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What Is MMT? (Short Version)

Published by Anonymous (not verified) on Thu, 09/07/2020 - 11:19pm in



One of the unusual things about Modern Monetary Theory is that many non-MMTers have a hard time understanding what it is. Although it would be reasonable to argue that this reflects communications issue by MMT proponents, I am not entirely comfortable with that characterisation. I had no issues picking up the theory, and the same could be said for the relatively large number of activists who have come from non-economics backgrounds. Many of the complaints about understanding MMT come from people who either work in finance or have a background in economics – which raises a question why they are having these difficulties.

Note: This is an unedited introductory section from my manuscript. It will be the second section, and designed to offer a minimal introduction to MMT. The rest of the book will give more details, but I want readers to at least have an idea of what MMT is in case they just jump to the MMT criticism chapter.

My argument why MMT is awkward to grasp for people with already fixed views about economics is that we need to draw a distinction between two concepts of MMT: a narrow version (or core MMT), and a broad version. (This is my preferred wording, but is probably non-standard.)

Most MMT primers on the internet focus on the definition of narrow MMT, while many of the interesting questions in economics (which show up in financial macro analysis) end up in broad MMT. It should come as no surprise that if you are interested in broad MMT, watching an online video about narrow MMT will leave a lot of questions unanswered. However, based on comments of MMT critics, this is exactly what many of them have done.

Finally, in the interest of brevity, I am presenting this overview from my perspective, and others may feel that there are better ways of presenting the material (or possibly that I am mis-characterising MMT). Chapter 4 gives a longer description of MMT and stays much closer to the source materials listed therein.
Narrow MMTThe narrow version of MMT uses as its base case a fiat currency (and not an alleged barter economy, or pegged currency). For a fiat currency, government money is a public monopoly – and should be analysed as such (and policy should be set according to this analysis). The economic reason why governments issue money is to provision themselves easily, instead of demanding goods and services in-kind (e.g., demand that citizens work for the government without pay). (To be perfectly clear about the preceding sentence, I specified that this is the economic reason for current arrangements, this says nothing about the history of the adoption of money – which is part of broad MMT. I specify this, as commodity money proponents often rely on ahistorical founding myths for money, which is a topic of little interest for people interested in analysing modern economies.)

Fiat currencies mainly exist as electronic entries, and have no inherent value (unlike gold, which has uses in industry and jewelry). (Banknotes and coins are material and thus might have some inherent value, but that value has no necessary relationship to the nominal value struck on the token). To provision itself using money, that money must have value in trading in the non-government sector. The government needs to think like a monopolist and set its policy to ensure that government money has value in exchange.

One leg of the monetary monopolist view of government leads to what is known as Functional Finance (an Old Keynesian school of thought, heavily associated with Abba Lerner.) These core principles attach most of interest around MMT (particularly from a bond market perspective).

  • The role of taxes is to create a demand for money to meet tax payment obligations – which are denominated in the domestic currency. There is a real need to pay taxes – since there is a real cost to going to jail for tax avoidance – and so money has a real value. This explains why private actors rationally offer real goods and resources in exchange for electronic entries.
  • Since the central government is a monopolist issuer of its money, and that money is not pegged to any external instrument, there is no danger of the central government running out of money. (To be clear, this does not apply to sub-sovereigns, nor to central governments that do not control their currency, such as euro area sovereigns.)
  • This means that the central government is not finance constrained like private entities such as households, firms, and sub-sovereigns. (The preferred phrasing is that the central government is the issuer of the currency, all those other entities are users of the currency.) In particular, government bonds are not needed as financing instruments: their economic function is to remove “money” from the banking system, so as to allow for a risk-free yield curve with positive interest rates. (This allows the possibility of using interest rates to influence the economy – a policy lever that MMTers feel is much weaker than conventional analysis suggests.)

The previous leg of argument is well-known and captures most arguments about MMT in popular forums (and even some academic reviews by mainstream economists that cannot be bothered to enquire further into MMT). However, the next leg is more important from the perspective of defining MMT as being distinct from Functional Finance.

In addition to using taxes to ensure that the currency has some value, governments help determine the value of the currency by the prices they set in their dealings with the private sector. This does not fit in with conventional economists, who rely on models in which the government is a price-taker in every single market. In fact, conventional governments have deliberately moved policy so that the government acts as a price taker. From the MMT perspective, this is a huge blind spot, and helps explain the inflationary outcomes in the 1970s – government policies exacerbated the drift in the price level. The Old Keynesians – like the rest of the mainstream – refused to accept the role of governmental provision in setting the value of the government’s unit of account.

More specifically, a key observation is that the labour market is the most important domestic market. Conventional economists argue that citizens must be kept unemployed to discipline workers, which hopefully moderates inflation. However, Bill Mitchell and Warren Mosler independently argued that the government can enact a policy similar to commodity price support programmes. That is, have a programme that bids for all unused labour at a fixed price. This is known as a Job Guarantee. (Economists previously suggested and experimented with such programmes, but never with the explicit aim of using it to determine the price level.)

Once these basic principles are in place, the focus then switches to monetary operations – what exactly is happening in the financial system in the context of government finance? The reality is that each jurisdiction has different legal and regulatory structures, and so a researcher needs to dig into each one independently. (One common feature of American MMT critics is to invoke some law in the U.S., and assert that this somehow globally refutes MMT.) The digging keeps coming up with the same answers – although there are self-imposed legal restrictions on government financing, the underlying economic forces match the MMT story outlined earlier. This is distinct from mainstream Economics 101 textbooks, which invent toy models of money markets that bear zero resemblance to how interest rates are determined in practice.

Another part of operations analysis looks at the banking system. The MMT story is straightforward: the conventional banks act as regulated utilities, and so “bank money” is an extension of “government money.” (This causes concern for some MMT critics, who argue that banks somehow create their own money without it having any relationship to government money.)

This largely wraps up what I call narrow MMT. Despite all the arguments about these topics, it is extremely hard to find a serious fundamental objection to them. Most arguments end up being about wording or politics, without any substantive theoretical differences.

For someone new to economics, the previous topics looks like a lot of ground to cover. Understanding Government Finance (Amazon affiliate link) covers most of the topics that are of interest to bond market participants at much greater depth. However, anyone experienced with macroeconomics would realise that macroeconomics covers more topics than that. We need to move to broad MMT to discuss those topics.
Broad MMTWhen I write “MMT” without qualification, I am almost certainly referring to broad MMT. My guess is that academic MMT proponents agree with this perspective. However, when outsiders discuss “MMT,” they only include the academic writings of self-described MMTers and the contents of online primers, and that ends up being closer to what I describe as narrow MMT.

My view of broad MMT is wide – and possibly wider than other MMTers. My starting point is to look at what the post-Keynesian academic Marc Lavoie describes as “broad-tent post-Keynesian” thinking. (See Section 1.4.4 of Post-Keynesian Economics: New Foundations for a longer description. There is a narrow-tent group of post-Keynesians, who argue that they are the only true post-Keynesians.) Post-Keynesian economics consists of a large number of factions, who despite having some broad similarities in their mode of analysis, have spent decades arguing with each other. Modern Monetary Theory is one school of thought within that post-Keynesian landscape. I define broad MMT to be the parts of broad-tent post-Keynesian economics that is consistent with the core analysis of narrow MMT. This means that it can include research by economists who are critical of MMT.

The textbook Macroeconomics by William Mitchell, L. Randall Wray, and Martin Watts is presumably the best starting point for understanding broad MMT. However, that text is an undergraduate textbook, and simplifies the academic literature. One needs to dig into monographs and articles for more specialised references. (This text provides a starting point for such references.)

The following topics are a non-exhaustive list of areas of debate that I have run across over the years (and is obviously biased towards my interests).

  • Labour market analysis, and the inflation process. Alternative counter-inflationary policies.
  • Business cycle theory.
  • Rejection of the assumptions and methodologies of neoclassical economics. (Arguably, too much of post-Keynesian discourse consists of complaining about neoclassical economics.)
  • Analysis of fiscal policy.
  • History of money (associated with the Chartalist school of thought, many people refer to MMT proponents as “neo-Chartalists”).
  • Legal and social analysis of the monetary and financial system.
  • Analysis of the Job Guarantee, and historical analysis of similar programmes across the globe.
  • Analysis of the Green New Deal proposal.
  • The challenges faced by developing countries, as well as the difficulties associated with non-floating currencies (e.g., the euro area).
  • Although my interest is exclusively with macroeconomics, the late Fred Lee at the University of Missouri Kansas City was a noted researcher in microeconomics. (UMKC is a stronghold for MMT academics.)

The rest of this text gives a limited introduction to some of these topics. However, it is clear that one would need a graduate level textbook to just introduce these topics. Broad MMT is an entire school of thought of economics, and not just a model like the Quantity Theory of Money, or the Fiscal Theory of the Price Level. Based on conversations with neoclassical economists, they assume MMT is just a single model like those “theories” that can somehow be slotted into the neoclassical body of thought, rather MMT aims to completely replace neoclassical theory in its entirety.
Concluding RemarksOnline MMT debates are inherently frustrating. In most cases, critics have a limited grasp on what narrow MMT says, but then they immediately veer into discussing topics that fit within broader MMT. Meanwhile, it is an extremely difficult task to find a conventional critic that cites even a single academic article on MMT, which would be required to discuss broad MMT.

(c) Brian Romanchuk 2020

A Pair Of Weaker MMT Critiques...

Published by Anonymous (not verified) on Tue, 07/07/2020 - 9:49pm in



I ran into a pair of MMT critiques recently. Since I am writing a chapter on MMT criticism, I want to see whether I can use them as material. Unfortunately, I am not sure whether either qualifies as being of enough interest to qualify for inclusion into my book. This is slightly surprising, since one of the articles was the John H. Cochrane review of The Deficit Myth that free marketeers were gushing about. I am noting these articles and making a quick response as a placeholder.
John Cochrane: "Magical Money Theory"This book review is now available without a paywall (published last month at the Wall Street Journal). It underperformed my expectations; the only substantive content I can draw from it is that John Cochrane is not a fan of the expansion of government.

From that perspective, all one really needed to read of this review is this passage:

In a revealing moment, Ms. Kelton admits that “MMT can be used to defend policies that are traditionally more liberal . . . or more conservative (e.g., military spending or corporate tax cuts).” Well, if so, why fill a book on monetary theory with far-left wish lists? Why insult and annoy any reader to the right of Bernie Sanders’s left pinkie?

