Misunderestimating Mmt

My ex-colleague Gerard MacDonell wrote an article "The problem alongside MMT" (Modern Monetary Theory). He offers a broad number of criticisms, nonetheless I believe that his noun ones are unconvincing. I volition notation from the kickoff that I cannot say that his arguments are wrong, they correspond ane side inwards a long debate inwards economics. Instead, I believe that nosotros take away to properly sympathise the debate, as well as that the MMT fly of post-Keynesian economic science offers a lot of insight to that debate.

[Update: Gerard has a followup article here; I volition response to a pair of points inwards an upcoming brusk post.]

This article is partly aimed at people who are non familiar alongside MMT; Gerard's arguments are using concepts as well as linguistic communication that are to a greater extent than familiar than MMT, as well as so I believe that agreement these arguments volition last useful for many readers coming to grips alongside it. Another thing to overstep away along inwards take away heed is that MMT did non merely look out of nowhere; it is a branch of broader post-Keynesian economic science -- I hash out the human relationship here. Since I sentiment MMT every bit percentage of this larger tradition -- as well as non merely the output of "MMT economists" -- it has much deeper intellectual pedigree than browsing to a greater extent than or less articles on the cyberspace would suggest.

(This article dodges the tidings of political strategy that Gerard raises. My feelings on this are mixed. Although I believe inwards Functional Finance for an analytical strategy, the associated political strategies to justify programmes is to a greater extent than awkward.)

The Disappearing Fiscal Constraint

Gerard took aim at to a greater extent than or less of Warren Mosler's comments nearly the financial constraint. Since I sentiment MMT every bit percentage of a broader tradition, nosotros take away to aspect at what that tradition suggests, as well as non quotes from a exceptional pop book. In this case, the MMT tradition relies heavily on Functional Finance, going dorsum to Abba Lerner.

I volition at in ane lawsuit restate my interpretation of what MMT says nearly the "financial constraint" for governments, using a fairly uncomplicated example.

Imagine that I walk into a novel shopping mall, alongside only a $20 nib inwards my pockets. I tin purchase whatever I desire -- so long every bit it costs less than $20 (sales taxes included). (I assume that I exercise non know whatever of the people running the shops, so they volition non extend me credit.) I take away hold a hard $20 constraint on my mightiness to finance purchases; thus it makes sense that I take away hold a hard financial constraint. A key request to notation that this constraint is direct related to a dollar amount, a fact that I volition provide to.

From a practical perspective, primal governments confront no such constraint -- the round out nature of governmental finance flows way that they tin "finance" practically anything. (OK, nether the electrical flow institutional framework, at that topographic point are limitations; the U.S. of A. Treasury could non merely write a $100 quadrillion depository financial establishment check to purchase a fancy hotel on a Fri afternoon. I hash out such institutional details inwards Understanding Government Finance; What matters is that these limitations correspond largely uninteresting "corner cases.") 

What stops the authorities from buying "everything"? Inflation. If the authorities issues an insane amount of liabilities ("money" as well as debt) relative to its revenue enhancement base, the value of those liabilities goes downwards versus existent goods as well as services. As a result, the constraint on authorities finances is best described: excessive authorities purchases as well as transfers tin heighten capacity utilisation inwards the economic scheme beyond "normal" levels, (eventually) giving ascent to inflationary pressures.

Since the authorities is buying materials alongside money, is this non financial? If yous desire "financial" to hateful "anything to exercise alongside money," I guess yous could say that. However, this is a fairly meaningless definition. The constraint has cipher to exercise alongside the government's mightiness to finance purchases, nor does it take away hold anything to exercise alongside fixed dollar amounts.

The minute request (no relation to dollar amount) is critical, as well as why I retrieve nosotros take away to drib the tag "financial."

