One of the regular stream of commentators who claim that MMT is wrong about everything it says has appeared on the blog.
So, I issue a challenge. What is wrong about the following, which is what MMT says?
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First, in a country with a fiat currency, which means that there is no asset backing to the money in circulation, which money does as a result only get value as a consequence of a government's promise to pay, there is, at least in theory, no limit to the amount of money that a government can create.
Second, a government creates money every time it spends because it instructs its central bank to extend it the credit to do so on every such occasion. It is not constrained by the availability of taxation funds when doing so: money can always be created by a bank on demand and at will, and central banks will always do this when instructed to do so by the governments that own them.
Third, to prevent this new money creating excess inflation a government has to tax to withdraw currency from circulation. This is the primary fiscal purpose of taxation, although tax also has other, as significant, purposes as noted below.
Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, at least in theory, simply run an overdraft at its central bank, on which no interest may be charged. This negates the need for borrowing. Second, government borrowing actually makes little apparent economic sense in an economy using the fiat money of the national government because the money that is supposedly borrowed has already been created by the government when injecting cash into the economy through its spending. But that does not mean that a government should not appear to borrow. A government has a social duty to be the borrower of last resort to its population and financial system. That is the function of government borrowing, and it is a vital role in the efficient operation of any fiat currency using economy.
Fifth, the same social obligation means the government is not indifferent to the way in which taxation is levied, or to non-payment of tax, even if sufficient tax is collected to secure the fiscal balance that it desires. Tax might have a primary goal of controlling inflation, with the secondary advantage that the tax charged for this reason provides the currency with value, but tax also has the other deeply significant social purposes of correcting income and wealth inequality; repricing market failure; delivering fiscal policy by incentivising or penalising certain activities and by reinforcing the social contract that exists between a government and its electorate. Tax is a reflection of the values of the society we live in and is the primary mechanism any government has for reinforcing them. For MMT to be indifferent to taxation is, therefore, completely incorrect. It would also mean that MMT was indifferent to the distribution of impact of taxation, both nationally and internationally, and that is not the case.
Sixth, the fact that the government spends first, and taxes second, means that the answer to the question 'how are you going to pay for it?' is always available to anybody who understands this process. A government decision can always be paid for, presuming the actual resources required to deliver it exist within the economy, simply by commanding the central bank to pay for it and then arranging, if necessary, for the additional tax due on the income that has been generated (because all government expenditure is, by definition, somebody else's income) to be collected.
Seventh, the realisation that a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled, is also of considerable advantage. Such a government should never be beholden to financial markets if they do not overheat their economies.
And that's it. There are of course implications of this understanding, most especially with regard to the goals of economic policy, who that policy prioritises and how, but these follow on from the above understandings, which are critical.
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I take no issue with what you’ve written, nor with what Stephanie Kelton has written in The Deficit Myth (almost finished). However I still think most people will respond, ‘yeah but what about Zimbabwe?’. I don’t think the communication about MMT is clear enough about the seventh point and which countries that really applies to. It is a fairly small list is it not?
Every country which has its own fiat currency and its own central bank applies it
MMT describes how the economy actually works
It’s not a policy a noted here
It’s a description
‘yeah but what about Zimbabwe?’. Well, here is the problem; what the philosopher AJ Ayer would have termed the ’emotive theory of values’. The problem is the discipline of economics; currently probably the least persuasive discipline in our universities. If you wish to play that tawdry game of whataboutery, the answer is ‘yeah but what about the Financial Crash?’ or ‘yeah, what happened to equilibrium?’. Mainstream Economists are, by and large not thinkers; they are Emoters.
Remember, economics is a “science” that does not do experiment (there are some heroes trying to introduce the concept), and it is totally; and that does really mean ‘totally’, incapable of making accurate predictions. The discipline has an established poor reputation in the use of statistics (see Ziliak and McCluskey, ‘The Cult of Statistical Significance’), the data the whole discipline mindlessly relies on is quite obviously and notoriously unreliable; and there is a huge hiatus, a black hole, an intellectual abyss between the abstract, unusable principles of microeconomics and the realities of macroeconomics. Will that do?
😉
I obviously didn’t make myself clear.
If MMT is to be accepted by policy makers then it would help for it to be understood by the public that votes them in. Most people are in the (TAB)S mindset that requires taxing and borrowing before spending. They think that if governments create money then you get inflation and then hyperinflation. They might use Zimbabwe as a recent-ish example.
It is my understanding the MMT doesn’t apply to Zimbabwe. They may have their own currency but they are currently reliant on Forex for borrowing.
I think it would make MMT easier to understand and accept if it were clearer that it applies to countries like the US, UK, Japan, & China. Kelton often refers also to Australia. My question is simple. What other countries and currencies can realistically follow MMT to create money as the US and UK could?
And John, your answer will not do. You would lose 95% within the first line of your answer. We need MMT to be accepted in the same way that for generations people have accepted that governments need to balance their books. Answering like that really isn’t going to help.
Shane
The answer is clear: all countries like the UK and US
And that could include all in the EU if the ECB agreed
It is miring that way
See my other post on this today
Mr McCracken,
I was addressing the issue in terms of where the problem really rests; not with the public, but the economics profession. “Yeah, what about Zimbabwe” is much like “Yeah, what about Weimar”. It isn’t engagement. It is emoting. There is no point debating the issue at that level. After the crash we had George Osborne claiming he was balancing the books while he was doubling the debt for no return (and in 2012 he actually cut back slightly on austerity because even he noticed he was making things worse): nobody noticed, nobody drew the obvious conclusion, and nobody cared. The politicians and public still believed in the household budget, because it appeals to deeper and more personal values.