In summary, John Cochrane got annoyed with the left-wing political economy of the book, and then phoned in the rest of the review. Given the editorial slant of the Wall Street Journal, that is probably all the target audience needed to know. As such, John Cochrane's view is largely covered by Michael Edesess' review that I covered earlier
Otherwise, signalling political affiliations is not enough to qualify as an academic review. I will just cover a few points of annoyance.
John Cochrane complains:

That effect is compounded by her refusal to abide by the conventional norms of economic and public-policy discourse. She cites no articles in major peer-reviewed journals, monographs with explicit models and evidence, or any of the other trappings of economic discourse. The rest of us read and compare ideas. Ms. Kelton does not grapple with the vast and deep economic thinking since the 1940s on money, inflation, debts, stimulus and slack measurement. Each item on Ms. Kelton’s well-worn spending wish list has raised many obvious objections. She mentions none.

This is an unusual complaint about a popular book that made the New York Times Bestseller list. Very few modern academic tracts make that list. Demanding that Kelton cite "major peer-reviewed journals" is bizarre when everybody knows that neoclassical economists have blocked post-Keynesians from those "major" journals in a raw academic power grab. The reality is that those "major" journals have devolved into a bubble that has offered very little in the way of tangible results in macroeconomic theory for decades. Why would Kelton cite literature that is viewed to be incorrect by MMTers in a popular book about MMT? If Cochrane wants critiques of the mainstream literature, the post-Keynesian academic literature is filled to the brim with them.
Complaining that Kelton does not cite neoclassicals when there is no evidence that John Cochrane read even a single MMT paper (free online search engines exist) can only be described as chutzpah. 
At least one passage can be described as bad faith. Cochrane:

To Ms. Kelton, developing nations suffer a “deficit” of “monetary sovereignty” because they “rely on imports to meet vital social needs,” which requires foreign currency. Why not earn that currency by exporting other goods and services? “Export-led growth . . . rarely succeeds.” [Emphasis mine] China? Japan? Taiwan? South Korea? Her goal posts for “success” must lie far down field.

Let us take a look at the quoted passage. This is what Kelton actually wrote (from Chapter 5; I do not have a page number since I have the ebook version):

Export-led growth may be framed as an employment policy for various countries [emphasis mine], but it rarely succeeds.

It goes without saying that success as an employment policy has only a limited relationship to a country "earning" foreign currency.

The following attempt to analyse the bond market by Cochrane is best described as "muddled."

[...] The Fed could stop paying interest on reserves. But in conventional thinking, these steps would result in a swift inflation that is equivalent to default. Ms. Kelton asserts instead that these steps “would tend to push prices lower, not higher.” She reasons that not paying interest would reduce bondholders’ income and hence their spending.
 The mistake is easy to spot: People value government debt and reserves as an asset, in a portfolio. If the government stops paying interest, people try to dump the debt in favor of assets that pay a return and to buy goods and services, driving up prices.

The old "everybody will sell at the same time" story, which ignores the identity that for every buyer, there must be a seller. All that can be done in secondary trading is rearrange holdings; the stock of debt remains unchanged. Meanwhile, bonds are typically held by institutional funds -- and bond managers do not have the right to go out and buy goods and services. One could try to tell a story about bond pricing (presumably private, since the presumed scenario is after a Treasury buyback). With the risk-free rate locked at zero, pretty well any conventional pricing model suggests that interest rates for high quality bonds would be low.

Otherwise, all that is left of interest are the complaints about inflation risks. Cochrane:

The second half of that decade—Lyndon Johnson’s Great Society and Vietnam War spending, inflation’s breakout, Richard Nixon’s disastrous price controls—is AWOL. Did we not try MMT once and see the inflation? Did not every committee of worthies always see slack in the economy? Did not the 1970s see stagflation, refuting Ms. Kelton’s assertion that inflation comes only when there is no “slack”? Don’t look for answers in “The Deficit Myth.”

This sounds legitimate, but it completely misses the boat. Anyone with even slight familiarity with post-Keynesian economics would know that they split from the mainstream (including the Old Keynesians) before the 1970s. MMT arise later than the 1970s, and so the developers were aware of the inflationary episode. It should be no surprise that MMTers analyse the 1970s inflation differently than Cochrane, and if one wants to question them on that, one would need to read the literature. MMT is new because the proponents of MMT do not want to make the same mistakes as the Old Keynesians.
I now turn to the next critique.What if banks broke the buck?James Culhan wrote "What if banks broke the buck?" He argues that private banks can limit the power of the sovereign.

Put simply, inflation is the fall in the market value of money. But money itself takes many forms - government money, central bank money, commercial bank money, to name a few. Yet they all share the same characteristic - they are vouchers.
In normal times these vouchers are fungible - they maintain value equivalence.
What if you went to your bank to deposit $100 in notes and the bank only credited you with an $80 deposit? In other words, it applied a discount to state money. Surely this breaks a bank’s obligation to honour convertibility between state and bank money? But no, banks only need to maintain dollar-for-dollar conversion for withdrawals. No problem - later on, when you withdraw your $80 deposit the bank would be only too happy to give you $80 in notes!

This is an interesting story, as I believe that a variant of this happened in the United States historically (sorry, I need to find the reference!). If my memory is correct, cheques ("checks" in American) might not be cashed at par outside their local area.

Unfortunately for Culhan, his story will not work. The domestic currency is a legal unit of account, and is the basis for debts and legal settlements. Banking system laws and regulations enshrine the principle that cheques and cash clear debts at par. (I was supplied the following reference by Rohan Grey: "The Case of Mixt Monies: Confirming Nominalism in the Common Law of Monetary Obligations" by David Fox, URL: I have not yet had a chance to read it.)

As the cryptocurrency believers have demonstrated, it is fairly easy to create private tokens and pretend that they are "money." (Whether or not such tokens are money lies in the eye of the beholder.) However, the private banking system is built around a payments system: and that unit of account is shared between governments and the banks. All cheques and transfers within the system are at par, and that represents every single governmental transaction.

Can a bank try to mess around with its customers by refusing to take government banknotes at par? Since the bulk of cash redemptions are done by businesses, the banks would be having a little chat with lawyers representing most of the bricks and mortar retail industry. Good luck with that one. Meanwhile, this just represents banks gouging non-banks; government payments will clear at par.

The only way this story sort-of works is for private banks to switch over to a new currency; either an existing foreign currency, or a brand new one. They can try, but who guarantees the payments system? Since private debts are extinguished via the existing payments infrastructure, a new currency would have exactly the same legal status as in-game currency in multiplayer video games. It is easier for a domestic economy to switch over to a foreign currency, but there are remarkably few examples for countries with large existing stocks of domestic private debt.

Households and firms have large debts denominated in the domestic currency. It would be suicidal for banks to try to redenominate cash flows within the economy in a new currency. As such, they are trapped in exactly the same way as other taxpayers.

Although this attempt to critique MMT falls flat, there is other grousing about "private money," and this could be worked in.

(c) Brian Romanchuk 2020

The "Noble Lie" Critique Of MMT

Published by Anonymous (not verified) on Sun, 05/07/2020 - 11:28pm in



One relatively common complaint that I have seen is that Modern Monetary Theory should be ignored because fiscal policymakers cannot be trusted to control inflation. This might be called the “noble lie” critique: we need to avoid discussing MMT as policymakers might make “undesirable” decisions.

(Note: This is an unedited excerpt from my manuscript MMT primer. This comes from a chapter of MMT critiques.)

This is obviously a political economy concern, related to the perennial “is MMT socialist?” debate (Section 1.2). The other issue with this critique is that this is obviously referring to a narrow definition of MMT (the parts that are related to Functional Finance). Since most online arguments about MMT are about those parts of MMT, this narrow scope matters, but as I argued in Section 1.2, that is missing too much of MMT for anyone interested in economic theory.

I am going to base my remarks here upon the article “Modern Monetary Muddle,” by Michael Edesess. This article was a review of Stephanie Kelton’s book The Deficit Myth. I have often encountered looser versions made by internet commentators. Edesess’ critique could be related to arguments made by neoclassical economists about fiscal policy, which I defer to a technical appendix.
Edesess’ ArgumentsWithin his review of The Deficit Myth, Edesess argues that the arguments of many prominent MMT critics – Martin Wolf, John H. Cochrane, Larry Summers, and Paul Krugman (a bipartisan group) – come down to similar theme. The theme is that the critics agree with the analytical premises of MMT, but are concerned about its effect on policy. Edesess argues:

But there is an even more basic issue raising those fears. They don’t trust Congress to make the appropriate adjustments. Would Congress, observing that - or being advised that - the economy was overheating therefore raise taxes to mop up the excess dollars, as MMT advocates? Would it restrain itself from spending programs once Congresspersons had to deal with lobbyists for various programs who had learned that MMT tells you that you don’t have to raise taxes to do it?
No, they don’t trust Congress to do that - in fact they don’t trust democracy to do it. And for good reason.
Democracy has a Tragedy of the Commons problem. A Tragedy of the Commons is, for example, a fish pond shared by many anglers, each of which, in their own self-interest, catches as many fish as they can, with the unfortunate collective result that the pond gets fished out.
Any threat to that arrangement is dangerous. To keep the unwashed masses from prevailing upon - or electing - a government that tries to provide all things to all people, as in a populist state, we must perpetuate the fiction that all new expenditures must be immediately paid for by new taxes. And we must delegate the management of the supply of money not to a democratic process, but to a quasi-authoritarian government arm, the Fed.

I do not think that Edesess’ analogy to the “tragedy of the commons” is persuasive (he discusses it further in the article); it sounds like a story out of Economics 101. The neoclassical arguments I allude to in the technical appendix is the more rigorous version of the argument. Instead, the value of the argument is that Edesess explicitly writes out the political economy argument: the “unwashed masses” need to be controlled by the “quasi-authoritarian” central bank.

I would argue that there are two reasons why one would be interested in MMT: from the perspective of economic theory (e.g., a fixed income analyst), or from a policy aspect (e.g., a political activist).I will discuss this critique from these perspectives in turn.
Economic Theory MattersThe argument that policymakers might behave badly is a complete non-issue from the perspective of economic theory. I am not going to believe something that is nonsensical just because someone might misuse the knowledge. From an academic perspective, this seems so obvious that it does not need elaboration.

The only interesting aspect is that I would argue that many people feel that theory ought to be tied to advocacy. The analysis of governmental bond markets and how they relate to fiscal policy is a major topic in financial news (roughly the only reason that government bonds are discussed at all on the media). One is typically treated to bank economists and strategists explicitly tying their market views to their political standpoint. For example, loudmouth free market fundamentalists predicting the demise of either the Japanese or American bond market is a staple attraction.

However, it is not necessary for bond investors to scream their views from the rooftops. For example, when I had any contact with outsiders, I was expected to not offer any useful information about how our fund was positioned. (The easiest way of doing this is professing ignorance of practically everything, and just nod a lot to what other people say.)

