Confused, of course, but in the news!
By Tom Worstall
Jan 12 (Forbes) — The idea that Modern Monetary Theory might actually become vaguely mainstream, even an influence on how the Republic is governed, entirely petrifies me. It’s not actually that I disagree very much with the economics that is being laid out in MMT: indeed, I’m terribly tempted to agree that they’re actually correct in much of what they say. Rather, it’s what it will do to the political process if they do gain real policy influence. For at present there does have to be some link, however vague or tenuous, between how much money the government takes in from all of us and how much money the government spends on giving prizes to all. The basic innovation of MMT is to point out that this no longer has to be so: and that’s simply not a tool that I want politicians of any stripe to have available to them.
Dylan Matthews has the story that has me hot and bothered:
President Obama’s biggest problem in the Senate is obviously its new Republican majority, but opposition from the left wing of the Democratic caucus appears to be growing too. Most prominently, Sen. Elizabeth Warren (D-MA) has clashed with the White House on a key Treasury Department position and the CRomnibus spending package. But new budget committee ranking member Sen. Bernie Sanders (I-VT) is poised to break dramatically from traditional Democratic views on budgeting, from Obama to Clinton to Walter Mondale and beyond.
His big move: naming University of Missouri – Kansas City professor Stephanie Kelton as his chief economist. Kelton is not exactly a household name, but to those who follow economic policy debates closely, tapping her is a dramatic sign.
If you want all of the grubby details of MMT then I recommend that piece and those it links to. I’ll just give a pencil sketch here.
It’s most certainly not obvious that MMT proponents are all barking mad or anything. Jamie Galbraith (who I’ve had one or two very limited interactions with) is certainly a reasonable guy. And his insistence that a budget surplus, despite the ribbing he gets about it, is in fact economically contractionary doesn’t seem to have anything wrong with it. Budget deficits are fiscally expansive, a surplus is fiscally contractionary, if there’s any one statement at the heart of Keynesianism that’s it. I might differ on the desirability of a surplus at times but not on that basic point about one being contractionary. My disagreement being that the old standard Keynesianism was based on the idea that at times we want the government to be contractionary. Not as a means of paying down the debt or anything but as just general good management of the economy. Sure, let’s add to aggregate demand in a slump but the flip side of that coin is that in the boom we want to temper things. Just as the old complaint about central banking goes (“the central banker’s job is to remove the punch bowl just as the party gets going” by raising interest rates) a budget surplus is the fiscal equivalent, just part of moderating both the booms and busts to which capitalism is prone.
So I’m certainly not thinking that the MMTers are over there with David Icke and whispering about the Grey Aliens or anything.
And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like. And sure, you could indeed finance government just by printing more money. Print money, spend it, hey presto, you’ve financed government. Standard monetary theory also recognises this: we know that the Fed makes a pretty profit each year from printing Benjamins (20 cents of paper and 3 cents of ink really is worth $100 these days) and that’s worth perhaps $20 billion a year to the US government in seignorage. We really don’t complain about it either. That standard monetary theory then also says that doing too much of this (in more detail, printing or creating lots of base money, rather than the creation of credit in the manner that the banking system does) will be highly inflationary. Standard theory points to Wiemar Germany, post WWII Hungary and modern Zimbabwe as examples (that last so fun that the end series of banknotes were only printed on one side as they didn’t have enough “real money” left to buy ink).
At which point the MMT crowd say ah, but yes, that’s what taxes are for. Print the money, spend it, thereby injecting it into the economy, and if inflation rises then taxes are what sucks that money back out of the economy and thus kills off the inflation. And it’s that bit that absolutely terrifies me. The effect that idea has on the incentives for politicians.
Given that we are discussing monetary policy it seems appropriate to bring Milton Friedman in here. And he pointed out that if you ever have a chance to cut taxes just do so. On the basis that politicians, any group of politicians, will spend the bottom out of the Treasury and more however much there is. So, the only way to stop ever increasing amounts of the the entire economy flowing through government is simply to constrain the resources they can get their sticky little mits on. We could, for example, possibly imagine a Republican from the Neanderthal wing of the party arguing that what the US really needs is another 7 carrier battle groups. And one from the even more confused than usual Progressive end of the Democratic Party arguing that each college student needs her own personal carrier battle group to protect her from the microaggressions of being asked out for a coffee. You know. Sometime. Maybe. If you want to?
By Warwick Smith
Jan 12 — It has recently been pointed out to me that some of my writing on monetary economics has not given proper attribution to the intellectual tradition behind the ideas that I present and that this gives the impression that these are my ideas. I’m embarrassed to admit that the criticisms are spot on and I have made a major misjudgement in how I wrote these articles (one in The Conversation and one in The Guardian). I had no intention of stealing other peoples ideas but, nevertheless, this is in effect what I did. I apologise unreservedly to those who may have felt aggrieved by my actions.
I have a history in public policy activism and I have approached my recent popular political and economic writing somewhat from an activist standpoint where I viewed the main game as advocating and causing public policy change and increasing public awareness. The branch of monetary economics known as modern monetary theory (MMT) has something of an activist element to it where a minority who hold an accurate view of how things are and, perhaps to a lesser extent, how things should be, are vying for airtime against the overwhelming majority who hold (or at least communicate) a false perspective on monetary economics and public finance.
I thought that I could add a new voice and a new strategy to that struggle by simply writing about monetary economics from an MMT perspective but as if it’s just the uncontroversial (among economists) truth about monetary economics rather than a minority view among economists. I think the complexities of intra-discipline disagreement are impenetrable for newcomers and will put most people off investing the effort to understand the arguments.
Taking this line of thinking led me to make a serious misjudgement in what I wrote and how I wrote it because MMT is more an intellectual and academic discipline than it is an activist movement and, as such, people’s careers and their professional profiles are at stake. Again, I apologise to the people whose work has inspired some of my writing who have not been properly acknowledged including Warren Mosler, Perry Mehrling, Bill Mitchell and Steven Hail.
I wrote to the Guardian editors requesting a couple of additions. They agreed to add attribution to a line early in the article that credits Warren Mosler but not to make further edits post-publication. I’m a strong believer in owning up to mistakes and trying to remedy them when others are affected.
I believe MMT faces serious challenges in part because of its name and the way it is usually presented. A better name would be something like Fiat Currency Economics because MMT is not a theory but is primarily just a description of reality and the clear consequences that flow from that reality. No economist that I’ve found has any clear and well reasoned refutation of MMT to offer. All attempts at refutation appear to rely on misunderstandings or misrepresentations. This is why I took the approach of not referring to MMT at all in the pieces that I wrote. Nevertheless, I still should have referred to the people whose work contributed to or provided the ideas for the articles and I greatly regret that I did not. I promise I will not make this mistake again.
Below is a list in rough descending order of significance with respect to influencing my views on monetary economics.
Perry Mehrling’s Coursera course The Economics of Money and Banking
Warren Mosler’s book The Seven Deadly Frauds of Economic Policy
Various presentation given by Steven Hail
University of Newcastle’s CofFEE report on the Job Guarantee
Professor Bill Mitchell’s blog – this is the most comprehensive of the sources here but it’s low on my list because I came to it quite late in the formative period of my thinking on money and finance.