Postscript To Misunderestimating Mmt

Gerard MacDonell has a follow upwards article to his before critique of MMT (my previous article was my reply to his critique). I merely desire to expand on a twosome of points, too respond to his response...

Policy Space too MMT

Gerard wrote:

I would invert the bit component subdivision to tell that MMT does non opened upwards up whatsoever obvious policy space, fifty-fifty though it does alter the analytics.

Although I cannot tell this is wrong, it does depend upon what you lot think virtually equally "policy space." My comments inwards the master version of my article maybe undersold MMT.

I volition annotation that some people bring interpreted some MMT arguments equally maxim that nosotros tin give the axe abolish taxation outright (which would patently opened upwards up policy space). This interpretation is incorrect. I cannot call upwards seeing text written past times i of the MMT academics that I interpreted that way; I only saw this interpretation on the internet. There is no value inwards discussing wrong interpretations of a theory.

However, at that spot are 2 policy proposals past times MMT, which could live on interpreted equally "opening upwards policy space," although it is possible to fence that they tin give the axe live on understood using conventional analysis. This is a semantic call for I do non attention to discuss; what matters are the merits of the policy proposals.

1. The elimination of bond finance. The primal authorities merely issues base of operations money (see technical appendix below). Interest rates are locked at 0% forever. One mightiness fence that this measuring eliminates policy space, equally monetary policy no longer exists, but that is the objective (the mainstream focus on monetary policy is component subdivision of the problem, non the solution). With involvement rates locked at zero, arguments that financial policy is "unsustainable" themselves are (ahem) unsustainable. I discussed this proposal inwards the master article.
2. The Job Guarantee. This is the signature MMT proposal. The proposal relies on MMT analysis of the labour market. I did non utter over this inwards my master article, but I would fence that it is a improve policy than the existing framework, too hence would opened upwards up "policy space" (since it is non beingness considered past times the mainstream).

Gerard did non utter over the Job Guarantee, too I argued that his effort to bargain alongside the elimination of bond finance was unsatisfactory. (In fact, he was originally unsure whether that was the proposal.) As a result, he is non going to encounter a lot novel inwards MMT policy proposals -- since he was unaware of (or ignored) the ones that existed.

I volition annotation that at that spot are a lot of other economists (pretty much the entire mainstream) that would handgrip alongside Gerard's persuasion that nosotros need involvement charge per unit of measurement policy to incorporate inflation; that said, a lot of people used to believe inwards witches. Whether or non an economic scheme tin give the axe reasonably role alongside a permanent ZIRP nether all circumstances is an interesting opened upwards economical debate.

However, my tidings hence far virtually policy infinite undersells the policy relevance. Not beingness utterly wrong adds a lot of room to policy space. 

• The euro expanse would never bring been created without a potent primal financial agency if European policy makers followed MMT principles. This would bring saved a spectacular amount of misery for those unfortunates stuck inwards the euro expanse periphery.
• The entire disastrous austerity drive later the Financial Crisis would non bring happened.
• People would non bring wasted fourth dimension looking for magical debt-to-GDP ratios.
• We would encounter that the drive to create financial watchdogs equally merely beingness some other effort past times unelected technocrats to catch powerfulness from elected politicians, on the the world of mainstream economical mumbo-jumbo.
• We would live on spared the idiots calling for imminent hyperinflation inwards Japan. (Although I do honour they render a bully bargain of amusement value.)
• The idiocy to a greater extent than or less the debt ceiling inwards the U.S. could live on avoided.
• The big thought of DeLong too Summers -- that nosotros should invest inwards infrastructure because involvement rates are depression -- would live on seen equally silly. Instead, the debate would be: does the U.S. need infrastructure investment, too are the existent resources available to brand the investment possible?
• The entire premise of hydraulic Keynesianism -- nosotros merely need "aggregate demand" to bargain alongside unemployment -- would live on seen equally questionable. We instead need to await at the existent side of the economy, too enquire whether the need created volition tally the available puddle of unemployed/underemployed labour. (This was Minsky's critique inwards the 1960s, too explains why the Job Guarantee is a lot to a greater extent than sophisticated than fauna strength "Keynesian" approaches similar fauna strength infrastructure spending.)

In summary, nosotros would bring been spared practically all of the verbiage dumped past times mainstream economists on financial policy over the past times decade. This is an payoff that cannot live on minimised.

Permanent ZIRP

Gerard had a department "My postal service wasted fourth dimension considering the instance of the Fed paying involvement on reserves...."

