Martin Wolf has conceded that MMT is an economic truth in the FT this morning. The headline says:
States create useful money, but abuse it
The sub heading is:
To the extent modern monetary theory is true, it is unoriginal; to the extent it is original, it is false
To summarise, he says MMT is right: states can create money at will; money is given its value by taxation; states with their own central banks that do not borrow in foreign currencies cannot go bust and taxes do not fund government spending, he agrees the whole gamut. I could quibble, and purists will, but in essence he says MMT is correct. And, of course, he agrees it always has been so by saying there is nothing new about any of this.
That's the good news. Then comes the ‘but'. He says this:
Money is a creature of the state. Modern monetary theory, a controversial account of this truth, is analytically correct, so far as it goes. But where it does not go is crucial: money is a powerful tool, but it can be abused.
That's partly because Wolf also makes some very basic errors. For example, he says:
[O]nly inflation sets limits on a government's ability to spend. But, if inflation emerges, the government has to tighten demand, by raising taxes.
This is not what MMT says. MMT does not say inflation imposes a limit on government spending. It says using all available resources - effectively available labour - imposes that limit. Then it says inflation follows if expansion continues. And it only says that is an issue if it is decided that the resulting inflation rate is too high. Inflation, per se, is not a limit. I suspect Wolf chose to get this wrong, deliberately. His narrative does not work if he noted correctly what MMT said.
But his real disagreement is that whilst MMT is correct (subject to his own misconceptions) he thinks the policy implications are wrong. He says:
This analysis is correct, up to a point. It also has implications for policy. A sovereign government can always spend in order to support demand. Again, expansion of the central bank balance sheet does not make high inflation likely, let alone inevitable. Some believers in MMT argue that the power to create money should be used to offer a universal jobs guarantee or finance programmes such as the Green New Deal proposed by Democrats in the US. But such ideas do not follow from their analysis. These are just suggestions for where the state should spend.
Again, this is misunderstanding, whether deliberate or otherwise, by Wolf. These ideas, or at least variants on them, are a necessary part of MMT, but Wolf cannot change his world view to realise that. This is because Wolf is stuck with the dying idea that macroeconomic policy is all about the need for independent central banks to control inflation rates with the objective of delivering a stable value for money to support the property rights of the world's owners of debt - who are banks and the well off. This assumption drives Wolf's slightly odd explanation of the role of bonds in MMT, and his objections to it. These are threefold.
The first is that we do not know where full employment is in an economy with certainty. This is true. Wolf thinks this justifies not taking the risk of creating it. Unemployed and under-employed people, and people not fulfilling their potential, is a risk Martin Wolf is clearly willing to take to prevent inflation. Those suggesting MMT think that the wrong priority. This is also why he does not say what the spending MMT permits should be spent upon, having dismissed the choices those who propose MMT make: he, by implication, suggest that the state should not spend. He clearly thinks that it should sit and watch human potential go to waste. I will say no more on that.
Second, he says this:
A still more important economic mistake is to ignore the expectations that drive people's behaviour. Suppose holders of money fear that the government is prepared to spend on its high priority items, regardless of how overheated the economy might become. Suppose holders of money fear that the central bank has also become entirely subject to the government's whims (which has happened often enough in the past). They are then likely to dump money in favour of some other asset, causing a collapsing currency, soaring asset prices and booming demand for durables. This may not lead to outright hyperinflation. But it might lead to a burst of high inflation, which becomes entrenched. The focus of MMT's proponents on balance sheets and indifference to expectations that drive behaviour are huge errors.
This is pure ‘bond fairy' nonsense. Even Paul Krugman (when not writing about MMT) has debunked this sort of scare-mongering, time and again. But let's be clear why. First, people can't dump money. Ultimately, it's what they have to make exchange. So the idea that they exit money forever is absurd. They will not do that. Instead, they might speculate. And as MMT makes clear, let them try. The government simply has to respond by buying the gilts they want to sell. It can. It is doing so regularly through the QE programme, so the mechanism exists, and as Japan proves, there is no real limit to how much of that debt the government can buy. In that case, a market panic, deliberately generated or otherwise, can always be neutered. No country is beholden to speculators in its bonds or currency, which it creates and the supply of which it controls if the core MMT conditions prevail. The only reason why this might not be true is if there was a central bank not under government control that then permitted runs by not intervening. One presumes Wolf wants such central bank independence to permit this possibility, which suits his theory. And that is precisely why I oppose it.
And then there is Wolf's third objection. He says:
These mistakes are economic ones, but there is a related and far worse political error, as Sebastian Edwards of University of California, Los Angeles, has argued. If politicians think they do not need to worry about the possibility of default, only about inflation, their tendency may be to assume output can be driven far higher, and unemployment far lower, than is possible without triggering an upsurge in inflation. That happened to many western countries in the 1970s. It has happened more often to developing countries, especially in Latin America. But the economic and social consequences of big spikes in inflation can be very damaging.
