Scott Sumner still struggling with MMT viewed from the conventional perspective.
The Money IllusionEndogenous interest rates and aggregate demand
Scott Sumner | Ralph G. Hawtrey Chair of Monetary Policy at the Mercatus Center at George Mason University
I wrote the following on his website:
ReplyDelete“Another argument I’ve heard is that lower rates don’t matter because interest payments are a zero sum game. Some people pay less interest but others earn less interest. Yes, they may not matter for consumption in a simple Keynesian cross model, but they certainly do matter for investment, even in the simple Keynesian model.”
I think you’re misrepresenting Keynes here. Here’s what Keynesian economist Alvin Hansen wrote in 1939:
“I venture to assert that the role of the rate of interest as a determinant of investment has occupied a place larger than it deserves in our thinking.”
Bill Mitchell then says:
“The clue is that firms will not invest in new productive capacity no matter how cheap the funds to engage in that investment become if they do not expect to be able to sell the extra output.
The central bank can drive the interest rate down to low levels and firms will still not borrow and spend. The similarities with the situation today are strong in this regard.
The reliance on monetary policy to get the advanced economies out of the crisis was misplaced and reflected a poor understanding of what drives national income growth. Hansen clearly knew this in 1939 as did many other Keynesian economists.
It was the classical/neo-classical economists who were unable to let go of the loanable funds doctrine, which said that saving and investment are brought into balance with interest rate adjustments. So if consumers do not want to spend they must be saving and that extra spending can come from investment if interest rates fall.
The loanable funds doctrine remains a central part of the mainstream neo-liberal economic theory and is wrong to the core.”
He just seems to be plain confused about interest rates. He’s jumping between policy rates and market rates, and just can’t understand that the central bank can pin rates without doing much of anything to the “money supply.”
ReplyDeleteYes, it's amazing. He has a mental block. I suspect he is not alone in this.
ReplyDeleteI can understand that, since if the truth got through, it blow up their entire worldview.
But that's operative in a whole lot of other areas, too.
For Sumner, this isn’t really about MMT. Nobody really agrees with Monetarist views, other than possibly some broken Economics 101 models that are hopelessly behind where actual research is. (Mainstream economists admittedly go back to those models in popular writing, but they wouldn’t make it to publication.)
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