For anyone who is not broadcasting their views, what those views are should literally have no effect on what politicians do. As such, this entire line of enquiry is a non-starter.
What About Policy?If we are interested in policy, we have a plausible reason to be concerned about policy biases. Of course, we must deliberately ignore all the policy implications of almost all of “broad MMT,” including the Job Guarantee. (Even from a conventional economic analysis standpoint, the Job Guarantee has almost no inflation implications in steady state if the wage is held stable.)

The first thing to note is that MMT is very unwelcome from the perspective of free market parties. These parties want to plead that the government cannot afford to offer social programmes, and that political strategy has been effective. So, if one wants to meet the doctrinal purity requirements of free market parties, one probably needs to keep any sympathies for MMT hidden from view.

However, not everyone wants to base their views on what is convenient for pro-market parties. In that case, the objection revolves around the question whether politicians are incapable of controlling inflation. In my view, this question devolves into a question of faith. I will return to this question in the technical appendix.

If we put aside the disputed question of whether only an independent central bank can control inflation, we are stuck with a rather unusual situation (which Edesess acknowledges). The MMT argument is that the only constraint on fiscal policy is inflation – and that fiscal policy frameworks should be based upon that premise. Turning around and complaining that this is somehow inflationary appears to be a non sequitur.

A less risible re-phrasing of this argument is that particular MMT proponents are not analysing inflation risks properly. In my view, this is the only firm ground of debate. Nevertheless, this is a long way from arguing that we need to hide the truth from the unwashed masses. I will return to the question of inflation control in Section 5.5.

Another related issue is that MMT critics seems to assume that MMT requires extremely active changes of tax rates to control inflation. If that were in fact necessary, it would be politically awkward. However, MMTers put much more faith in automatic stabilisers, and there is limited need to change tax rates as often as the policy interest rate. After all, MMTers argue that interest rate changes have little effect on inflation, yet inflation has been stable since the early 1990s in the developed countries in the absence of active fiscal policy movements.
Policy AmbitionsThe main academic MMT proponents are arguing in favour of ambitious policies, such Medicare for All, as well the Green New Deal. These plans have a lot of moving parts, and each has its own inflationary and deflationary effects. Even the Job Guarantee will have some effect on the price level in the short run, and its exact effect will depend upon many hard-to-model effects.

Given the complexity of those plans, I cannot argue either way about the inflation analysis. Given that my view is best summarised by “inflation is complicated,” (a phrasing I have taken from Marc Lavoie, but I am sure he was not the first to suggest that), all I can suggest is let the dueling inflation modelling commence. Even if the unwashed masses are not interested in discussions of models, there would certainly be an interest in the real-world policy issues raised. In any event, this debate is entirely on MMT territory; the “inter-temporal government budget constraint” is likely never to come up.
Fiscal Conservatism a Dead Religion?Finally, I would note that this argument is just a reheating of the neoliberal consensus of the early 1990s. Although there are some remnants of the political dynasties of that era still around, it is unclear how much influence it has.

The reality is that any sentimental attachment to the balanced budget religion disappears as soon as it becomes even slightly inconvenient. Free market parties have been cutting taxes and hiking military spending since the early 1980s. all the while shedding crocodile tears about governmental debt levels. Fiscal interventions in response to the Financial Crisis and the Pandemic of 2020 were robust, although the Obama administration’s response in 2008 was too small because of the mediocrity of the economic team.

The developed countries are filled with university-educated citizens who have access to the internet. I have extreme doubts about the sustainability of an economic theory that says one thing to policy-making elites, and another to the masses.
Technical Appendix: Policy ConsistencyOne of the big ideas of neoclassical modelling of the 1970s was time consistency of policies. This was part of the ideological attack on Keynesianism, as it was argued that fiscal policy was time inconsistent.

Since I am not writing a primer on neoclassical economics, I will outline the argument very briefly. Imagine that policymakers want to reduce unemployment while keeping inflation stable, and we assume that the framework is Old Keynesian: increase government spending to create jobs (or cut taxes), but the rise in aggregate demand creates inflationary pressures. (Needless to say, this hydraulic Keynesian framework ignores the Job Guarantee, which features full employment with no changes in the policy wage. However, the people who apply time inconsistency arguments against MMT ignore that part.)

The time inconsistency shows up in the following fashion. Assume that unemployment is “too high,” and so policymakers want to launch a fiscal stimulus programme. They argue that future fiscal tightening will offset the future inflation risks, so that the mixed policy objective is met However, in the following year, unemployment is at a more comfortable level, and inflation is higher. When trying to find the optimal policy for the policy mix, the tightening of fiscal policy is less than was forecast in the previous year. As such, even though the policy objective for trading-off inflation versus and unemployment is unchanged, future policy does not match what looks like optimal policy at the beginning: there is a bias towards running higher inflation.

The literature is premised upon using mathematical optimising models. We need step back, and ask: what are these models?

  • You first assume some mathematical relationships in a system of equations (and constraints, etc.).
  • You then apply the rules of mathematical operations to examine the properties of the solution of the set of equations. For example, you can simulate the results on a digital computer.

In this case, neoclassical economists have created a mathematical system that assumes that fiscal policymakers prefer a system that generates inflationary outcomes. The obvious question: why should we assume that the model applies to the real world? Has this particular model been fit to real-world data, and done a good job of explaining outcomes? The answer is: not really, but other neoclassical models have been fit to data. How convincing this defense is ends up being a question of faith. Since this is not a primer on neoclassical economics, I cannot hope to address this aspect of the critique. All that can be said is that post-Keynesian economists reject pretty much all the underlying assumptions used in the models.
References and Further Readings

(c) Brian Romanchuk 2020

Why Isn’t Modern Monetary Theory Common Knowledge?

Published by Anonymous (not verified) on Sun, 05/07/2020 - 9:56pm in

I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.

Traffic lights (like money) are a social convention. We agree that red means stop and green means go. Why we’ve chosen these particular colors is an interesting question, as is why we choose to put traffic lights where we do. But the fact that red means stop and green means go just is. It’s something we’ve defined to be true. The workings of money are similar. True, money is more complex than a traffic light — but only in application. In conceptual terms, money is equally simple. It’s a social convention that we’ve defined into existence.

To frame our discussion of money, let’s begin with what it isn’t. Money isn’t a thing. True, money can have concrete forms like dollar bills and metal coins. But it needn’t. It can be as abstract as digits in a bank account, or tallies on a stick. Money is an idea. It’s an agreement to tie our social relations to a unit of account. To understand money creation, we need only look at the principles of double-entry bookkeeping. Debt goes on one side, credit goes on the other. The two sides carry opposite signs and so cancel out. This allows us to create money while simultaneously balancing our accounts.

Here’s a simple example. Suppose that a friend does a favor for me. I want to return the favor, but don’t have the time to do so immediately. So I give my friend a note that says “Blair owes you one favor”. This note is money. It is created from nothing using the principles of bookkeeping. On one side is a debt: I owe my friend a favor. On the other side is a credit: my friend is due a favor. And that’s all there is to it. My friend can now exchange my IOU with other people. It becomes money in circulation.

Understanding this act of money creation is trivial — much like understanding the creation of a traffic light. Just like we define the rules of traffic, we define the rules of double-entry bookkeeping. We then use these rules to regulate our behavior, creating money as we please.

What’s interesting, though, is that few people misunderstand traffic lights. We all know that traffic lights can be put anywhere we want them, and that they’re based on an arbitrary social convention. Yet when it comes to money, the same is not true. Many people fundamentally misunderstand money. To them, it’s not an arbitrary social convention that can be created/destroyed at will. Instead, they perceive money as a scarce commodity — something that, like water in a desert, must be guarded and conserved.

What we really need, then, is not so much a theory of money, but a theory of why people misunderstand money.

The quantified obligation

To think about why people misunderstand money, let’s keep the definition of money in our heads. The anthropologist David Graeber defines it best. Money, he argues, is a quantified obligation. The holder of money is entitled to receive things from other people. (See his book Debt: The First 5000 Years for a detailed exposition.)

We can see from this definition that money is a powerful tool. In fact, it’s a tool for power. If I have a lot of money, I can get other people to do my bidding. This fact is hardly controversial. We all know the adage that ‘money is power’. But somehow we forget this adage when we think about money creation. Money is nothing but a quantified obligation, so in principle anyone can create it. But in practice, few people have this power. The problem is that for money to circulate, people must trust that they can use it to receive an obligation. I could try to circulate a note that says ‘Blair owes you one hug’. But other than my wife and daughter, few people want that IOU. So it will never circulate as money.

In practice, money creation is done almost exclusively by the powerful. Textbooks on money will use the word ‘trust’. They’ll say that money can circulate as long as we trust the issuer. This is true, but neglects the flip side of trust. When you trust someone, you endow them with power. When soldiers trust their commanding officer, they’re likely to obey orders. That gives the commander power. Trust, in many ways, is the basis of power. You can’t have stable power relations without it.

So while I could try to create money, few people would be interested. I lack the trust of the public, which is another way of saying that I have little power. But if government wants to create money, many people are interested. Many people trust the government, which is why governments have power.

Legitimate violence

The sociologist Max Weber famously defined the ‘state’ (i.e. government) as having a ‘monopoly on the legitimate use of violence’. I think we could equally define the ‘state’ as having a monopoly on the legitimate creation of money.1 There are interesting parallels, in fact, between violence and money.

Just like anyone can create money, anyone can do violence. You could walk onto the street right now and shoot someone. But most of us don’t. Why? First, because we think it’s wrong. Second, because the state punishes murderers. In other words, violence in modern societies is highly regulated. The same is true of money. Technically, anyone can create money. But few of us do. Your personal IOU will never circulate widely. And if you try to create state-backed money, the government will punish you. Like violence, the creation of money is tightly regulated. To see this fact, we need only look at language. We have a name for taboo violence (murder) and we have a name for taboo money creation (counterfeiting).

Those of us raised in stable societies take for granted both the regulation of violence and of money. This regulation begins to feel like a ‘natural order’. But if you were raised in a war-torn country, I suspect you’d feel differently. You’d understand that anyone can do violence — with devastating results. And if you lived through a period of hyper-inflation, you’d probably better understand that anyone can create money. (People tend to make their own money when government currency breaks down.)

Limits to government power

One of the main thrusts of modern monetary theory is to point out that government spending has no limits. If governments control their own currency, they can spend as much money as they want by creating money out of thin air. The interesting question is not whether this is true. It’s trivially true — much like it’s trivially true that a green traffic light means go. Any currency issuer (government or otherwise) can create as much money as they want. The interesting question is why governments don’t spend unlimited amounts of money.