Now we come to the core of Wolf's objection. It is, as he admits, political. And it is that politicians might use their judgements. Heaven forbid! Wolf is very clearly of the school that created economics to impose constraint on that judgement so that full employment, rising real wages and a redistribution from capital to labour may not happen. And now he is petrified that the so-called economics that underpinned that heinous political system is shown to be wrong the constraints must still be imposed because politicians - and so, of course, those who elected them - cannot be trusted with the economy. Only bankers can have such faith placed in them, according to Wolf.
But he is wrong, of course. The 1970s are not now. And the economics of that era, including the belief that money was still a scarce resource, are even longer gone. Instead we live in an era of perpetual underuse of labour, and of politics that, if given the choice to do something would rather not do it. We have stagnation, inequality and real poverty precisely because of the maintenance of the economics that Wolf now wants to perpetuate by fear alone.
And tacitly even he admits that. He has to acknowledge the power of the state to intervene. In his conclusion he says:
The solution, nearly all of the time, is to delegate the needed discretion to independent central banks and financial regulators. Yet proponents of MMT are right that during a period of structurally feeble private demand (as in Japan since 1990) or a deep slump, a sovereign government must and can act, on its own or in co-operation with the central bank, to offset private weakness. There is then no reason to fear the constraints. It should just go for it.
We are back to basic errors here. We have endured structurally feeble private demand for a decade now. And we need a Green New Deal. We could deliver that GND without problem precisely because there is structurally feeble private demand without there being a shortage of resources or inflation. But when a central bank is told it may not deliver such a programme it is an impediment to progress. The result is we need to sweep away the central bank and the independence it has that is this impediment to progress. Or we, at the very least, need to change its mandate. Wolf's perception of what is normal is seriously awry and his ability to adjust his economics to suit that false perception is as adrift.
Wolf has conceded MMT is right. Now he needs to accept the consequences. Including that democracy by and for the people should prevail.
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He’s a wolf in a cage – an ideological one. States ‘ abuse money’? Well what was 2008 and all the crashes before it about?! Market Prudence!!? Von Hayek would be proud – but wrong.
Does he mention how a fair tax system might also help control the inflation he worries about? Perhaps that is going a bit far for him at the moment but at least he is talking about it. But you are right – you can feel the ideological pain he is going through – to renounce decades of bad thinking. It’s tough but – tough – it has got to happen. It’s a pity the Thatcherite replacements for May don’t seem realise that so called neo-lib economics just don’t work – time has reified the vacuity of their thinking.
I have Tweeted Martin Wolff this morning (he has Tweeted his article). My Tweet in response, as best I recall the exact words is as follows:
“Who claims MMT is original? It can be traced back at least to Beardsley Ruml (1945) and Mitchell Innes (1913). To the extent MMT is a description it is true. Everything else is politics.”
I appreciate you may not entirely agree; but Economics used to be known as Political Economy. and I believe the older title better expresses the epistemology of the discipline in social science.
I am a professor of political economy right now….I agree with you
Professor of Political Practise.. does that honourable title continue to bestow when you no longer have an affiliation to an academic institution?
You’ve got the title wrong
How do you know I will no longer have an affiliation to an academic institution?
You might be just a little presumptive
God John you have it in a nutshell.
They told us in the text books about Normative versus Positive economics.
That positive economics was the best as it was ‘objective ‘ and scientific.
That being normative was based on ‘value judgements’ and then loaded the description with examples of left wing values and sniffed haughtily at them.
And then claimed all was well with the world and economics had been cleansed of politics. As an undergraduate I didn’t buy it. But when you saw that so many of your lecturers did, you felt outgunned or that you felt that you didn’t quite get it. ‘It’ was a mirage.
So called ‘positive’ economics is full of neo-lib political values and the politics of greed to match it.
100% agreed
I had the same experience as a student and never succumbed
First they ignore you,
Then they laugh at you,
Then they argue (and dissemble)
Then you win.
Of course government can abuse its spending powers under MMT (or any other financial system that ever prevailed). We’ve just been living through it in spades for a decade.
Precisely
Thanks for this meticulous critique worthy of the eponymous journalist! I believe those who position themselves as reformist while still adhering to core regressive tenets are more dangerous than hard-line traditionalists because they obscure (intentionally or out of ignorance) the underlying ideological false truth. It’s akin to ‘the better form of slavery’ propagandists who delayed total abolition.
It would be good to have Martin Wolf defend his critique of MMT. Doubtless he believes he doesn’t have to. It’s a version of the fallacy of a false attribution, whereby a person who assumes their skill in one area applies to another, except in this case Wolf actually claims to be a valid economist which is arguably more deceptive.
Somewhat off topic, but his namesake Richard Wolff tells a not dissimilar story about himself and Jordan Peterson re ‘Cultural Marxism’. By way of light relief (?) you might enjoy this recent clip with the admirable Abby Martin – https://www.youtube.com/watch?v=liT7e5M6XfY.
Exactly John D.
‘Cultural Marxism’
Even certain Tories have succumbed to this false narrative.
In the world of housing, I’ve heard tales about social landlords being ‘vested interests’ as an excuse to lever in more private money and ‘choice’.
There is no willingness to entertain the fact that by doing this, what the Tories/Neo-libs tend to do is replace one vested interest with another rather than getting rid of all ‘vested interests’. I mean – what is private money other than a ‘vested interest’?