It is only a crisis like COVID-19 that may (only may) change matters because the consequences become so stark (it took a world war for Keynsianism to triumph); or the economics profession.
You ask the hyper-inflation hysterics to provide historic data showing developed economies like the United Kingdom and the United States running continuous hyper-inflation despite growing national government deficits and they can’t provide it.
Neither do they understand that continuous improvements in technology and productivity techniques reduce the price of goods and services counter-balance inflation tendencies.
It seems that always these hysterics cannot fathom that before their household account is able to show a surplus a means has to be provided to allow that “money” surplus to appear on their account. It really is a mystery to them where this money comes from. The more intellectually challenged simply say “well I earned it” entirely missing the point. Others can’t grasp the concept of macro-accounting for the three sectors that make up an economy.
The only solution to national hysteria has to be to teach how money really works in an economy. The only people who can mandate this is done are the politicians so its these individuals MMT has to persuade. As Stephanie Kelton found this is an arduous task. As someone recently said she never did get Bernie Sanders to say the words “MMT”
Zimbabwe had many large farms run by white Zimbabweans which provided most of the food for the towns and cities. The excess food was exported. The rest of the food was produced by small plots for household consumption. The government took the large farms away from the white farmers and gave them to their friends who had no experience of farming and most of these farms closed. This was the cause of the Zimbabwe’s hyper inflation as the government printed money to buy food and subsidise it.
Another case of high inflation was during the 70’s when OPEC doubled the price of oil and this increased the cost of almost everything. The UK government tried to reduce the inflation by increasing the interest rate up to 25% but of course this had no effect on the price of oil or the inflation rate.
These are ‘external shock’ inflation
No amount of fiscal or monetary policy, MMT or otherwise, can control them
Hi Richard! Respectfully, I think your assertion that the *primary* purpose of taxation being to curb inflation and your suggestion that govts should appear to borrow, even though they don’t have to, are not part of MMT as described by its principal architects.
From Warren Mosler’s white paper: “MMT recognizes that taxation, by design, is the cause of unemployment, defined as people seeking paid work, presumably for the further purpose of the […] Government hiring those that its tax caused to become unemployed, and thereby provision itself with labor.”
It seems to me that MMT says that tax liabilities denominated in the issuer’s unit of account, in the first instance, cause people to need the currency and therefore become users of currency. (Chartalism).
Also, although I’ve not read everything, I’ve not seen any of the MMT scholarship indicate that it’s desirable that a government should keep up an appearance of borrowing, but rather I have seen the core MMT architects recommend the exact opposite: a zero rate policy (ZIRP).
Again, from Warren’s white paper:
“Interest Rates: MMT recognizes that a positive policy rate results in a payment of interest that can be understood as ‘basic income for those who already have money.’”
“MMT understands that a permanent 0% policy rate is the base case for analysis for a floating exchange rate policy.”
Warren Mosler’s white paper: https://docs.google.com/document/d/1gvDcMU_ko1h5TeVjQL8UMJW9gmKY1x0zcqKIRTZQDAQ/mobilebasic
Thanks as always for your hard work, and all the best, Christian.
I have to disagree
I suggest that The Deficit Myth does too
Of course it is true that tax can reduce private sector demand
To say that tax causes unemployment as a consequence is absurd. It no more does so than a shortage of sounding does. I suggest Warren is wrong in his framing in that case: the language is sloppy, to be kind.
What I suggest MMT actually says is that tax is used as part of fiscal policy. Of course it filled that overtaxing can cause unemployment, that’s indisputable, but don’t confuse the example with the policy.
As for ZIRP, I agree. But without borrowing can you tell me how the policy could be delivered? Again, you are confusing issues. Zero interest does not mean no borrowing, it means borrowing is used to create a zero interest environment
MMT needs to get real. The great merit of The Deficit Myth is it does that by leaving the absurdities of people like Bill Mitchell – who lives in an unreal bubble – behind and brings it into the real world
That is what I am doing to.
If MMT is yo succeed I suggest all now need to do that
Best
Richard
Richard: A few items.
Sometimes folks talk past each other. When Warren talks about taxation creating unemployment, some folks think he means that it’s a result of taxation lowering aggregate demand for goods and services and workers getting laid off. (This of course wouldn’t make any sense since in most cases the sovereign is running a fiscal deficit in any event and thus spending the monies right back into the economy, presumable increasing demand back to where it was.) What he’s talking about is creating demand for the currency in the first place in order to hire folks for public purpose. Presumably these folks were already fully employed in an economy where supply/demand curves already maintained full employment and perhaps the currency was already the money of choice or maybe not. They could have been using sea shells or bartering or whatever. The taxation converts potentially already-employed folks into now unemployed folks desperate for the currency or they might lose their heads.
RE: ZIRP: Its delivered by zero rates on reserves and a policy of simply not issuing additional securities. The sovereign, with the aid of its trusty Central Bank creates and spends money. This drives interest rates to zero. Taxation is used to control inflation. If for whatever reason, interest start to creep up, the Central Bank buys securities (private securities if necessary). This drives interest rates to zero again. Why would the sovereign need to borrow? What does keeping up the appearance of borrowing even mean?