Many economists will trumpet inflation as the boogeyman. Create too much money, they say, and you’ll have hyperinflation. Just look at what happened in the Weimar Republic. It’s true that money creation can lead to inflation. But MMT proponents point out that this has an easy solution. Government can destroy money just as easily as it can create it. Government spending creates money. Government taxation destroys it. Again, this is trivially true. And yet few (if any) governments accept this truism. In fact, most governments behave as if money, like water, is a scarce commodity. Why?

The answer, I believe, has to do with power. The creation of money is inseparable from the accumulation of power. Here’s an example. Suppose that I’m a king who claims the sole authority to create money. And suppose that everyone in my kingdom accepts this right. I create hordes of money and use it to buy all the land in my kingdom. I put the landed aristocracy out of business. And in so doing, I put all the citizens under my command. Everyone, in effect, becomes a state employee. It’s the totalitarian dream — an entire society unified under a single hierarchy.

This tale is, of course, a fantasy. The problem for a real king is that his subjects probably won’t accept his right to create unlimited amounts of money. There will be pushback, largely from other powerful people. The landed aristocracy, for instance, won’t want to give up their land. So they’ll oppose the king’s right to create money (and to tax it out of existence). History shows that rather than being sovereign money creators, feudal kings were in perpetual need of finance. This is just another way of saying that kings were relatively weak. They lacked the power to finance themselves.

What is true for the feudal king is true for modern governments. Like the king, governments can in principle create as much money as they want. But in practice they don’t, because there are limits to their power. When governments create money, they accumulate power, which implicitly means taking power away from other (powerful) people. The landed aristocracy didn’t want to cede control of their land to the king. And modern corporations don’t want to cede power to the government. And so these corporations act continuously to oppose government money creation.

The arbitrariness of power

I’m hardly the first to connect money creation with power. It’s been done countless times before. And yet many (most?) people still misunderstand money. Why? A good theory of money should explain this misunderstanding. Why — despite it being plainly true — do we recoil at the idea that anyone can create money, and as much of it as they want?

My suspicion is that accepting this fact is difficult because it means accepting that our existing social order is arbitrary. Those who create money do so not out of any natural right, but because of power that has been arbitrarily given to them. Nothing makes the human mind recoil like learning that the things we hold dear — the patterns and behaviors that dominate our lives — are arbitrary.

This points to a deep truth about human behavior. Our social conventions are, by definition, arbitrary. And yet the existence of these conventions is predicated on us believing that they are not arbitrary. One of the worst things you can say about a law is that it is ‘arbitrary’. Convince enough people of this fact and the law will soon change. Similarly, one of the worst things you can say about money creation is that it is ‘arbitrary’. Our social order depends on us forgetting (or refusing to see) this fact. The flip side is that changing the social order means remembering this arbitrariness.

[Cover image: Skitterphoto]


  1. I can hear your objections. Private banks create money — so how can government have a monopoly on the legitimate creation of money? I think of banks as the equivalent of military subcontractors. The latter are private-sector institutions that have been given the right to do violence. The same is true with banks, only with money. Banks are private-sector institutions that have been given the right to create money. Just as easily as it was given, government could take this right away.↩

Further reading

Galbraith, J. (1975). Money: Whence it came, where it went. London: Deutsch.

Graeber, D. (2010). Debt: The first 5,000 years. New York: Melville House Pub.

Robbins, R. H., & Di Muzio, T. (2016). Debt as power. Manchester University Press.

Rowbotham, M. (1998). The grip of death: A study of modern money, debt slavery and destructive economics. Jon Carpenter Publishing.

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White Paper: Modern Monetary Theory (MMT)

Published by Anonymous (not verified) on Sun, 05/07/2020 - 3:39am in

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Published online 4th July 2020


Full Document




The purpose of this white paper is to publicly present the fundamentals of MMT.

What is MMT?

MMT began largely a description of Federal Reserve Bank monetary operations, which are best thought of as debits and credits to accounts as kept by banks, businesses, and individuals.

Warren Mosler independently originated what has been popularized as MMT in 1992.  And while subsequent research has revealed writings of authors who had similar thoughts on some of MMT’s monetary understandings and insights, including Abba Lerner, George Knapp, Mitchell Innes, Adam Smith, and former NY Fed chief Beardsley Ruml, MMT is unique in its analysis of monetary economies, and therefore best considered as its own school of thought.










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The post White Paper: Modern Monetary Theory (MMT) appeared first on The Gower Initiative for Modern Money Studies.

NAIRU, And Other Will-O'-The-Wisps

Published by Anonymous (not verified) on Wed, 01/07/2020 - 11:00pm in



The discussion of the role in unemployment is a key theoretical divide between Modern Monetary Theory and mainstream approaches. Theoretical conclusions determine the suggested policy response of governments to unemployment. The structural changes to the labour market made by policymakers in the 1990s were based on following a theory.

(This is a rather lengthy unedited excerpt from the manuscript of my MMT primer. It has references to other sections of the manuscript.)

The modern version of the theory relied up the concept of the Non-Accelerating Inflation Rate of Unemployment – NAIRU – although if one digs into academic history, there are a few related measures with slightly different definitions. Since I want to focus on MMT – and avoid going too far into the swamp of critiques of neoclassical macro – I want to underline this section is offering a simplified version of the evolution of the concept. Interested readers are pointed to the text Full Employment Abandoned: Shifting Sands and Policy Failures by William Mitchell and Joan Muysken. From my perspective, the historical development of these concepts might be of interest of historians of economic thought, but from an empirical perspective, any measure like NAIRU is found to be of no use in understanding the economy. Within the physical sciences and engineering (which I briefly taught), we do not waste students’ time going through the history of failed concepts.
Really Short History of NAIRUThe history behind NAIRU is long, and to do it properly, one would need to watch the full evolution of economic theory. Rather than attempt to do that, I am going to focus on the political economy aspects. I will caution the reader that it is simplistic, but my argument is that you need to get the big picture view before being bogged down in who said what.

If we look back to the pre-Keynesian era – normally called classical economics – the working assumption was that all markets moved to equilibrium courtesy of the laws of supply and demand. The story was that unemployment was essentially a natural outcome of market processes, and there was little to be done about it. If the economy is perturbed by some disturbance (a depression or recession), it will move on its own back to the level where all workers who want to work at the prevailing wage are employed. (Note that business cycle analysis as well developed as it is now, and it is not clear how seriously held this view was. This may have just been pro-market propaganda produced for the masses.)

John Maynard Keynes created the field of macroeconomics when he launched his theoretical research programme into the business cycle. The politically-charged insight of this programme was that unemployment rates can stagnate at a level above what would be seen as “efficient.” A such, governments had an imperative to drive down the unemployment rate – the Full Employment framework described in Section 2.2.

Free market-oriented politicians and economists were not happy with the social programmes aimed to reduce unemployment, and eventually launched a counterattack. The main theoretical concept advanced was the natural rate of unemployment, proposed by Milton Friedman. The idea is straightforward: if the unemployment rate falls below the natural rate, the economy will experience accelerating inflation. Although Friedman cautioned that the word “natural” was derived from usage elsewhere in economics, it was effectively mis-interpreted as being a “law of nature” and immutable. (Friedman did argue that the rate depended on other factors.)

(From the perspective of MMT, this episode is a useful example of the concept of framing in economics. Why call it the “natural rate” if it is not a law of nature? One could easily assume that this was a deliberate attempt to mislead the broad public.)

The original formulation of the natural rate of unemployment failed miserably as an empirical concept. Nevertheless, new variants of the concept appeared. In North America, the concept of NAIRU was the most popular replacement. (European theory diverged slightly, following the path set in the text Unemployment: Macroeconomic Performance and the Labour Market, by Layard, Nickell, and Jackman. I will stick to the consensus North American version of the theory for simplicity.)
NAIRU: the U.S. ExperienceIf one looks at the historical debates about NAIRU (and its relations), it is easy to drown in details. However, if we focus on the post-1990 period, it becomes much easier to discuss. The issue is straightforward: the concept failed empirically, and it is fairly clear that there is no easy way to save it. This was not the case in earlier decades: new models were proposed that at least fit recent historical data.

For reasons of simplicity, I will look at a single measure of NAIRU: the long-term NAIRU produced by the Congressional Budget Office (CBO). It is extremely likely that one could find a different measure that performs slightly better, but that is clearing an extremely low bar.
 NAIRU and U3 Unemployment Rate
The figure above shows the movements of NAIRU and the U-3 (headline) unemployment rate. The top panel shows the levels since 1990, while the bottom shows the difference – NAIRU minus the unemployment rate. (It seems preferable to subtract NAIRU from the unemployment rate, but I am reversing it for reasons to be discussed below.) I am labelling this difference the “employment gap” – as an analogy to the output gap – but I warn that this may not be standard terminology. I cut off the charts in January 2020 to avoid the jump in 2020, which obscures movements in earlier decades.

As can be seen, the unemployment rate spikes higher during recessions, and then grinds steadily lower during the following expansion. (The 2020 experience is likely to be erratic due to the nature of the slowdown. At the time of writing, only a few post-pandemic datapoints are available.) The unemployment rate slices through the relatively slow-moving NAIRU.

Keep in mind that there are many ways in which one could calculate a NAIRU estimate. However, the premise is that it is a slow-moving variable, similar to the CBO measure shown. If we replaced the CBO NAIRU estimate with any variable that meets that criterion, all that would happen is that the unemployment gap measure just shift up or down by a certain amount, but the qualitative picture would be the same. That is, the unemployment rate drives below the new series during the expansion, and then shoots above it during the recession. (If the measure was always above or always below the observed unemployment rate, something is obviously wrong.)

Just a simple visual analysis of this chart largely puts to rest an ancient theoretical debate: does the unemployment rate “naturally” converge to NAIRU? Given that it typically took around half a decade to close the negative employment gap after recessions, the reversion speed is too slow to be of any interest.
NAIRU and InflationInstead, modern theories of the NAIRU (and its relations) suggest that the employment gap ought to be a determining factor for inflation. The initial problem is that “inflation” is somewhat vague: in this context, one could either look at wage inflation, or the rise of consumer prices (e.g., the CPI). (Yet another alternative is the GDP deflator, but the GDP deflator has some unusual properties that I do not want to deal with.)

If one delves into the economic literature (including Full Employment Abandoned), whether one uses consumer price inflation or wage inflation matters if one looks at the historical development of models (who gets credit for what). Since these models have obvious weaknesses, I am not too concerned about these distinctions. For completeness, I will show both variants.