And that the new private vested interest is less publicly accountable than the previous one?
Neo-liberalism just tends to replace common ownership with another form of private ownership. The assets are still owned by someone, yet this is portrayed as gallant, new and ‘radical’. That’s all it does. You could call it ‘cultural privatisation’ or how about mendacity?
Slowly but surely the realities of our banking system are being learned and accepted, albeit reluctantly. Over the years I have had to complete many financial services examinations and I have been challenged at times over how I interpret the principles now known as MMT.
I remember being told “If you want to get on in the financial world and reach the highest levels you should keep those interpretations to yourself.”
Perhaps Martin Wolf is bearing this advice in mind.
I found the answer was to become a self-employed consultant and I was free to develop my own views.
Through Tax Research, Richard, I think you have helped readers develop a much broader understanding of this subject.
I have always paid a price for being a free thinker
I will be when leaving my current job this autumn
It’s always been worth it
Just sent your blog to The Wolf.
This was his email reply.
” I don’t pay any attention to him. Why should I? ”
Would you be prepared to debate with him if I could arrange it?
Of course
I know he has no regard for me – we have met
He has no regard for anyone outside his rather cloistered little circle
That’s the problem
Perhaps we have the answer here. Martin Wolf is attending the Bilderberg meeting in Montreux this weekend.
https://www.bilderbergmeetings.org/press/press-release/participants
🙂
Kissinger and Jared Kushner are also going. Ugh! Nice company Wolf is keeping.
MMT addresses the question of full employment through the job guarantee. There is always “quasi” full employment since anyone wanting to work is guaranteed a job. Full employment likely to lead to inflation occurs when there is no one working on the job guarantee.
[…] Cross-posted from Tax Research UK […]
“I know he has no regard for me — we have met”
“He has no regard for anyone outside his rather cloistered little circle”
They say very similar people repel each other.
I am more than open to him if ever he wants to talk
I have always made that clear
Martin Wolf is not exactly at loggerheads ideologically with what you say indeed he is pro Keynesianism and if i recall correctly was pushing for a big fiscal response in 2008/9. It seems he just doesn’t see anything new or novel in state spending to boost an economy and using taxation to stem inflation. He and 1000s of others have wrote the same many times just not using the term MMT really because they don’t see it as a new theory.
In which case they do not understand it
By stating there is nothing new Wolf joins Krugman, Stiglitz, Summers, Rogoff, Bootle, Palley, Wren-Lewis and many others then in “not understanding MMT”..
You are right
It does not pay them to give up their view that economists must run central banks that fundamentally conflict in their goals with democratic governments
This is political economy: it’s all about power and they don’t want to lose it
Most of the aforementioned economists have no political motive to protect the establishment or whoever. Most favour some sort Keynesian state intervention to reduce inequality. No I disagree with you, these are economists with fine minds and they genuinely don’t see anything new in the MMT bandwagon.
Colin
Your comment is about as honest as the thirty or so different identities you have used on this blog
Richard
This seems to be further evidence of the increasing alarm and concern about MMT being expressed by the officer class of the armies of well-heeled professional flunkies and functionaries who service the corporate capitalists and oligarchs and the politicians, policy-makers and regulators they have suborned. And you are correct to highlight the obsession with independent central banks focused on inflation to deliver a stable value of money to support property rights that are held predominantly by the wealthy and influential. It is fundamentally about supporting and entrenching property rights and the economic rents they generate. And this also requires the neutering of fiscal policy and the suppression of effective competition and regulation.
The volume of mendacious, scurrilous and obfuscatory attacks on MMT will only increase – and it will increase in proportion to the increasing public awareness that the proponents and defenders of the existing arrangements lack any moral or intellectual underpinning. The bedrock of their beliefs is an aversion to effective democratic governance.
But, equally, excessive reliance on democratic processes badly in need of reform and on the use of majoritarian processes for the self-selecting memberships of political organisations can generate unintended and damaging outcomes. Furthermore the majority of voters in advanced economies enjoy property rights of some shape or form. Most aspire to entrench and extend these property rights – and to increase their extraction of any economic rents.
It is easy to understand why “small c” conservatism tends to dominate politics in advanced economies. It is also easy to see how generally beneficial policy initiatives and institutional reforms emanating from MMT could be mendaciously portrayed as damaging to the interests of many voters. It might be prudent and pragmatic for progressive advocates of MMT to moderate what might be construed as ill-conceived radicalism or a democratic plurality will be unachievable. Revising the mandates of central banks to curtail their powers and remit, re-empowering fiscal policy to function in the broad public interest and applying effective competition policy and regulatory governance might be sufficient initially to secure the necessary democratic plurality.
Thanks Paul
If not inflation what is the limit on spending? Velocity of money in the economy (if that’s such a thing).
On unemployed or underemployed people presumably you would agree with David Graeber’s analysis of there being lots of underemployed people in “bullshit jobs”?
Would you expect that MMT and Green New Deal would create lots of substantive jobs which weren’t rubbish?
I have clearly explained the limit
And yes, that is exactly what I hope the GNDS will deliver
That, and a transformed view of work