RE: Inflation Explanation:
I would suggest: The Job Guarantee law has to include automatic across-the-board tax increases that kick in when certain monthly wage inflation target are hit. These can include:
a) Income Taxes,
b) Sales / VAT Taxes
c) Asset Value Taxes (or Wealth Taxes)
That’ll cool things off pronto. The important thing is that the taxes be inserted into the Job Guarantee law so they kick in automatically if monthly inflation exceeds a certain level for say 6 months in a row.
In addition: Inflation is too many dollars chasing too few goods and can come from different mechanisms. For example, it can come from:
1) an external shock in a commodity that an economy needs to import – such as the oil embargo in the 1970s, causing a price increase in gasoline -> fertilizer -> food -> and labor through union cost of living contracts.
2) excessive borrowing in an external currency or commodity and then a rise in that commodity and falling into a spiral as the country prints in order to make ever increasing payments (Weimer Republic making payments in gold, Venezuela, USSR, Argentina borrowing in dollars),
3) a catastrophic supply shock in the production of a key output/export product coupled with foreign currency debt or import requirements (Weimer Republic – > France took over their steel making capacity when they fell behind in gold payments; Zimbabwe –>Mugabe expropriated farms from experienced white farmers and giving it to his inexperienced urban cronies resulting in a 40% drop in grain production, swinging the country from grain exporting to grain importing.
– Its actually kind of hard to induce inflation (see: Japan in last 20 years and US in last 8 years)
What’s your beef with Bill Mitchell?
Noted
But the tax law cannot work as your suggest except re VAT, and that’s regressive and so unsuitable for use. I will be publishing more on this soon. Another tax is needed.
The claim that tax creates unemployment remains unhelpful: much better to say what is meant.
And your version of ZIRP denies the reality of saving.
My beef with Bill Mitchell? He’s aggressive and gratuitously offensive and that does not help MMT. That plus a lack of pragmatism. There are real world constraints to deal with. There is no point criticising absurdly idealistic economic models with absurd idealism. It looks like you are falling into that trap. Hence my suggestion that we need pragmatic MMT
Great post
I would dearly love for Rishi Sunak answer the following question without lying / waffle / bullshit.
If MMT is incorrect and say for example, taxation is required for government spending, please explain how
1) the government been able to fund Government stimulus since March 2020 without
a) an immediate increase in taxation rates / tax take and
b) how we have not experienced a significant increase in inflation (at least pre Brexit tariff /supply shock inflation)?
Perhaps you might ask next tine you are on radio/TV & see if you get a straight answer.
I fear the simple answer may be the best – you can’t.
Or at least I haven’t heard a decent explanation. Look at the f***ing evidence.
The reason the government won’t acknowledge it as true is that it cant.
If they do, the last 30 years of economic policy (i. E. can’t afford it) espoused by the government was a) wrong and b) unnecessary. The “responsible” economic policy of the Tories is proven to be unnecessary, irresponsible, damaging and as all accountants know, ultimately more expensive (the later corrective action is taken, the greater the cost, and not just financial).
Ita an utterly depressing thought but my opinion is that you hit the key problem with the last 13 years with the following:
“A government has a social duty to be the borrower of last resort to its population and financial system”
[re fiscal / tax policy objectives]
“reinforcing the social contract that exists between a government and its electorate.”
1) The evidence of the last 13 years shows the government does not have any sense of any duty to maintain the social contract, or even protect its citizens/integrity. They don’t have any idea how or why they would do so.
Rather, it’s raison d’etre is simply, to remain in government – rather than, god forbid, try to improve the lives of current and future citizens.
It/they will literally do/say anything to achieve that, even if it is demonstrably wrong/false/damaging and at worst, likely to have increased mortality rates.
Through that lens, the lies and logical inconsistency around Brexit, government spending, austerity, NHS, [insert current hot potato here], etc. Make any sort of sense.
2) Perhaps this is why neoliberalism seems so “sticky” and the public/media is so wed to the idea that government spending is “bad”, most be paid for (rather than self – funding over time) and repeated election of Tory governments.
Its much harder for us to accept that as a country, a FPTP majority have repeatedly voted for policies that are unnecessary / damaging.
Even harder to realise that we voted in governments which, say, cause an estimated 50k – 130k of deaths through austerity plus >60k + covid-19 excess deaths (this year).
Easier to keep believing we are constrained by factors outside of our control, rather than accept the harsh reality and ultimately, our share of collective responsibility for the failures. We elect governments.
We need to and can do much, much better.
Sorry for the long, depressing ramble! Too much coffee this morning.
I’ve not had enough
Too much blogging…
Hi Richard. Whilst broadly in agreement with the points you mention, there is one area that I am really struggling to get my head round. In the past, when the ruling monarch largely had powers over expenditure, there was very little to stop them spending money on vanity projects (typically large palaces or pointless wars). The only blocker on this was the fact that they needed to fund the expenditure by taxing their subjects, mainly the rich nobility who had most of the money. Eventually the nobility got fed up with this arrangement and removed powers on expenditure from the monarch. In the world of MMT, what stops governments spending large amounts of money on similar vanity projects? If, for example, our government wanted to buy most of the world’s gold, what is to stop them printing money to achieve this objective? Using money in this way doesn’t appear to have an inflantionary impact as it is simply exchanging one asset for another. As such they don’t need to raise taxes to offset this inflation (nor do they need to raise taxes to fund the expenditure in the first place). Until I can get my head around this issue, I have a feeling that something is missing in the explanation of MMT.
The ballot box
Which is why I am committed to electoral reform
So if the only thing stopping governments spending money on vanity projects is the views of the populace on what is fair and reasonable, does not that extend to governments having to do likewise if the populace believe that governments should only spend what they can raise through taxes/borrowing? In other words if the general population believe that the goverment should balance the books, they are duty bound to do so (even though there may not be strong economic arguments for this). To not do so would break down the trust between citizens and the government – the same trust that gives money its value in the first place.