I am currently developing my stock-flow consistent (SFC) modelling framework, as well as I take away hold discovered that it is fairly tardily to generate endlessly growing governmental debt levels. All yous take away to exercise is to add together a sector to the economy, hand it a origin of cash flow, as well as forget to add together an outflow. It volition hoard financial assets, as well as drive the economic scheme to a set down of capacity underutilisation. The automatic stabilisers associated alongside financial policy boot in, as well as the authorities runs deficits to counteract the demand drag. Eventually, the economic scheme returns to a "normal" capacity utilisation level, but alongside higher governmental debt as well as deficit levels. In other words, nosotros tin take away hold wildly dissimilar governmental debt levels corresponding to the exact same degree of capacity utilisation.

If nosotros provide to the existent world, nosotros exercise catch sectors that emulate such hoarding behaviour.

• Pension funds are relentlessly accumulating financial assets to encounter hereafter outflows. Those pension funds volition never purchase existent goods as well as services (beyond their technology scientific discipline infrastructure), no thing the degree of their financial property holdings.
• Foreign primal banks take away hold been accumulating reserve assets, alongside no intention of ever buying existent goods as well as services alongside those reserves -- they are to last used to purchase a exceptional financial property (their domestic currency if it is nether attack).
• Many corporations are mindlessly piling upwards cash hoards, reflecting the empire-building objectives of the C-suite.
• Increasing inequality is redistributing income flows to the parts of the solid sector alongside a depression propensity to consume, leading to the growth of the stock of financial assets held.
• If nosotros include diverse intra-governmental debt holdings inside the total, authorities debt outstanding could larn arbitrarily large without whatever observable outcome on economical behaviour.

As a result, nosotros cannot relate the dollar amounts of governmental debt or deficits to existent set down capacity utilisation. Anything that causes such hoarding behavior to growth volition growth authorities debt degree spell keeping "capacity utilisation" essentially the same.

In summary,

• governments (that command their currency) tin ever "finance" spending (under plausible limits); and
• government spending is express yesteryear an inflation constraint, as well as when that constraint is striking has no human relationship to the dollar amounts involved.

Under such circumstances, my sentiment is that anyone who applies the term "financial" to this constraint is using the tidings "financial" inwards a mode that bears no resemblance how that tidings is unremarkably used yesteryear speakers of the English linguistic communication language.

With that detour out of the way, I volition address what Gerard genuinely wrote. He appears to take away hold alongside the logic I outlined above, but he soundless thinks that the tidings "financial" applies. In the version that he has posted at the fourth dimension of writing (Gerard extensively edits his articles, as well as so I am unsure what the reader may catch inwards the future):

Finally, imagine that the debt/GDP ratio rises to a degree that would otherwise last hard to send if funded alongside fifty-fifty one-week treasury bills.  The argue for defining the debt degree inwards price of what would last hard to finance alongside bills volition larn obvious below. For concreteness only, telephone telephone that debt degree 200% of GDP.

Why I believe that he is incorrect is that he is ascribing a direct human relationship betwixt the debt/GDP ratio as well as existent variables ("200% of GDP"). His article makes no explanation of why this is possible, but I would debate that it is clearly incorrect (for the reasons given above). For example, if nosotros determine to capitalise actuarial liabilities as well as inflows onto the Federal government's remainder sheet, the "debt" ratio could easily ascent to a higher house 200% of gross domestic product without it having an observable outcome on anything.

The only way that I tin brand sense of Gerard's declaration is to assume that the policy mix is unchanged forever, as well as so nosotros tin relate governmental liabilities to existent goods as well as services inwards a to a greater extent than reliable fashion. For example, a 1% growth inwards the governmental deficit volition imply a 1% growth inwards authorities consumption (which so feeds into capacity utilisation). I cannot guess why he believes this, but I would notation that it follows from typical assumptions inwards mainstream economics. (To last clear, I am non maxim that he believes all of the next points, rather this is my characterisation of measure mainstream views, which look to last consistent alongside his analysis.)