The chart above shows the experience of the employment gap and the changes in average hourly earnings in the United States since 1990. The top panel shows the employment gap (NAIRU minus the unemployment rate), and the bottom panel shows the annual change in average hourly earnings.

One initial reaction is that the two series are correlated (the two series move up and down together). This is exactly what one would expect if wage inflation is correlated with the business cycle – which is a prediction of most plausible economic models.

However, this is not enough – we need to see whether inflation is accelerating (since accelerating is the “A” in NAIRU). As we can see, this is not happening. Wage inflation bottoms after a recession, but it does not keep falling. If we look at the three circled episodes after recessions, wage inflation stopped falling when the employment gap was negative – which means that it did not keep falling, even though the employment gap was still negative for a few years. As for a positive acceleration, the one clean episode where the employment gap was clearly positive (in the 1990s), we see that wage inflation stopped accelerating years before the recession (and the employment gap was positive). (The employment gap did not get very positive in the latter two expansions, so the picture is not particularly clear.)
 Employment Gap And Core CPI
The figure above repeats the analysis with core consumer price inflation – excluding food and energy. (Although the use of core inflation distresses some people, the difference between headline and core is largely the result of gasoline prices. Energy prices are important, but oil price spikes cannot be exclusively pinned on U.S. domestic policy settings in the post-1990s period.

If we put aside the period of relatively high inflation in the early 1990s, we see that core CPI inflation stuck near its period average of 2.4% - with dips that occurred after the recessions that started in 2001 and 2008. Core CPI inflation was correlated with the employment gap – an unsurprising outcome given they are both pro-cyclical – but given the scale on the graph, we see that “acceleration” in inflation is negligible.

With some ingenuity, one could attempt to explain away the lack of acceleration by appealing to other factors that coincidentally always managed to cancel out the acceleration predicted by the NAIRU concept. I will return to that argument in the technical appendix.
The Policy DebatesThe three expansions after 1990 featured the same debate: the unemployment rate is about to drop below NAIRU, so should the Federal Reserve hike rates to counter-act the risks of rising inflation? The lack of accelerating inflation was typically seen as the result of flawed estimates of NAIRU; if we improved the methodology, NAIRU was lower than expected. Pavlina R. Tcherneva discusses the “search for NAIRU” in Chapter 2 of The Case for a Job Guarantee.

This argument that any particular NAIRU estimate (like the one produced by the CBO) is flawed and could be replaced by a better one is entirely reasonable. If we assume that economics is a science, we need to adapt our theories to observed data. However, I have some deep reservations with this view. Given the complexity of the topic, I have deferred this discussion to a technical appendix at the end of this section.

Rather than debate estimation methodologies, there is a much simpler alternative: NAIRU does not exist. The title of Chapter 4 of Full Employment Abandoned is “The troublesome NAIRU: the hoax that undermined full employment” offers a hint as to what the authors’ views on the matter are.

From my experience, when one argues that NAIRU does not exist, one is hit with a wall of objections. The objections that I have seen were not particularly strong, as my feeling is that the people raising the objection are conflating “NAIRU does not exist” with “there is no relationship between unemployment and inflation.”

I will start off stating what I see as a minimal version of the statement “NAIRU does not exist.” The statements are theoretically weak (assume very little) but are easily understood. However, this is how I interpret MMT, and thus need to be taken as a grain of salt. I will then discuss some of the comments from Full Employment Abandoned, which is an authoritative source.

I argue that the following terms are safe observations to make about the business cycle.

  1. Inflation (however defined) is positively correlated with the business cycle: it tends to rise during an expansion.
  2. The unemployment rate is negatively correlated with the business cycle. (This seems almost to hold by definition, but people enter/leave the workforce.)
  3. The two previous statements imply that should expect to see a local relationship between unemployment rate changes and the inflation rate. This implies that we can typically fit a NAIRU-style relationship to a small segment of historical data.
  4. The unemployment rate and annual (core) inflation both feature trending behaviour: the level in the current period is relatively close to historical values. (There is considerable noise in annualised inflation rates on a month-to-month basis, but that noise tends to cancel out, so that the annual average follows a trend.)
  5. This trending behaviour means that the local models in (3) can be spliced together in back history, but one would expect that predictions based on such splices will tend to break down.

The implication of this logic is straightforward. It is a mistake to look at historical data and argue that if the unemployment rate drops below some arbitrary level in future years, inflation will accelerate. That was the mistake that policymakers and market participants kept making over the 1990-2020 period. (Will they do it after 2020? That may depend upon the theoretical success of MMT.)

Mitchell and Muysken phrase the idea differently.

We have demonstrated (in Section 4.2) that contrary to theoretical claims of the natural rate theorists, non-structural variables have an impact on the NAIRU, which means that aggregate demand variations can alter the steady-state unemployment rate. This insight, alone, undermines the concept of natural unemployment, or NAIRU, which is driven by the notion that only structural measures can be taken if the government wants to reduce the current steady-state unemployment rate. As a consequence it is little wonder that the concept of equilibrium unemployment lost its original structural meaning and becomes indistinguishable in dynamics from the actual unemployment rate. [Section 4.2, page 116]

These statements are somewhat more complex than saying NAIRU does not exist, rather it is saying that if it existed, it does not behave the way that “natural rate theorists” suppose. Fans of arcane theoretical disputes will probably prefer this phrasing, but my argument is that the plain English interpretation of the phrase “NAIRU does not exist” covers this more complex theoretical position.

The jargon about “structural” and “non-structural” might be unfamiliar. To interpret, “structural” factors are institutional barriers that allegedly cause people to remain unemployed. From the neoliberal perspective, these are mainly the result of social programmes that give incomes to the unemployed. Non-structural factors are those related to the business cycle. I now will turn to one such factor that is highlighted by Mitchell and Muysken: hysteresis.
HysteresisBill Mitchell’s work in the 1980s emphasised the concept of hysteresis, although the idea has a longer history. (Full Employment Abandoned provides a 1972 quotation from Edmund Phelps that used the term in this context. Hysteresis is a term used in physics and is typically described as “path dependence.”

In the case of unemployment, the definition is as follows. Firstly, we need to assume that there we can define something resembling NAIRU so that the employment gap offers useful predictions about inflation. If hysteresis is present, this measure is affected by the historical trajectory of unemployment. More specifically, if the rate of unemployment was high, the estimated “NAIRU” will rise.

Although this might sound like the case without hysteresis, this has radically different policy implications. By driving the unemployment rate lower, the value of “NAIRU” is lower. It implies that there can be a trade-off between unemployment and inflation, and that policies that create employment are optimal – since they are associated with lower steady state unemployment. Meanwhile, this help explain the lack of inflation acceleration discussed earlier. If “NAIRU” is just tracking the unemployment rate (similar to taking a moving average), inflation will not move very much.

There are several ways in which hysteresis can arise – the literature surveyed in Full Employment Abandoned gives a number of mechanisms. Although this of interest to academics, from a practical perspective, it means that “NAIRU with hysteresis” does not behave the way the consensus assumes (e.g., the only way to lower it is through “structural reforms”). From a forecasting perspective, the concept is largely useless. Since the reality is so far away from beliefs about NAIRU, I would argue that the simplest description is that “NAIRU does not exist.”

From the perspective of MMT, the key conclusion to draw from this line of argument is that it makes little sense to keep people unemployed in order to stabilise the price level. This will be expanded upon in the discussion of the Job Guarantee in Chapter 3.
Technical Appendix: Falsifiability?Given that the neoclassical consensus decided that inflation control is the mot important task for policy, it is no surprise that a great deal of effort has been expended upon the analysis of inflation. As such, just showing a couple time series plots is not the final word on this topic. Nevertheless, the outlook for NAIRU is not much better even if we dig deeper.

The first thing to realise is that we can very easily reject the belief that NAIRU is a constant, or that inflation depends solely upon the employment gap. We need a more complex model, where other factors influence inflation, and the estimate of NAIRU changes over time (as does the CBO series).
The addition of the extra factors gives the defenders of the concept of NAIRU (and its close cousins). Those other factors always managed to shift in such a fashion so that inflation did not accelerate, even with a non-zero employment gap. So, we can find a model that has a good fit to the back history.

Unfortunately, there are two explanations for this.

  1. The more complex model is correct.
  2. The model is wrong, and the employment gap does not cause inflation to accelerate.

Since central bankers and academics are paid to produce models that predict economic outcomes, it is perhaps unsurprising that the first option was chosen, and the second brushed aside.
Neoclassical theory is highly dependent upon variables that are inferred from the data:

  • the natural rate of unemployment/NAIRU;
  • potential GDP (a replacement to the above);
  • the natural rate of interest (r*).

Economic outcomes are the result of observed variables (unemployment, GDP, interest rates) from these theoretical constructs. Since the variables cannot be directly measured, they are inferred from statistical procedures that assume that the underlying neoclassical theory is correct.

Neoclassical theorists have little difficulty believing that the underlying assumptions of their theories are correct. However, outsiders have a good cause to question the falsifiability of the methodology. Since the level of the hidden variables are backed out from observed data, there is no way that historical data can deviate from the model predictions.

However, we are not interested in predicting historical events, we need forward-looking behaviour. As one might suspect, the models do a decent job in fitting economic data following smooth trends, but have a hard time dealing with turning points (mainly recessions, which is a sub-theme of my text Recessions). Longer-term extrapolations – such as inflation rising when NAIRU is hit in future years – also fail, with the failure covered up by continuous cuts to the estimated value of NAIRU.

It is safe to say that neoclassical theorists can find counter-arguments to my line of argument here. Since the objective of this text is to explain MMT, I will not pursue the argument. But from the perspective of those who are interested in how MMT fits in with financial market analysis, this is a topic that is of importance.
References and Further Reading

  • Full Employment Abandoned: Shifting Sands and Policy Failures, William Mitchell and Joan Muysken, Edward Elgar Publishing, 2008. ISBN: 978-1-85898-507-7
  • The Case for a Job Guarantee, Pavlina R. Tcherneva, Polity Press, 2020. ISBN: 978-1-5095-4211-6

(c) Brian Romanchuk 2020

We need to talk about Tommy…the NHS: charity, taxes and MMT

Published by Anonymous (not verified) on Mon, 29/06/2020 - 2:05am in

Thank You NHS flag with rainbowPhoto by Red Dot on Unsplash

In this post, originally published on Medium, Michael Berks discusses NHS funding.

