q=I−S in the elementary investment economy,
(3) Q=Yd+I−S in the investment economy with profit distribution,
(4) Q=Yd+I−S+(G−T)+(X−M) in the general case with government in an open economy.
For the three sectors (business, household, government) of a closed economy this boils down to Q=(G−T)−S (I=0, Yd=0) and for two sectors (business, government) to Q=(G−T), i.e. Public Deficit (G−T) = Private Profit Q.
This tells one that MMT’s policy of deficit-spending/money-creation is a free-lunch program for the Oligarchy and that Warren Mosler is a Wall Street agenda pusher and that his White Paper is proto-scientific garbage.#3
For the detailed refutation of Peter Cooper enter his name in the search field at AXEC https://axecorg.blogspot.com/.
Egmont Kakarot-Handtke
#1 Stephanie Kelton’s legendary Plain-Sight-Ink-Trick
https://axecorg.blogspot.com/2019/01/stephanie-keltons-legendary-plain-sight.html
#2 The sectoral balances obfuscation: stupidity or corruption?
https://axecorg.blogspot.com/2019/10/the-sectoral-balances-obfuscation.html
#3 Why MMTers permanently explode myths of public deficits
https://axecorg.blogspot.com/2020/01/why-mmters-permanently-explode-myths-of.html
Matt -I used “reserves” in a completely standard way - balances at the central bank, held in reserve against deposits. These do not exist in Canada (among other countries), and the target for settlement balances in Canada is zero. Where reserves exist, they are a component of the monetary base, which is what was being discussed.
Any other usage of the word “reserves” refers to things that do not show up in the monetary base, and are completely irrelevant for what was being discussed.
Brian, they are the same thing... a Reserve Asset...
Global bank regulatory accounting requires that banks have a certain minimum % of total assets as direct liabilities of the Central Bank and/or the nation's Treasury...
Dosen't have anything to do with Deposits...
Every nation on planet earth does this...
Its right in Basel 3...
Its not a bad idea or some sort of "mistake"... it might be a good idea if there is some sort of information system disruption (hack, war, natural disaster, etc) to have a direct CB liability balance which might help at least facilitate accrual of intra-bank settlements or something like that if the system is degraded... it would be better than nothing...
Brian,
MMT says "Reserves don't matter!" in one of their dogmas...
They are very mistaken on this... They are a significant part of global bank regulatory accounting...
Brian Romanchuk
You summarized the White Paper: “Mosler answers the question ‘What is MMT?’ as follows. MMT began largely a description of monetary operations, which are best thought of as debits and credits to accounts kept by banks, businesses, and individuals.” and “To give further background, Warren Mosler is successful fixed income investor who developed the ideas around MMT independently of the other founders, …”
The problem is this: Warren Mosler’s approach is microeconomic and institutional. Now, we know from methodology that ALL microfounded approaches run into the Fallacy of Composition. NO way leads from the description of the institutional/operational details of the FED or other banking systems to the understanding of how the monetary economy works. Monetary Theory has to be macrofounded.
Because Warren Mosler gets the analytical starting point wrong, he gets the determination of the price level and the key interest rate wrong.
From the correct macrofoundations follows the correct balances mechanics, i.e. the interdependence of the balances of the business, household, and government sector. From the mathematically correct balances analysis (= macroeconomic accounting) follows that MMT’s sectoral balances equation is false.
So, both Warren Mosler’s microfoundations approach and the post-Keynesian macrofoundations approach are provably false. And when the foundations are false the whole analytical superstructure is false.
Conclusion: Forget the White Paper, forget MMT, and stop blathering about the absolutely irrelevant institutional/operational details of FED/Treasury/Private Bank interactions. The lethal blunder of economics is that the macrofoundations are false since Keynes because economists are too stupid for the elementary algebra that underlies macro.
People love hands-on practitioners like Warren Mosler and love to get lost in operational details and regard Mosler as an expert because he has made tons of money on Wall Street. Nothing wrong with this, except that economics is above Warren Mosler’s intellectual pay-grade. The proof is in his White Paper.
Egmont Kakarot-Handtke
Egmont you here: " Public Deficit (G−T)"
G doesnt include Transfer Payments so that is not the "Deficit"... at least not in Cash Basis Accounting...
Also you here: " the understanding of how the monetary economy works. Monetary Theory has to be macrofounded."
In the first part you are talking about "the monetary economy" then in the next part "Monetary Theory".... two different things... ?????
Matt Franko
You say: “Egmont you here: ‘Public Deficit (G−T)’ G doesnt include Transfer Payments so that is not the ‘Deficit’... at least not in Cash Basis Accounting ...”
Right, transfer payments have been left out of the picture here. But you can easily apply the analogous case which has been dealt with elsewhere.#1 Just substitute transfers for Yg.
The inclusion of transfers does NOT change the crucial relationship Public Deficit = Private Profit, so there is no need to bring transfers in at this point.