Trust does not give money its value
Tax does
And if a real choice was offered to people and they said they want to choose a balanced budget, high unemployment and crushed public services that would be a choice I’d have to respect
But I’d still fight to overturn it, showing that an alternative was possible
A couple points…
1) Not all monetary regimes are the same. MMT applies only to fully sovereign, non-convertible fiat currencies.
2) Governments can lie to themselves day and night about what is real and what is not. Just because the king thinks he has to tax his nobles to the point of revolt doesn’t mean that’s really what needs to happen to fund one’s government. We hear about bond vigilantes all the time, yet it is operational fact that only FED reserve balances can be used to buy bonds. Just look at this graph…
https://fred.stlouisfed.org/series/EXCSRESNS
Prior to 2009 quantitative easing excess balances (excess being what would be needed to fund treasury issues because all others are regulatoraly required) were basically $0, but yet the US Treasury has never had a problem of selling tens of millions in bonds on any given day. Why and how is this done? See next bullet…
3) It’s actually forgotten public record. Former FED Chair Mariner Eccles, probably the smartest central banker ever and father of the current FED architecture, said so to Congress already. See page 8 of the text (page 11 of the PDF) where Eccles starts… “Mr. ECCLES. Well, as I remember the discussion…”
https://fraser.stlouisfed.org/files/docs/historical/house/1947hr_directpurchgov.pdf
“Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the
interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.”
Thanks
Adam,
Thanks for that wonderful link on the debate between the Fed and the US committee on banking in 1947. Terrific stuff!
Made me chortle over an over. Here we see the great an the good of the day trying to get their heads around how the Fed created money ,despite the Head of the Fed sitting right in front of them and telling them as clear as he could what the Fed does when it creates money to buy US bonds. The number of times he is asked to explain in detail how he creates money is incredible, yet none of them actually seems to “get it”. It’s as if he was speaking a foreign language, they just cannot grasp that the Fed just creates money(reserves) out of thin air. Only the congressman, Wright Patman gets it because, as he says, he has been studying the issue for 25 years and was desperate to stop the Fed profiting from the issue of state backed money . I see him a pioneer of MMT!
I would add, no doubt his bill to stop that failed. You can feel the animosity to his views from his fellow committee members throughout.
https://mises.org/wire/review-stephanie-keltons-deficit-myth
Explains the many of the fallacies of MMT well, but there are many other critiques available – and many from the left before Murphy makes some statement about right wing economists.
I’ll also make a few points myself.
1. Money doesn’t only gain a value from the issuers ability to pay in that fiat currency. The availability of that money matters hugely, as does price stability of that currency. Keep printing more of it and people will be less and less reluctant to hold it or receive it as payment. Print too much and it can quickly become worthless, as has happened in the many cases of hyperinflation around the world.
2. This is simply not true. Governments hold reserve accounts at their central banks, but don’t spend past those reserves before raising the revenue to do so. This is in the form of taxes or debt. Central banks don’t (certainly not the FED, BoE or ECB) create money on demand for their respective governments.
3. Tax can indeed be used to control inflation – in theory. In practice it is not so simple. Tax does not have a linear relationship with inflation and it acts with a significant lag. In addition, it has political limitations: politicians won’t raise taxes as necessary as they will lose votes, and there are limits to the effectiveness of raising taxes as people will change their behavior.
MMT ignores all these points, and just tells us tax can be used to control inflation. Just not exactly how it would be done. This is an important detail which it does not have an answer for, so instead just ignores.
4. Governments can print money. This has always lead to economic disaster, literally every time it has been tried. I’m not sure why MMT would be advocating this.
MMT seems to believe that government spending has created all money and all value in the economy. This is demonstrably not true. Government only creates a small proportion of the money in an economy (approximately 3%), the rest is created through credit, which doesn’t not need government intervention. Nor is government the original source for all value created – the private sector came first, and would still be there should there be no government.
5. Apart from the error already pointed out regarding tax controlling inflation MMT moves on the claiming tax provides a currency with value. Again, this is simply not true. A fiat currencies value is primarily determined by the amount in circulation, the underlying asset and value added of the economy and price stability and even then only in relation to other assets.
MMT makes a fundamental mistake in that it thinks fiat money has some intrinsic value in and of itself. This is incorrect and leads MMT to claim that printing more money creates more value.
6. Government doesn’t spend first, as has been pointed out. As mentioned above, it taxes or raises debt to spend. Nor would there be government at all without the private, non-government sector.
Government decisions can’t always be paid for, as it relies on the value created in the private sector to do this. MMT would have people believe that any amount of additional spending could provide any amount of additional vale to the economy as long as there are the resources, normally meaning labour available to do it.
Resources have a cost, and by printing more money what you are in essence doing is diluting the value in currency terms of the existing resources. No new value is created simply by printing money.
7. On the face of it, this is true. A government could always print more money to pay off debt and never default.
Alas, along with most of MMT, this is a gross simplification. Governments can implicitly default in their own currencies, through the action of inflation. If you buy a government bond and real yields (interest rate minus inflation) is negative, then you are losing money every year – the government is effectively taxing you via inflation. If the inflation is high enough or the currency you hold loses it’s value in purchasing parity terms, then you could lose everything – what the government could repay you in the future might have the same number on it, but not the same value.
“And that’s it”
I would add a couple of points.