I’m sure you’ve all seen the story of 100-year old Captain Tom Moore, who, by walking 100 laps of his garden has raised over £23 million for NHS charities. It is, on the face of it, a happy, feel-good story — something we all need in these difficult times. And I’m certainly not going to knock Captain Tom— bloomin’ legend that he is, or complain at anyone donating to his cause. However, if your social media feeds are anything like mine, you’ve probably seen lots of counter posts, pointing out the inescapably true fact that we have a government with a remit to properly fund the NHS — the importance of which has never been clearer — and portraying the NHS as charity, reliant on the goodwill of donations to perform its everyday duties, far from a good thing, is actually a very damaging viewpoint to take.

The majority of these counter posts also point out something else seemingly obvious –the way the government funds the NHS is by collecting taxes from all of us and using these to pay for services. And if some of the rich celebrities cheering on all this giving would instead pay a fair share of taxes we really could fund the NHS properly without relying on charity! Amirigghht?!!

At this point, of course, my MMT alarm bells start ringing. In fact, I’d argue that framing the funding of the NHS in this way is only marginally better than seeing it as a charity case. In this post, I’ll try and explain why. It’ll be quite (ok very) long, but I’ve kept it as economic jargon-free as possible, so I really hope you take the time to read through and hopefully come away with a clearer idea of how government provision of services actually work.

The big problem with the taxes pay for NHS (or other government services) frame is it promotes the idea that money grows on rich people — and as a result, that rich people are thus some special species we must protect. We must nurture them, the wealth-generators, to harvest them for their taxes, without which, we can’t have the things we need to make society work. In other words, while we might want to collect more taxes from the rich, if we upset them too much, they’ll all leave the country — so now we’re even worse off than before. Or at the very least, they’ll just use creative accounting to squirrel away more of their earnings into tax havens so we won’t see any extra income anyway. More generally, just reducing their earnings in any way actively harms us — they earn less, we get less in taxes, our services suffer. We’re fed this narrative time and again, and ultimately it leads to absurd stories like this… a pay-cut to Premiership footballers will harm the NHS!

Let’s be clear what this is claiming. There will be a frontline member of NHS staff somewhere — say Charlie the nurse — who as a result of footballers having to take a pay-cut while not playing football, will have to lose his job.

Take a step back. Forget what you think you understand about economics or how money works for a second, and just try and think this through.

In fact, stop and say these words out loud:

“Because some very rich men don’t get to go out and play ball with each other, we’ll have to stop Charlie doing his job as a nurse.”

Sounds ridiculous right? That’s because it IS ridiculous.

Why should anyone not doing their job, prevent Charlie from doing his? Obviously if said person’s job produced food for Charlie, or his transport, or something else he needs to live and breathe and get to work on time each day, that might be a problem. In other words, all they key-workers we’ve suddenly realised exist — we need them to keep working. But footballers..? Not so much.

As long as Charlie is willing and able to be a nurse, our government has an infinite supply of pounds it can pay him. It doesn’t need your taxes or charity to pay him. Indeed creating money out of nothing is how all government spending works.

Oh God! I mentioned government spending and infinite in the same sentence. You’ve just put your economics hat back on, haven’t you? Inflation. Hyperinflation. ZIMBABWE!! Don’t I know what happens when governments ‘print’ money without limits?!

OK, calm down. Let’s work this through properly…

First up, I’ll concede there is some conceptual difference between the notion of Charlie receiving pounds created out of nothing from the government, and paying him with pounds directly linked to a tax or your charity donations. The former are new financial assets entering the economy, whereas the latter are the same pounds recycled from somewhere else in the economy. So on the face of it, paying Charlie with ‘new’ government money is increasing the money supply.

And with your economics hat on again, you’ve heard that increasing the money supply equals inflation. As the supply of money goes up, its value must come down — the pound in your pocket is worth less, and thus all the goods you need to buy will cost you more. Simple supply and demand. QED.

Again, slow down. Take a step back. In fact ‘money supply increase equals inflation’ is one of those ‘common sense’ bits of orthodox economics that has no basis in reality, and is completely disproved by all the actual data we see in economies across the world (if you really want a description of what happened in eg Zimbabwe, ask me in the comments).

To see why, stop thinking in abstract economic terms, and think instead about some real supply and demand you actually experience in everyday life. Take petrol prices. The average pump price of a litre of petrol in the UK at the end of January was just over 127p. Today it’s 109p [ed. this was mid-April]. That’s a 15% drop in 2 months. The money supply in the UK hasn’t shifted by anything like that in this time — and more specifically, government spending is rising significantly to meet the demands of the current crisis, so surely prices should be going up?

Of course you know why petrol prices have dropped. No-one is driving their cars, so no-one is buying petrol, both here and abroad. More generally, the demand for oil across the world has plummeted, and in turn, so has its price (indeed there’s been a way larger percentage drop in the price of crude oil — the reason pump prices have ‘only’ dropped by 15% is because of all the other fixed costs in the retail price of petrol). When demand for oil increases, prices will go back up. The point is, it isn’t the total supply of money out there driving changes in the price of oil, but money that is actually being used to try and buy oil. The same principle, give or take, is what defines prices for most goods and services. In particular, money being saved — by you me, or anyone else in the economy — is not being used to buy anything. It just sits there in our accounts, as numbers on a spreadsheet somewhere. It is not inflationary.

So now let’s go back to Charlie and our Facebook posts. “If only the government would make rich people pay their share, and collect some of all that loot in tax havens, we could actually afford a fully funded NHS”. Polls show this sentiment is pretty popular across the political spectrum. Obviously if you read the Daily Mail you hate Lewis Hamilton, whereas if you read the Guardian you hate Richard Branson — but one way or another, everyone, apart from the super-rich, hates a tax dodger.

And you might disagree on how feasible it is to actually collect those taxes (and therefore not believe it when party X includes that income in their spending plans), but assuming the government does find a way, everyone thinks it’d be great if we could use that tax as income to better fund public services.

But hold on. Those pounds we’ve just clawed back from the Cayman Islands were previously sitting in the accounts of Richy McRich doing nothing. If we now use them to pay Charlie to keep being a nurse they are every bit as ‘new’ pounds to the real economy as the government creating pounds out of thin air.

Take the following three scenarios:

(1) Richy McRich in an uncharacteristic display of generosity pledges a portion of his off-shore account to pay Charlie’s wages forever as a charitable donation to the public.

(2) The UK government in an uncharacteristic display of a government doing what it promised to do, closes a tax loophole and is able to collect from Richy McRich’s off-shore account enough to pay Charlie forever.

(3) The UK government uses its power as the sovereign monopoly supplier of pounds to pay Charlie forever.

The functional impact on the real economy — that is, what money is used to buy goods and services across the country, is identical in each scenario. But (3) had your head screaming about hyperinflation a minute ago, whereas (1) or (2) seem like the perfect win for society.

So if that’s true, does that mean we don’t need taxes at all?

Well no, of course not.

Firstly, what makes Charlie, or anyone else, want to work for the government at all?

This is where taxes come in. By making all of us pay a tax, that can only be settled using pounds (of which the government is monopoly supplier) — and moreover, having the authority to put us in jail if we don’t pay — we all have the incentive to either earn pounds by directly working for the government, or by providing good and services for people that do. The government pays Charlie to be a nurse, receiving pounds some of which he uses to pay his tax. You sold Charlie his car, or walk his dog, or clean his windows — receiving pounds from Charlie, some of which you use to pay your taxes. You use your pounds to go to the supermarket… And so on. That’s how a modern monetary economy works.

You might not realise this fundamental role of taxes –after all, it’s obvious why you need pounds when everyone ELSE values them too. But have you ever thought, why does everyone else value them too?

Put another way, the government doesn’t need our money, it needs us to need their money. That is why in MMT we say taxes drive the value of money. It is the ability of the UK government to tax us in pounds, that gives what is otherwise just a piece of paper with the Queen’s face on it (or some numbers on a spreadsheet) value.

So #1 — taxes drive the value of money.

Next, remember the first rule of MMT is: THOU SHALL NOT TALK ABOUT MMT.

Wait, that’s not true either, we bang on about it all the time!

The first rule of MMT is: “Societies are always constrained by the real resource limits of their economy”.

What does that actually mean? In this case, Charlie is our real resource.

To keep Charlie employed as a nurse, we need him to be not employed doing something else. In that sense, the government is in competition with all of us in the private sector for all the goods and services we can produce between us. If everyone has a job, and there are no more people with sufficient skills to be trained as a nurse (or a doctor or a teacher etc) the government can’t magic one out of thin air, just because it has an unlimited supply of pounds. It could double the wages of all nurses, and then offer new posts — which might cause some people to think, ‘hey, I’m going to quit my job and retrain as a nurse’. But this scenario absolutely is inflationary. The government is using its infinite supply of money to bid up the cost of wages across the economy.

So as well as driving the value of money, another important role taxes play, is to take away some of our spending power. That leaves less money in our pockets to bid away the services of Charlie or anyone else. In other words, taxes stop us (the private sector) from using real resources we might otherwise want, making them available for the government to buy and use instead.

If that seems to contradict what we said above about tax havens, the point is Richy McRich didn’t want to use his pounds to buy any more goods and services — he just wants to hoard them. That’s why he stashed them in an off-shore account in the Cayman Islands. So trying to tax them doesn’t actually free up any real goods or services this government might need.

It’s at this point people with left-wing/progressive views (and largely the people making and liking the fund-the-NHS-with-taxes Facebook posts) get a bit uncomfortable with MMT. After all, taxing the rich is a pretty core tenet of our beliefs. And now we’re saying you don’t need to? Well, fear not my lefty friends. Think about the three scenarios above. The first two actually give power to Richy McRich — it’s the money grows on rich people framing I talked about at the start. Which means if we make our public services dependent on the ability of us to get his money, we also have to accept when he lobbies the government to get his way (to reduce corporation taxes or ease environmental restrictions on his airline or make his offshore fund legal in the first place etc, etc). This is exactly how politics work now. That’s why framing the NHS as dependent on tax income is almost as harmful as framing it as being dependent on charity donations.

Whereas in scenario (3) we just ignore Richy. We don’t need him to keep Charlie as a nurse or all our other public services running. This means if you want to shut down his Cayman Islands account or whack him with a proper inheritance tax bill, or whatever, you can do so without being told ‘no, you can’t upset the wealth-generators or we’ll hurt the NHS’. Ironically, by understanding MMT and the role of taxes, you have far more freedom to insist on a more redistributive tax system (if you wish of course — others on the right may disagree, remember ultimately MMT is agnostic left vs right, by all means, fight it out, just get your economics right first).

So how about the NHS now? What are its real resource limits? The COVID crisis is showing us we’re hitting a lot of them. We can’t suddenly magic more nurse, doctors, ventilators, ICU beds or PPE in to existence. And even if people, in general, are available, they still need to be trained and moved to the required location. An unemployed ex-factory worker in Hartlepool can’t suddenly be redeployed as a nurse in London.