Egmont Kakarot-Handtke
#1 Q: How are you going to pay for it? MMT: By stealth taxation!
https://axecorg.blogspot.com/2019/11/q-how-are-you-going-to-pay-for-it-mmt.html
Egmont you may be using different Basis in your analysis...
What basis of Accounting are you using?
Cash? Accrual? Modified Accrual?
You have to pick ONE and only ONE and use it consistently throughout any Accounting analysis...
Which one are you using?
I use Cash Basis in this type of analysis but not many do...
US CBO and OMB use Modified Accrual...
I don't think Art Degree Economist (MMT) use a consistent basis in their analysis that how they keep saying everything is going to shit and it never does...
iow if you are saying "G-T is the deficit" then that i believe is Modified Accrual...
I say "G + Transfer Payments - T is the deficit" which i believe is Cash Basis for sure...
So you just have to make sure you are not switching back and forth between Basis' in the midst of your analysis... you cant do your accounting in Modified Accrual and then all of a sudden switch back to Accrual in some sort of evaluation mode...
Always stick to the same Basis... which nobody in Economics ever does btw...
Matt Franko
You say: “What basis of Accounting are you using? Cash? Accrual? Modified Accrual?”
Obviously, you do not remember that this question has already been discussed and settled in 2017.#1
All macroeconomic variables relate to the same period and all transactions are settled with fiat money in the same period as you can see from the transaction patterns.#2
So, the question of different accounting methods does NOT arise at this point because the variables G, T, Q in the algebraically determined macroeconomic relationship Public Deficit (G−T) = Private Profit Q relate to the same period.
Your repeated attempts to obscure with irrelevant technicalities the plain fact that MMT is a free-lunch program for the Oligarchy are futile. This only makes you part of a manifest political fraud.
Egmont Kakarot-Handtke
#1 Just enter “accrual” into the search field at AXEC
https://axecorg.blogspot.com/
#2 Money and time
https://axecorg.blogspot.com/2017/07/money-and-time.html
"the plain fact that MMT is a free-lunch program for the Oligarchy "
No I dont go for conspiracy theories sorry...
I dont care about any of that "political economy" Art Degree moron stuff...
In this I remain scientific...
You seem to be using the typical Modified Accrual if you are claiming G-T = Deficit
But in Cash Basis, the net USTs issued over any period = G + xfers - T which is what I look at in trying to understand what is really going on...
Cross-posting Brian Romanchuk
You say: “Woah, buddy, you’re jumping all over the place. Your first comment referred to ‘accounting’, and that only makes sense in the context of discussing the monopoly issuer status of the central government. Now you are pretending you are just talking about price level determination ― which your accounting mumbo-jumbo tells us nothing about.”
The fact is that I start with well-defined macrofoundations.#1 From these macrofoundations follows the price level as P=W/R and the elementary balances equation (which is the algebraic counterpart of macroeconomic accounting) as Q=−S or Q+S=0. In plain words: macroeconomic profit of the business sector Q is equal to dissaving (= deficit-spending) of the household sector −S.
For the government sector follows analogously Q=(G−T), i.e. private profit Q is equal to public deficit (G−T), i.e. to the deficit-spending of the government sector.
For the household and the government sector combined this gives Q=(G−T)−S. This equation replaces the false MMT slogan “Government Deficit = Non-government Surplus.”#2
From Warren Mosler’s “operational core” follows NOTHING about the price level or about macroeconomic profit. Accordingly, the word profit does NOT appear once in your discussion of the White Paper.
Profit does also NOT appear in MMT’s foundational sectoral balances equation. We have (I−S)+(G−T)+(X−M)=0 in the MMT textbook#2 and this contrasts with the correct equation (I−S)+(G−T)+(X−M)−Q=0 which contains the balance of the business sector Q.
From Warren Mosler’s ‘operational core’ follows NOTHING about the price level or the macroeconomic balances.
You say: “In any event, your entire theory is based on you doing macro accounting in wacky fashion that nobody agrees with.”
Of course, NO MMTer agrees with it because the axiomatically correct algebra implies (i) Public Deficit = Private Profit, (ii) MMTers are too stupid for elementary math, (iii) MMT’s policy of deficit-spending/money-creation is a free-lunch program for the Oligarchy, (iv) Warren Mosler is an agenda pusher/useful idiot for Wall Street, (v) Brian Romanchuk is Warren Mosler’s applause troll, (vi) MMTers are NOT scientists but political fraudsters because they deceive WeThePeople about the present and future negative effects of the MMT policy of deficit-spending/money-creation.
Egmont Kakarot-Handtke
#1 Macrofoundations are for a start defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Q≡C−Yw, S≡Yw−C) in simplified notation.
#2 Down with idiocy!
https://axecorg.blogspot.com/2017/12/down-with-idiocy.html
#3 Refuting MMT’s new Macroeconomics Textbook
https://axecorg.blogspot.com/2019/03/refuting-mmts-new-macroeconomics.html
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