MMT does not have a workable theory of inflation. Certainly none that any MMT academic has bothered to explain in any detail, or even bother putting to paper. The essential claim is that there won’t be any until the economy is running at full capacity. Which in turn enables MMT to say that spending should be increased, essentially without limit until that point – which conveniently will never be reached.
This has two major implications. The first is that it ignores any consideration of inflation being linked to anything other than the capacity of the economy, which we know is false. It is common for economies to run below capacity, with high unemployment, yet still have high inflation – the 70s in the UK for one example. It also ignores external factors totally, which is another problem with MMT – it assumes as closed economy in it’s model, with no external pressures and no leakage.
Secondly, MMT totally ignores sectoral treatment of an economy. Inflation and growth don’t occur evenly across an economy. Certain areas or assets might be inflating whilst others deflate, likewise growth and it’s benefits. The problem this causes is that inflation in one sector can drive price levels in other sectors of an economy without those other sectors benefiting.
A very simple example: Government prints money using MMT to embark on a massive house building project. The construction industry benefits from the added investment, profit, and those involved with that sector benefit in kind through more jobs and higher wages, as supply for labour is increased. This causes inflation in the construction sector. Some adjacent sectors will see a portion of the benefit, as construction industry workers have more income to spend. Those not connected with the construction industry at all, especially those on fixed incomes like pensioners, don’t see any benefit from this extra spending, but still are exposed to rising prices, making them poorer.
MMT treats economies as single homogeneous blocks, which is a gross oversimplification. It makes no mention of how to deal with this problem.
Going back to the closed economy issue. MMT’s model only “works” (and I use the term loosely) in a closed economy. It ignores and cannot cope with external price pressures. For example, the UK being a net importer is exposed to import price pressures. If food or oil prices were to rise, this would have an effect on inflation regardless of the capacity of the UK economy. MMT simply ignores this.
MMT also ignores the fact that fiat currencies are freely convertible. You aren’t forced to hold your money in a particular currency all the time. MMT claims that you are forced to, to pay taxes, but again this is a gross oversimplification. You only need to hold that currency when you actually need to pay those taxes. If you were concerned about inflation or the government devaluing the currency by printing too much of it, you would hold the bare minimum for day to day use and the rest you would convert into something more likely to hold it’ s value in purchasing parity terms. For example, you could convert to another currency, buy assets (ideally inflation protected ones) and various other options. This behavior is always observed in countries where currency is or is likely to devalue. It also creates feedback doom loop as no-one wants to be left holding the currency, so the velocity of money increases further, which in and of itself increases inflation.
To finish. MMT doesn’t actually tell us anything new. It comes from a mix of Keynes, Chartalism and Lerner’s functional finance. What it does say looks lovely on the surface, essentially promising lots of new spending. lots of free things and lots of jobs, without anyone even having to pay for it.
Unfortunately, it is snake oil. MMT’s models, where they exist are gross oversimplifications. More often than not, they don’t exist in any meaningful sense – like inflation or how in practice taxes would be used to control it. MMT academics are incredibly evasive when questioned on these points – no doubt Richard Murphy will also be. MMT also makes some very fundamental mistakes in it’s basic formulation and understanding of how certain processes work.
You don’t create more value in an economy by creating more of an intrinsically valueless token.
This I suppose is why MMT has remained very much a niche economic theory, despite claims of the very few academics who support it. There has been a lot of criticism of MMT from both the right and the left, and MMT has done little to answer these concerns, typically preferring to ignore them. Till it can, I suspect it will remain a fringe theory favored by the hard left as it prescribes high spending with no real limit and no costs – a political sales pitch, not an academic one.
1. Trillions of QE around the world has not created inflation. Your claim is wrong.
2. That’s not what governments say. It’s not what central bankers say. So why do you say what is not true?
3. MMT does not ignore these points. I have an article out soon suggesting ways to address this. Practical issues are ours concern. I accept they need addressing. But I’[m glad you agree with the technical claim.
4. All money is created by government. Is mon et a disaster? That’s what you are saying. Why?
5. Explain how this value creation works. If it does, why does the amount of matter? There would be value independent of the number of units of currency based on your argument.
6. You’re simply wrong on this: you clearly known nothing about how Mooney works and that deposits never fund spend in either the public or private sectors.
7. Thanks for agreeing. Non one says it would do it. It’s just theory.
8. It’s quiet amusing that you say MMT has no theory of inflation and then discuss what it is.
9. MMT does not ignore inflation not linked to the capacity of the economy: it says that neither fiscal or monetary policy can control that. That’s quite different. But you ignore it. That’s a comprehensive theory of inflation.
10. MMT is the only theory of macro that takes the sectoral balances into account. You are wrong.
11. MMT never says over expand a sector to create inflation. It says the exact opposite. You are wrong.
12. Your claim that MMT treats the macroeconomy as homogenous is quite amusing. Have you ever read macro? I guess not. That’s the problem with neoclassical and noeKeynesian macro, not MMT. You are wrong.
13. MMT argues all currencies should float. You are wrong.
14. If MMT says nothing new why are you so worried about it, and why do you say it does not say things?
I’m sorry – bit the reality is that you have spouted a pile of nonsense here.
1. I don’t think you understand QE. QE doesn’t directly affect the money supply, as it swaps one asset (bonds) for another (cash). QE only aims to increase the money supply through the action of lower interest rates. You can see this in money supply aggregates.
MMT would directly increase the base money supply, which again we can see through money supply data QE does not do.