• It is typically assumed that at that topographic point is only ane representative solid (hence no income distribution effects);
• there is only a unmarried composite skilful (which allows for a well-defined production percentage alongside a unmarried capacity variable);
•  the problem organization sector is a cipher that does non accumulate financial assets; and
•  models typically exercise non include unusual primal banks that hoard reserve assets. 

In a model that embeds these assumptions, nosotros would catch a uncomplicated human relationship betwixt governmental deficits as well as capacity utilisation. However, since I sentiment those assumptions every bit dubious, I exercise non aspect such a human relationship to exist.

[Update: added this paragraph.] This tidings relates to the MMT/Functional Finance sentiment of financing every bit it relates to analysis; at that topographic point is no claim that eliminating the "financing constraint" from analysis opens infinite for novel policy. For example, the authorities soundless needs to impose taxes, fifty-fifty if they are technically non "financing" spending. (The MMT sentiment is that taxes drive the value of the currency -- The problem alongside MMT" (Modern Monetary Theory). He offers a broad number of criticisms, nonetheless I believe that his noun ones are unconvincing. I volition notation from the kickoff that I cannot say that his arguments are wrong, they correspond ane side inwards a long debate inwards economics. Instead, I believe that nosotros take away to properly sympathise the debate, as well as that the MMT fly of post-Keynesian economic science offers a lot of insight to that debate.

[Update: Gerard has a followup article here; I volition response to a pair of points inwards an upcoming brusk post.]

This article is partly aimed at people who are non familiar alongside MMT; Gerard's arguments are using concepts as well as linguistic communication that are to a greater extent than familiar than MMT, as well as so I believe that agreement these arguments volition last useful for many readers coming to grips alongside it. Another thing to overstep away along inwards take away heed is that MMT did non merely look out of nowhere; it is a branch of broader post-Keynesian economic science -- Chartalism.) However, it does eliminate analytical errors that drive policy mistakes. For example, the Maastrict Treaty 60% debt-to-GDP ratio made no sense, nor did the search for the magical 90% debt-to-GDP ratio that appeared inwards the to a greater extent than lurid corners of economical analysis. In other words, MMT analysis does non offering the prospect of a gratuitous luncheon (disclaimer follows) -- but it helps avoid wasting nutrient every bit a termination of ignorance. (The Jobs Guarantee tin last viewed every bit providing a gratuitous luncheon -- the programme offers the possibility of eliminating underemployment spell at the same fourth dimension offering a to a greater extent than humane method to anchor the cost level.)

MMT as well as Money Financing

Gerard so turns to the inquiry of coin financing. He discusses ii possibilities:

1. Excess reserves pay the policy charge per unit of measurement of interest; and
2. excess reserves exercise non pay interest.

He wastes an incredible amount of infinite on the initiative of all possibility -- he plainly missed the percentage of the MMT proposals that emphasises that the minute possibility is what is inwards mind.

Unfortunately, yesteryear emphasising the first, he did non convey the minute seriously. Highlights of his comments:

I don’t desire to larn into this scenario besides deeply because it is so unrealistic as well as because it is quite a fleck to a greater extent than complicated than I am smart.  But nosotros tin imagine ii ways inwards which this instance rapidly goes intolerably inflationary, ane next a conventional logic as well as ane next the financial theory of the cost level. I volition last brief – as well as yes, conclusory – on each.
...
If an involvement charge per unit of measurement of null is besides depression relative to how the economic scheme is doing, so nosotros larn inflation every bit the Fed falls increasingly “behind the curve”, yesteryear virtue of non existence able to move.  I volition halt at that topographic point because the story is really familiar to all of you, as well as I take away hold cipher to add together to it.

Essentially Gerard is assuming that locking the policy charge per unit of measurement at 0% volition motility inflation, because the primal depository financial establishment tin no longer exercise anything alongside involvement charge per unit of measurement policy. The footing of this assumption: "it is really familiar to all of you."