Some of those shortages (eg a lack of PPE orders) appear to be down to current government incompetence, but a lack of nurses and doctors (and ambulance drivers, lab technicians etc) is a long-standing problem due to the continuous underfunding of the last decade. As a proportion of the population, we had more frontline staff in nearly all our public services 10 years ago. The reason we don’t now, isn’t because we ran out of people, but because we were convinced we’d run out of money. But as you hopefully now understand, the idea we didn’t have any money is, and always was, nonsense! In other words, the real resources were always there, and thus the government always had the ability to keep buying them.

Where are all those people who could have been employed in the NHS working now? Well, Charlie’s mate Emily was training to be an ambulance driver but is now a self-employed courier delivering next-day Amazon prime parcels. Steve wanted to be a teaching assistant but works for Uber instead, and Vanessa was going to be physiotherapist for stroke victims but freelances as a PT in her local gym. Where do you think the record employment in the private sector and the gig economy has come from?

If you detect a note of sneering there, I promise you there’s none. I’m not knocking any of those jobs or the people that work in them. They clearly have value to the economy — both to Amazon, who benefit from a nice low wage driver for their sellers, but also to us, who get our gadgets delivered seemingly before we’ve even ordered them. And who doesn’t love an Uber eats?

The question for us all, then, is what we want from our economy. Or more importantly, what do we want from ourselves. Our taxes haven’t gone down to make those resources available to us as private individuals, and they won’t need to go up, if we wanted to instead shift them back to working in the public sector for society as a whole. Ultimately, it’s a political decision, far more than it is an economic one. And it’s not for me to persuade you what your what political views should be. But now you hopefully understand the economics a little better, then next time you’re clapping for all our NHS staff, have a think about what you value most.









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New Book: The Case For A Job Guarantee

Published by Anonymous (not verified) on Sun, 28/06/2020 - 11:00pm in


Books, MMT

Yet another MMT book is out in North America: The Case for a Job Guarantee, by Pavlina R. Tcherneva (Amazon affiliate link). The book does a very good job of covering the ground of what the Job Guarantee is, and why it is needed.

Although online discussions of MMT typically revolve around "printing money" and "whether MMT is new?," the Job Guarantee is a core part of the theory, and often skipped over.

This article is not meant to be a formal review, nor do I explain the Job Guarantee. I am in the process of writing a MMT primer, and I will use this book as the basis for sections on the Job Guarantee.

Book DescriptionThe Case for a Job Guarantee discusses the academic literature and has a full set of citations, but is written for a broader audience.  The tone is not that of a dry policy document, rather it is focused on the human costs of unemployment, and how they can be reduced.

After an introductory chapter, chapters 2-4 cover some basics of MMT, and how the analysis of the labour market differs from orthodoxy (notably, the concept of NAIRU). Chapter 5 discusses the structure of the Job Guarantee, and chapter 6 the linkage between the Job Guarantee and the Green New Deal.

From the perspective of an advanced reader who is already familiar with the MMT basics, it might have been preferable to have a greater weight on Chapters 5 and 6. That is, more discussion of the the experiences in existing programmes, as well as policy details. However, it is clear that this material would be of less interest to most readers.
What is the Job Guarantee?My plan is to devote two sections of my book to the Job Guarantee: the first discussing the structure, the second discussing common criticisms and responses to them. Since I do not want to write the same thing twice in the matter of a few weeks, I will be extremely brief here.

The Job Guarantee -- as the name suggests -- is a programme that guarantees a job to all adults. Tcherneva uses the same wage as suggested by others for the United States -- $15/hour. The key to the programme is that the U.S. Federal Government pays for this programme out of its regular budget, but the actual jobs are created in a decentralised fashion.

By having the Federal Government pay for the programme, it can be fully counter-cyclical, without the financial worries faced by sub-sovereigns. It will be a potent automatic stabiliser, and will also help reduce regional disparities as the wage is uniform.

The decentralised nature of the programme means that potential jobs would be proposed by state and municipal governments, as well as charities. The workers will be creating goods and offering services for the community, but not competing against the private sector. The Federal Government's administrative role would be to collect information on best practices, and monitor that there are no shenanigans.
Will it Work?There are a number of concerns that one could have about the Job Guarantee; the book discusses many of them. In my view, the story is straightforward: it is a big programme, so it takes more effort than just mailing people cheques. However, the same is true of any number of other governmental programmes, like universal K-12 education.

The cost of the programme is not really a problem. Even if we just look at dollar spending (ignoring the MMT injunction to look at real resources), during an expansion, the cost of the programme might be relatively close to the cost of dealing with the side effects of unemployment. There might be a rebalancing of government spending towards the Federal level, but that is advantageous from a risk management standpoint. During a recession, the dollar cost will rise rapidly, but the spending is more efficient that conventional stimulus plans, which as Tcherneva points out, largely act to put a floor under profits, and not to create jobs.

The Job Guarantee creates a policy lever to help stabilise inflation, more precisely, wages in the steady state. The key is that the Job Guarantee cannot be automatically indexed to inflation, as otherwise it becomes pro-cyclical. (The feasibility of freezing the Job Guarantee wage in the face of inflation will be an awkward political challenge.) However, the introduction of the Job Guarantee will have the effect of pushing up wages at the low end in the private sector: minimum wage employers will need to offer a compensation package that is better than the Job Guarantee. This will have the effect of raising costs for certain industries (e.g., restaurants), and could easily result in a one-time bump in the price level.

From my perspective, the main practical problem the programme faces is sabotage by free market fundamentalists. (Tcherneva is more diplomatic than I am, so that is not a quote from the book.) Although the Job Guarantee is somewhat neutral for profits in aggregate (the pie being larger offsets an increase in the wage share), as Michal Kalecki argued (in "Political Aspects of Full Employment"), many capitalists prefer lower profits to giving up any power over workers. Tcherneva argues that many reforms (for example, work week reductions) were finally normalised by capitalists, but today's conservatives are very different than those of the post-war era.
The Job Guarantee and MMTFor the handful of people who are interested in claims of academic priority, the Job Guarantee is a core part of MMT. Although variants of the policy have been proposed before, the analysis is different. Bill Mitchell and Warren Mosler independently conceived of the Job Guarantee as a buffer stock scheme that helps determine the price level in a fiat currency. Although "determining the price level" is not a concern to normal human beings, it is a problem for economic theory once the Quantity Theory of Money is thrown out, and the currency is not pegged to a commodity.

  • If one is looking at economics from a post-Keynesian perspective, this is a key distinction that helps us a draw lines in the taxonomy of the squabbling theoretical tribes. (There are many such tribes, with some consisting of one economist.)
  • If one is approaching MMT from a more conventional perspective, the broad post-Keynesian/neoclassical divide cuts across many topics, and this is just one. From this perspective, the correct question is not "what does MMT offer versus neoclassical theory?," rather "what does broad post-Keynesian theory offer versus neoclassical theory?"

Wrapping Up...In summary, The Case for a Job Guarantee is a good book to get a better grasp on an important part of MMT, as well as understanding the labour market.

I have written up a section on the NAIRU. and thus labour market analysis has been on my mind. As noted earlier, I will be writing up a proper summary of the Job Guarantee for my book. Drafts should make it onto my website in the coming weeks.Post-Script: The Job Guarantee and the PandemicThe book was largely written before the pandemic hit, so it only shows up in a few passages. I just want to offer my own comments on how the Job Guarantee fits in with the pandemic response.
The reality is that the Job Guarantee is a complex programme. There is no way it could have been implemented during the lockdown period, given the coordination issues. It was easier to mail people cheques. However, that is a poor criterion to judge a programme; successful programmes like K-12 universal education would also be rejected.
However, if the programme existed before the pandemic hit, it would have been very easy to repurpose it as a pandemic response vehicle. All the payments issues that have been discovered would have been dealt with. Meanwhile, the aid is targeted, so there was no need to invent criteria for who gets paid. Due to physical distancing requirements, it seems likely that people would be told to stay at home during the lockdown phase, so the implementation would resemble the grants used during the pandemic. However, once the parameters of the virus were better understood, the Job Guarantee workers could do things like make masks, help in areas that are under pressure, and help educate people about safety protocols. (The latter would generate tons of great social media content as deranged people scream at each other.)
(c) Brian Romanchuk 2020

‘What if the Public (really) Understood How Money Works?’ Just think what we could achieve!

Published by Anonymous (not verified) on Sun, 28/06/2020 - 5:54am in

Line graph with downward trend, virus image and word COVID-19Image by iXimus from Pixabay

“There’s something invigorating about people freaking out about modern monetary theory (MMT). They treat MMT as akin to the Ark of the Covenant in the first Indiana Jones movie. They are petrified that knowledge of the financial equivalent of the “holy of holies” will be released to normal people because they project their greatest terrors onto the possibility that the public will be transformed and empowered by their knowledge of matters that much of the financial world has understood for at least a century.”

Dr William Black


After having previously been ignored and disparaged for decades by mainstream economists and politicians, MMT has been making the headlines and finding its way into a growing public conversation.

Two significant publications over the last few weeks are challenging the very basis upon which government policy is determined; ‘does it fit with our political agenda, is it affordable’ and ‘how can it be paid for?’

The Deficit Myth’ by Stephanie Kelton was described by Professor Hans G Despain in a review in the LSE blog as a ‘triumph’ challenging, as he explained, the false idea that ‘deficits are irresponsible and ruinous towards the productive political activity of deciding which spending programmes should be prioritised’.

Hot on its heels came Pavlina Tcherneva’s book ‘The case for A Job Guarantee’ described by James K Galbraith as the ‘next big, common-sense idea for economic reform’. And in the words of Paul Prescod in the Jacobin Mag, the Job Guarantee ‘offers an inspiring vision of what society would look like if we utilized the various talents and skills working people possess’

Both these publications have stirred an already growing interest in that hitherto boring subject of economics, showing that far from being irrelevant to people’s lives it is critical to them in terms of human and planetary well-being.

Hitherto sceptical economists are now saying things like ‘well we knew it all along really’ and sovereign currency-issuing governments across the world have suddenly discovered the fiscal levers they denied us previously, to keep their economies from foundering as a result of the deleterious effects of Covid-19. Until now, there has been a depressing failure to make the critical connection between government spending and economic and societal well-being which are fundamentally two sides of the same coin. Whilst people may not make the technical connection, they are now beginning to understand the impact that government policies and spending decisions have on their lives. They live them every day.

Whether on the right, where politicians defer to the market as the wealth-maker, claiming that public services depend on a healthy economy to generate sufficient tax revenue, or the left, who scrabble for a limited pot of tax revenue, preferably from the rich, or through borrowing at low interest to deliver their political agenda, the orthodoxy prevails on both sides of the political spectrum.