2. This is how it works in reality, so it is fair to say it. Central banks don’t just print money for governments to spend as they see fit.
3. The problem MMT faces is it is purely a technical claim. In theory taxes can be used to control inflation. As we both agree, MMT has yet to offer any indication how this would work in practice.
I would go further and add, that real world experience and studies of this has shown that increasing taxes has at best a limited impact and ability to control inflation.
4. This is simply incorrect. Only a small percentage of money is created by government. The bulk of it is formed by by credit creation in the private sector. Once again we can turn to the monetary aggregates to evidence this.
5. Simple example. Take all the gross value added in an economy and all assets. Compare them to the amount of currency in circulation. Now double the amount of that currency in circulation. Has the value of those assets and Labour doubled, or the value of the currency halved?
Now let’s take the same example, but increase the productivity of labour. More productivity means more asset creation which means more wealth. This is independent of the fiat currency, but for a fixed amount of that currency it’s value would increase.
The value of a fiat currency is only relative to something else. It holds no intrinsic value. If nobody was willing to accept that currency, it would indeed be valueless.
We use fiat currency as it is a very convenient measure of wealth and means of exchange, but if the amount in circulation keeps increasing, the relative value will decrease and people will be less and less willing to accept and hold that currency. The stability of a currency matters a great deal, and that means the money supply (the amount of that currency available) matters a great deal.
I could ask you the opposite question. Why do you think that a fiat currency has any intrinsic value?
6. I’m not sure what I have said which is wrong here, as your statement is a non-sequitur.
What is certainly true is that government cannot fund everything at will, without constraint, which is what MMT suggests. Resources are limited, and availability is not changed by printing more money.
7. You haven’t engaged with the point I made. Why does it matter how a government defaults to you, if it still defaults? If you lose your money through the government failing to repay it’s debts, or by inflating away it’s debt, the end point for the lender is still the same. If anything, the government that has defaulted explicitly is probably a better situation for the lender, as there will be a recovery value and claim on assets. Default through inflation leaves an unrecoverable loss.
8. Again, you are not engaging with my point. I said that MMT doesn’t have a WORKABLE theory of inflation. Not no theory. It uses a very basic Philips curve, and then only treating inflation as a step function, setting it to zero until full employment.
This is clearly wrong.
9. What you say here is quite untrue. MMT simply states that economic capacity, normally equated to full employment is the only driver of inflation. It ignores every other potential source of price pressure, and even on employment, as I have pointed out, it is massively simplified.
There is a huge amount of research on the drivers of inflation and how fiscal and especially monetary policy interacts and manages it.
MMT simply saying that all this research, based on real world evidence and experience, is somehow invalid.
Personally I wouldn’t call that a comprehensive theory.
10. You are talking about two different things here. You are talking about MMT using sectoral balances from accounting identities. Which is tautology, nothing more. I am talking about sectors within an economy. Different sectoral balances. I thought that would have been pretty obvious. MMT avoids dealing with economies as anything other than totally homogeneous blocks, which is in complete contradiction to the real world, and basically every other serious economic theory out there.
11. MMT doesn’t deal with sectors, so how could it say anything about them?
12. Please, do show me a paper where MMT doesn’t treat the economy as a single homogeneous entity, especially for the purposes of inflation modelling. I think your understanding of macro economics is pretty shallow if you see to think that other theories haven’t tried to deal with this problem.
13. I’m not sure what you are getting at here – I made no mention of fixed pegs or the like. Most currencies float. If you started dramatically increasing the supply of them, they tend to float down though.
14. I’m not worried about it. It is a fringe view held by very few economists. The things it says are either well known and well understood, or purely political statements not based in fact. It is a polemic, which appeals to people in the most base way, by claiming they can have a lot more things for free. That’s hardly a new thing.
I’m not sure where I have spouted nonsense. I have made my case clearly. You, on the other hand, have failed to engage on the key points I have made and for the most part just claimed I’m wrong without any real explanation.
It would be a good start if you could point us all to a practical, empirical theory and detailed description of how MMT deals with inflation, and the same for how MMT would use tax to control it. MMT has been around long enough that surely these exist? Without them, MMT really is just a series of grandiose claims.
1. The BoE says it does in crease the money supply.
2. This, in reality, is not how but works. Governments, including that of the UK, can and do run overdrafts with their central banks, for example.
3. MMT is answering this question.
4. All money is created by the government. Some of it is done under licence by commercial banks. They coiled not do it without government permission.
5. Tell me how labour productivity increases when markets refuse to engage in the process without government intervention. As has been the case throughout the period we have, in effect, measured labour productivity. And I have answered the question as to how a fiat currency gets value” it is based on the requirement that it be used to pay tax.
6. MMT does not say a government can act without constraint. Indeed, that’s its whole argument. You have never read it, have you? It breaks the madness of other economic thinking that does not appreciate this.
7. Are you saying it was wrong to deflate away the debt of WW2 and we all suffer as a result? Really? Why?
8. MMT rejects the Phillips curve and NAIRU. You really have not read it, have you?
9. MMT does not say that. It says there are external shocks that cannot be controlled. You have mot read MMT, have you?
10. MMT is micro. You’re talking micro. Oops: basic category error on your part.
11. See 10.
12. See 10.
13. So you agree, MMT says currencies should float. How do you think all curate cries float down at the same time?
14. MMT makes no claim about anything for free. It simply says money is a state created tool to be sued to increase incomes of real people.