He wrote:

 It would live on hence if MMT advocates were never to offering U.S. of A. financial policy advice, except inwards the context of beingness crystal clear that they assume that the institutional set-up at the Fed is exclusively dissimilar from what it genuinely is.

This is wrong. The MMT policy proposal is to abolish bond finance; but it tin give the axe analyse the electrical flow system. The MMT analysis is that Gerard's showtime instance (paying involvement on reserves) is precisely the same equally QE, too MMT says that QE is completely ineffectual since it is functionally equivalent to mouth finance.* Since MMT says the policy is ineffective, an analysis that tells us it would non piece of work is useless equally a critique of MMT.

I believe that Gerard argues that QE is ineffective, because it is equivalent to mouth finance. Since his analysis is precisely the same equally MMT's, I think his electrical load hither is somewhat silly.

More generally, MMT consists of analysis too policy proposals. Just because MMT prefers floating currency regimes, it does non hateful that you lot cannot utilisation MMT principles to analyse a fixed central charge per unit of measurement system. The points of failure of a fixed central charge per unit of measurement organisation are precisely why MMT advocates a floating charge per unit of measurement system.

Saying that economists should non give policy advice if the existent the world does non arrange to their theory's assumptions is pretty unsafe for someone who thinks Paul Krugman is worth reading. I would stack upwards MMT's assumptions versus mainstream assumptions whatsoever twenty-four hours of the week.

At this point, I need to emphasise that I am including broader post-Keynesian analysis equally beingness "MMT" -- which is precisely what the MMT academics do. Modern Monetary Theory inherits analysis (such equally Stock-Flow Consistent models) which were developed past times post-Keynesians who are non considered component subdivision of the MMT schoolhouse of thought. MMT is an effort to create a unmarried cohesive the world persuasion out of a broader, somewhat self-contradictory post-Keynesian literature. It has a narrow focus, inwards gild to continue everyone on the same theoretical page, but nosotros cannot lose sight of the broader literature if nosotros are discussing topics exterior of that focus.

Arguments virtually the MMT Canon

The volume of Gerard's article revolved to a greater extent than or less his agreement of the MMT literature. The obvious solution: he should purchase Understanding Government Finance (conveniently available inwards ebook too paperback forms!).

My less flippant respond is that nosotros need to focus on to a greater extent than concrete noun examples, too non worry virtually terminology. I bring attempted to bargain alongside what I encounter equally Gerard's concrete objections, but I am non attempting to address his complaints virtually how MMT puts itself forward.

I doubtfulness that Gerard wants to read hundreds of academic primers on MMT, but at the same time, criticising a theory without genuinely reading the literature seems similar a foreign exercise. My solution to this is to utter over how the MMT analysis differs from the mainstream alongside regards to concrete issues, too hence allow the reader honour the primers if interested.

Appendix: Eliminating Bond Finance

One possible call for of confusion virtually the MMT proposal to eliminate bond finance revolves to a greater extent than or less Treasury bills. The people behind the evolution of MMT are really good aware of the institutional framework for fixed income (Warren Mosler made a reasonable amount of coin past times setting upwards a fixed income hedge fund.) This institutional awareness agency that the proposal is slightly to a greater extent than complex than what would live on suggested past times the uncomplicated version used inwards an economical model.

The uncomplicated version of the proposal is that the authorities merely issues "base money," alongside an involvement charge per unit of measurement of 0%.

In the existent world, this policy would need to live on supplemented past times the issuance of Treasury bills. This is necessary equally at that spot are non-banks that need to handgrip condom assets on their portfolios, too they cannot realistically stockpile currency, nor locomote out deposits at the primal bank.

The divergence is the issuance scheme: the primal authorities issues Treasury bills at a fixed cost (I believe that a yield of 0.25% is the suggestion), too the someone sector tin give the axe purchase equally many bills equally it wishes at that fixed yield. As a monopolist, the authorities tin give the axe number Treasury bills past times allocating on a cost or quantity basis; the hidden supposition that the allotment has to live on done on a cost the world is wrong.

As a result, i mightiness technically need to tell that involvement rates would live on locked at 0.25%, too non 0%, forever.

Footnote:

* Why does MMT tell that increasing excess reserves is the same equally mouth finance? The preferred MMT analytical approach is to consolidate the primal banking concern alongside the balance of the authorities (regardless of the institutional framework; the only exception mightiness live on if you lot wanted to model a sovereign default). Once you lot consolidate the primal bank, nosotros encounter that:

• excess reserves are a authorities liability that pays the short-term rate; and
• Treasury bills are a authorities liability that pays the short-term rate.

In other words, they are functionally equivalent, too hence Pb to equivalent outcomes.

(c) Brian Romanchuk 2017