After decades of being in the wilderness, MMT is happily beginning to make headway and that is very encouraging. However, over recent weeks, the Empire seems to have been striking back! Sensing a challenge to its economic and political hegemony, recent newspaper headlines are reinforcing the orthodox narrative of the public finances being like a household budget. Fake news to keep the population compliant in the false understanding that there are real financial constraints to public spending and to prepare them for the possibility of more austerity to pay back the enormous, eye-boggling sums spent by the government during the Covid-19 crisis.

In an article last month, the FT asserted that the Chancellor would ‘face tough choices’, and that ‘at some point, taxes will have to rise’. While tax increases would be an unpopular move, it said this ‘would send a signal that ministers are getting the deficit under control.’

And just this week, headlines aimed at eliciting a negative public reaction have dominated the news.

‘Britain nearly went bust in March says the Bank of England’.


‘Borrowing cost set ‘set to rise’ as Bank sells off stock of gilts’

On the right, John Major waded in with a call on the government to ‘borrow heavily…to improve living standards’ and claimed that ‘taxes will eventually have to be increased to pay for an extremely expensive programme.’

And on the left, the Shadow Chancellor Annaliese Dodds said again this week that ‘it is only right that those with the broadest shoulders’, should make a bigger contribution as the UK recovers from the economic effects of Covid-19.

Whilst the IFS think tank couldn’t resist the following:

It is clear that the COVID-19 outbreak – and the public health response to it – will dramatically reduce economic activity in the second quarter of 2020. This in turn will depress tax receipts and add to government spending, increasing government borrowing and in turn adding to government debt […] A key issue is how quickly – and how fully – the economy, and with it the public finances, recover over subsequent years.

The economic pundits, institutions and politicians are reinforcing, as a deliberate tactic, that at some unspecified time in the future there will be a price to pay for all this spending. As Aldous Huxley, author of Brave New World said; ‘Sixty-two thousand four hundred repetitions make one truth’ the implication being that the more a statement is repeated, the more credible it is seen to be. And certainly, over the last decades in terms of discussion about the public finances, the household budget version rules in the public consciousness – even at the expense of its own well-being.

Just a quick look at recent headlines show the pernicious nature of such repetition on the health of the economy and its citizens, who compare the public accounts with their own finances.

It was reported this week that some of the UK’s largest councils may have to declare bankruptcy unless the government stumps up extra cash to cover the extra expenditure needed to deal with the impact of Covid-19. Nearly 150 authorities have predicted a combined budget shortfall of at least £3.2bn. Having already been struggling to deal with ten years of cuts to central government funding for local government, the chickens are now coming home to roost. Even the government’s proposed additional funding package will struggle with an already slimmed down local government infrastructure which includes people and services. However much money is allocated, local politicians and their officers will not be able to repair those losses to essential services quickly.

Also this week, the IFS reported that families who had become unemployed during the Covid-19 crisis would get £1600 less in benefits, on average, than they would have done without the damaging decade of Tory austerity. It warned that the UK, which had entered the crisis with an already less than generous welfare safety net combined with the worst decade for income gains since the 60s, would not ‘provide a good blueprint for a bounce-back’.

Pascale Bourquin, a research economist at the IFS, said that in the last decade the country had ‘witnessed the slowest growth in household incomes since records began as earnings and productivity stalled and working-age benefits were cut sharply’. And added that ‘we now have the dual challenge of trying to recover the ground people have lost in their careers and employment prospects and addressing the problems we already had’.

The narrative of household budgets is pernicious and yet it pervades the public discourse. On the one hand, the IFS recognises the damage austerity has caused and yet on the other still blathers on about the public finances and the national debt, hinting about the future cost we will all have to bear for this increased spending.

When Helen Barnard at the Joseph Rowntree Foundation, which funded the research, talks about ‘Finding a lasting solution’ she is demonstrating, just like the IFS, a woeful lack of knowledge about how governments actually spend. The solution is staring them right in the face.

The government has the power of the public purse to find solutions to unemployment, low productivity, poverty and inequality, not to mention the coming threat of climate change. It doesn’t matter which end of the political spectrum you sit on, whether you are on the right or the left, a healthy economy and societal and planetary well-being go hand in hand and should be a top priority for both.

This week the IMF warned of a deep global recession. This will, without doubt, lead to further poverty and inequality which will be worsened by the prospect of a world ravaged by human-induced climate change if we fail to act now. It is time for the public, politicians and institutions to put away childish analogies about how governments spend – that is if we really want to secure a stable future for those that will come after us.

In the words of Dr William Black ‘What if the public understood how money works?

Well, there might just be a revolution!








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Looking At Some MMT Criticism

Published by Anonymous (not verified) on Thu, 25/06/2020 - 12:35am in



Work is proceeding on my "MMT primer" manuscript. One chapter I am working on (in parallel with the labour market analysis) are a discussion of what I view as serious objections to MMT as a theory. Although I want to finish off that chapter later, I am adding to it as I run into interesting criticisms. I discuss a couple of recent entries in this article. Although I do not want to derail my book with lengthy discussions of MMT critiques that are coming from every random direction, I also want to have at least some quotations of critics so that my comments are not viewed as attacks on straw men.

[Update: here is a link to this Daniel de Voss article on Twitter wars. The complaints about MMT are weak, providing examples for my complaints about low quality criticism. I certainly will not want to crowd my book with low quality targets like that, but it is fun to read.]

Robert Murphy Review Robert P. Murphy wrote a review of Stephanie Kelton's the Deficit Myth (Amazon affiliate link). The part of the review that catches the eye is that Murphy warns the readers at that it is a mistake to dismiss the book, which was the usual response.

This matches my view -- the strategy taken by mainstream economists was to follow the line of Paul Krugman and attack straw man versions of MMT. Although this has a signalling effect -- if you want to be part of the mainstream club, you cannot take MMT seriously -- attempts to police the boundaries of acceptable discourse fall flat on those outside the neoclassical bubble. In the case of free market advocates who are the likely readers on, the usual dismissal was made largely on ideological grounds -- "MMT is socialism!" Although this might work to police the ideological boundaries of libertarianism, one runs into the reality that most major parties outside the United States are also viewed as "socialist" by libertarians. With opponents counter-attacking purely on the basis of affiliation signalling, MMT has expanded with almost no serious critical scrutiny (other than a handful of post-Keynesians).

I am not going to attempt to discuss Murphy's criticism of MMT here -- the review is long, and contains many points. The differences revolve around the underlying economic "models" (which are verbal, not equations), and it will not be a surprise to the reader that I disagree with Murphy's models. A longer discussion will follow at a later point, I just wanted to highlight this review to my readers.
Some Comments on Matthew C. Klein's ArticlesMatthew C. Klein wrote two articles on MMT, one a primer, and a review of the Deficit Myth. They outline MMT from an outsider's perspective. The articles are not deeply critical, rather they lay out the issues.

The observations on MMT policy proposals are interesting. Klein's discussions of MMT policies is one of the few available that is not written by MMTers (who unexpectedly support the programmes) that is based on what MMTers have said themselves about the proposals. As such, there is a clearer idea of the trade-offs of the proposals (i.e., a less sunny view than the advocates).

However, my focus is on getting my own primer done. Right now, there was one criticism that caught my eye, and I believe that I can work into a section on complaints about MMT rhetoric. It overlaps an earlier criticism I discussed by John Quiggin. The rest of this article is an unedited draft of my comments on that topic. I think the text is too long, but I will worry about cutting it down once I work in the Quiggin material as well.
Rhetorical Tricks?Matthew C. Klein writes in the article “MMT's Stephanie Kelton Advocates for Permanent Wartime Economics” (which is a review of The Deficit Myth):

Kelton sometimes relies on sleight of hand to make her case. She rightly notes that the government is financially unconstrained when it comes to paying Medicare beneficiaries, for example, because it can’t run out of money. But that doesn’t tell us whether Medicare is sustainable as currently structured. Population aging, trends in obesity, and the persistent increase in the relative cost of healthcare all mean that Medicare will, on its current trajectory, end up eating more of the rest of society’s resources. Elsewhere, Kelton suggests the answer is to shift more and more of the workforce into medicine and elder care. But that’s quite different from saying that “the biggest challenges facing these programs have nothing to do with affordability.”

I see two legs to these statements: the substantive policy concerns, and then the narrow question is whether there is a rhetorical trick.

With regards to the substantive policy issues around Medicare in the United States, I do not see a reason to disagree with Klein’s assessment. The sustainability debate around Medicare does not really fit the Canadian situation; the expensive parts of medical care are under government control, and governments already grasped the political nettle of the decisions associated with the ageing population. Adjustments will be made as needed – but there is no constituency in Canada that expects otherwise.

The problem with the United States is that the ruling elites have a hard time dealing with adjusting policies. If we assume that the current structure of medical provision in the United States is extended forward – itself a dangerous assumption – Klein’s assessment seems to capture the challenges faced by the system. It seems exceedingly likely that Medicate will take increasing amounts of real resources as the population ages. Meanwhile, the “persistent increase in the relative cost of healthcare” is a direct result of the design of the system.

As a fan of the economist Herb Stein’s dictum that “if it can’t go on forever, it will stop,” I expect that the assumption that something will change. Given the high cost of American health care versus developed country peers, it is clear that there is no inherent law of nature that medical costs must spiral out of control. In summary, I do not see that there is a substantive policy dispute (other than the possibility that the situation is better than suggested).

Instead, the disagreement is whether saying this has “nothing to do with affordability” is a “rhetorical trick.”

I will first note that the substantive issue is that this is a question of real resources, and Klein’s description of the problem matches this. I would argue that there are many linguistic precedents for treating real resource constraints as not being an issue of “affordability.”

Since everyone loves household analogies, I will use one. Imagine that we have cooked supper for our family, but. I then discover that one of my children has invited friends over to eat at the last minute. There is a definite concern that we might run out of prepared food, but there is no question of our being able to “afford” the extra food – unless these friends have extremely large appetites.
So why is discarding “affordability” seen as rhetorical trick? I would guess that this is the result of conventional economists framing what are really real resource limits as being about “affordability.” So by denying “affordability,” people who do not understand the distinction will believe that there are no constraints on spending – including real resource constraints.

Although it is unfortunate that people draw the wrong conclusions, I also do not have a lot of sympathy for the conventional economists’ position here. All they need to do is use language properly and admit that floating currency sovereigns do not face nominal constraints, rather real constraints. In the meantime, all that can be done is to correct over-exuberant activists and point out that real resource constraints still exist.

(c) Brian Romanchuk 2020