15. Can you tell me where the inflation MMT needs to deal with is?
1. Yes, through the action of lower interest rates. Not directly through QE – there is no 1:1 increase in money supply.
2. Not in the manner you are suggesting These overdrafts are small, short term and financed through repo. They are always repaid with revenues from taxes or debt. The central banks are not just a piggy bank for governments to raid.
3. Is answering the question? Shouldn’t a theory as old, well-developed and certain as MMT already had a look at this rather important topic?
4. This is once again, simply not true. You do not need a license to extend most forms of credit. Or even be a bank. Biggest provider of credit in the US is General Motors, for example. No banking license. You only need a banking license to perform certain tasks.
5. You haven’t answered my points, and are off on a tangent. Value is created by productive activities. Not by printing more money. Government policy will affect gross value added, but the simple act of increasing the money supply doesn’t change anything.
Tax doesn’t give a fiat currency it’s value either. In a highly inflationary environment – forward looking- it would still lose value independent of taxes – which are backward looking. That is before you consider the point I made that you only have to hold the bare minimum of a currency, and only hold it for tax payments they day before that payment is made. If you are concerned about devaluation you would simply move any currency you have into a more stable one until the moment you actually have to pay taxes.
This is the problem with MMTs closed economy model – it can’t account for leakages like this and instead tries to ignore them or shut them down (I’ve seen capital controls talked about, for example).
6. MMT claims the only constraint is capacity in the economy. Which MMT usually describes in terms of unemployment. MMT also states that there will be no inflation up till full employment.
At which point, until you hit full employment, the government can essentially act without restraint. Which MMT advocates go on about, at length.
7. Again you aren’t actually answering my point. It seems to be a theme every time you get stuck. The point I made is that even under MMT, governments can default.
8. MMT uses a Phillips curve as it’s basic inflation model. Of course, I’m sure you can point me to a paper or reference on MMT which explains how MMT models inflation, if it doesn’t actually use a Phillips curve?
9. MMT deals with external price shocks by ignoring them or saying it can’t manage or control them. A sound policy for economic management then.
10. Sectoral balances within an economy is macro economics. Microeconomics is the study of the behvior of individuals within an economy and their interactions. Not sure how you can confuse the two.
I do note that you are avoiding the point I made with rhetoric though. Would help if your rhetoric was even close to being correct.
11. See 10.
12. Still waiting for that paper which shows MMT treating the economy as anything other than a single homogeneous unit.
13. You seem to be talking to yourself. I have made no mention of currencies floating or otherwise. What is your point?
14. Read what you said. State creates money. Incomes of real people increase. Simples.
Except of course, in the real world, it isn’t.
15. Are you really trying to base an argument on the idea that because there is no inflation now, there never will be again? A purely rhetorical argument, I might add.
One of MMT’s basic claims is that if the economy is not running at full capacity, there will be no inflation.
You are basically saying that because it is true at this given moment in time, it proves the theory.
However, you only need to look around the world at various countries, or through recent history to see that this claim is clearly false. As any scientist knows, a single example disproving a theory is enough. Though in this case we have no shortage of examples.
Are you seriously suggesting we follow an MMT policy description which relies on hoping inflation remains low, because MMT can’t predict or model it if it rises and doesn’t have an empirical plan (as you acknowledge in point 3. above) what to do about it when it does?
Let’s conclude you’re pout of your depth here and haven’t tread MMT, as is very apparent to those who have
I have no more time to waste on your nonsense
I have critiqued MMT, which I thought was the purpose of this post, having read the title.
The questions I have asked are relevant and important, assuming MMT is to be taken seriously. Even more so if you think it should be used to manage fiscal and monetary policy. One would have thought that if MMT was an accurate description of “how the world actually works” as some have claimed, it would actually…..have a description?
It turns out that you can’t answer some of the questions, won’t answer others and the answers you do give are pretty much entirely incorrect. That is when you are not just answering a question with rhetoric or another question.
Then at the end of it all, you resort to being obnoxious, making a claim that I’m out of my depth (pretty bold, given the obvious and basic mistakes you make here and in some of the other posts of yours I have read) and then shutting down debate.
So I take it this post is not a place for critics to take a pop at MMT?
MMT can’t (and isn’t) be taken seriously because it can’t or won’t answer some basic questions. I thought that by asking those questions again you would be able to set the record straight and provide some of the answers. The closest you got was admitting that MMT doesn’t actually have a model as to how tax would be used to control inflation.
I’m delighted if [eople can critique MMT
You didn’t
You haven’t read it
And the claims you made were not true of MMT
That’s not a critique
You won’t get posted again
“1. Money doesn’t only gain a value from the issuers ability to pay in that fiat currency …. …. Keep printing more of it and people will be less and less reluctant to hold it or receive it as payment. Print too much and it can quickly become worthless”.
Notice what you are doing here. Abstracting an idea from any context whatsoever, universalising it and then saying in effect, there are circumstances when it will come unstuck. Anybody could write that about anything. Apply the context, the circumstances that MMT describes and your case falls.
“3. Tax can indeed be used to control inflation — in theory.”
Here you then provide nuance, specific circumstances to make a case, but again attempting to suggest that MMT is an abstract universal that does not survive contextual scrutiny. You are not conducting rigorous analysis, but rather rhetoric and special pleading; and emoting to boot.
What you produce is a straw-man MMT, a distortion.
MMT is primarily a description. A description of the real world, our real world, our 21st century context.