Ahem. The outcome of involvement rates on inflation is along running debate, as well as was non invented yesteryear mainstream "neo-Ricardians." (It only seems that way because they ruthlessly exclude citing anyone other than other mainstream economists.) The MMT seat on locking the involvement rates at 0% hinges on the declaration that involvement charge per unit of measurement policy has only a express outcome on inflation. If yous desire to disagree alongside MMT, yous take away hold to convey on that argument.

I am agnostic on the inquiry of the effectiveness of involvement rates (it's an opened upwards debate inside post-Keynesian economics, as well as fifty-fifty inside MMT). That said, the modern mainstream literature that I take away hold seen is only useless. The effectiveness of involvement charge per unit of measurement policy is assumed inside the mathematical structure; it is literally impossible to debate the theme using DSGE models. The theory is non-falsifiable.

How would nosotros falsify the theory? We would take away an episode where the primal depository financial establishment holds the policy charge per unit of measurement away from the natural rate. The recent catamenia of null rates inwards the U.S.A. would take away hold qualified -- if nosotros used pre-crisis estimates of the natural rate. However, the mainstream estimates the natural charge per unit of measurement of involvement yesteryear using techniques that assume that it has the assumed outcome on the economy, as well as so the natural charge per unit of measurement was conveniently estimated to last negative, so that the theory appears to predict the lack of inflation. (The problem alongside MMT" (Modern Monetary Theory). He offers a broad number of criticisms, nonetheless I believe that his noun ones are unconvincing. I volition notation from the kickoff that I cannot say that his arguments are wrong, they correspond ane side inwards a long debate inwards economics. Instead, I believe that nosotros take away to properly sympathise the debate, as well as that the MMT fly of post-Keynesian economic science offers a lot of insight to that debate.

[Update: Gerard has a followup article here; I volition response to a pair of points inwards an upcoming brusk post.]

This article is partly aimed at people who are non familiar alongside MMT; Gerard's arguments are using concepts as well as linguistic communication that are to a greater extent than familiar than MMT, as well as so I believe that agreement these arguments volition last useful for many readers coming to grips alongside it. Another thing to overstep away along inwards take away heed is that MMT did non merely look out of nowhere; it is a branch of broader post-Keynesian economic science -- I discussed this theme at greater length here.)

I am non maxim that Gerard is wrong, rather that I catch no evidence that his sentiment is right. As a result, he is non inwards a seat that the MMT sentiment is wrong. In whatever event, I exercise non catch the proposal to lock involvement rates at 0% every bit existence a centre percentage of MMT theory.

(He afterwards discusses the Fiscal Theory of the Price Level, The problem alongside MMT" (Modern Monetary Theory). He offers a broad number of criticisms, nonetheless I believe that his noun ones are unconvincing. I volition notation from the kickoff that I cannot say that his arguments are wrong, they correspond ane side inwards a long debate inwards economics. Instead, I believe that nosotros take away to properly sympathise the debate, as well as that the MMT fly of post-Keynesian economic science offers a lot of insight to that debate.

[Update: Gerard has a followup article here; I volition response to a pair of points inwards an upcoming brusk post.]

This article is partly aimed at people who are non familiar alongside MMT; Gerard's arguments are using concepts as well as linguistic communication that are to a greater extent than familiar than MMT, as well as so I believe that agreement these arguments volition last useful for many readers coming to grips alongside it. Another thing to overstep away along inwards take away heed is that MMT did non merely look out of nowhere; it is a branch of broader post-Keynesian economic science -- which I take away hold discussed elsewhere.)

Concluding Remarks

Gerard MacDonell's article illustrate to a greater extent than or less of the difficulties MMT faces for broader acceptance. In improver to difficulties alongside terminology, at that topographic point is a constant take away to hash out how underlying assumptions differ from mainstream economics. Having to create total every unmarried article alongside discussions of theoretical concepts so every bit to avoid existence misunderstood when existence quoted out of context makes writing awkward.

(c) Brian Romanchuk 2017