Precisely
I recommend everyone read the Mises.org article. I am surprised it is being promoted here, because it does not appear to be very good. It uses rambling examples that keep shifting focus; ending with a debate about whether or not the US Treasury would spend more money than it had in its ‘checking account’; from a seminar with the Mises writer of the article, Robert P Murphy; Warren Mosler and John Carney (moderating) at Columbia. Murphy’s conclusion is “Maybe it would, maybe it wouldn’t”. Mosler and Carney both thought it would spend.
A critical part of the argument turns out not to rely on a refutation of MMT’s descriptive analysis of what happens, but rests on an appeal to Ludwig von Mises opinion that “inflationary finance” (notice the question-begging terminology) is “undemocratic”. Another argument leads to a resolution over how much “slack” in the economy is a factor in MMT, with this conclusion: “On this score, we simply have a disagreement about how the economy works, and in this dispute I think the Austrians are right while the MMTers are wrong.” The Boo-Hurrah theory of Money, straight from Ayer to Mises.
Well, at least that is all I squeezed out of it.
I read it a while ago
It was drivel, in my view
Who is this mysterious “commentator who claims that MMT is wrong about everything”?
I’m not sure which one Richard was referring to, but the long post here from Marc is a good example. He displays total ignorance of descriptive MMT, and of the policy prescriptions of those who understand MMT.
e.g. MMT academics have analysed open economies, have a much better understanding of inflation than neoclassicals do, and recognise the effects of external shocks. They also predicted that the configuration of the Eurozone would lead to a crisis, which it did.
Agreed. Thanks
George,
Care to point me in the direction of this analysis? Or a full description of MMTs inflation model? You seem to be acquainted with them, so am assuming you have some source you could share with me.
One of the problems with MMT is that the papers on it are purely descriptive. Nothing empirical. Policy is even easier to design if you simplify your model down to the point where you can pay for anything you want and ignore trade-offs and externalities.
The maybe we can discuss if MMT has better understanding of inflation (MMT uses a simplified neo-classical Phillips curve, so where MMT would get their greater understanding from?), or recognizes externalities (they don’t, specifically modelling MMT in a closed economy). Let’s also face it – it’s hardly a secret that the Eurozone and Euro would lead to a crisis either, and certainly not one MMT academics can claim as their own.
But if you have the papers, with empirical studies and work, then I’d be very keen to read them.
Start with The Deficit Myth
And I amused by the demand for empirical studies
Look how many Keynes referenced in his General Theory
I don’t know the background of the writer. But the Mises Institute from whence I think most of the counter MMT argument has been devised, is a Libertarian, Right Wing Austrian School Think Tank as far as I can ascertain. Therefore as it runs counter to their bias, they would be against MMT wouldn’t they?
Correct
I waded through Marc’s extensive missives with what is these days, a well exercised cynical eye.
It only served to confirm a long held belief: that it’s a funny world we live in, that can put the words “libertarian”, “right wing”, “Austrian School”, and then “think” into the same sentence……….
The invoking of “mises.org” is just the icing on the cake!
Was’nt it Snagglepuss who regularly cried “I hate those Mises to pieces!”?
🙂
Richard,
A poster called Rob posted that same link yesterday to that clueless Mises article allegedly rebutting Kelton but making a complete horlicks of it..
Could it be that Rob and Marc are on and the same troll : )
I don’t have evidence of that
I do check such things
Vince
I am not one for conspiracy theories but MMT is a challenge to the power wielded by banks and finance houses. It says, as I infer, democratically elected governments can act and not have to , for example, cut public services to get approval from the City or Wall Street. During the euro crisis, every move by the EU was greeted with ‘how will this play with the bond markets?’
The think tanks with obscured funding have every motivation to discredit MMT and they have enough ruthless people ( 55 Tufton Street?) who think nothing of lying and media manipulation.
What look like individuals could well be agents, voluntary or rewarded, of vested interests. They seek to create the impression that MMT is a fad of the few who can be ignored. I would be surprised if there is not some people being supported to do it.
Ian,
That may well be true I agree, but you’d think “they” could afford a to employ some people who have a better understanding of how money works. ; )
It’s good they can come here and learn though.
My mistake.
It was Mr Jinx.
Looks like Mervyn King has become an advocate of MMT.
https://www.theguardian.com/business/2020/oct/19/mervyn-king-says-covid-furlough-scheme-may-be-needed-throughout-2021
Keynesian, I think
I note Larry Elliott is doing his bit for the Tory Party again today:-
“A nagging concern for the Treasury is that the markets will have a change of heart and make it more expensive for the government to fund its deficit. For now, though, there is no sign of that happening.”
https://www.theguardian.com/business/live/2020/oct/21/uk-government-borrowing-record-inflation-september-eat-out-sunak-business-live#comments
Wide and varied views on MMT
Over the Summer I spoke with a retired Economist from Europe about MMT
His Reply “Japan has been doing it for years “
Keep up the Good Work, Richard
We have been doing it for a decade
I saw this quote recently from a well known economist about MMT:
Indeed, I’ve been struck by three things about the more fervent supporters of MMT.
First, they rarely have any academic or professional background in economics. Of course, this is not necessarily a bad thing. However, most people who have actually studied economics at university, or worked in a finance ministry or central bank, are likely to agree that the correct parts of MMT are nothing new and that the new parts are often wrong.
Second, MMTers are almost always on the political left, or extreme left, and strong believers in big government. Again, that is not necessarily a bad thing. But it is often impossible to escape the conclusion that they are looking for some intellectual backing for a predetermined agenda of heavy state intervention, high public spending and high taxes.
Third, many of the more cultish MMTers are convinced that they are right and that it is only a matter of time before everyone else recognises this. Anyone who disagrees with them must, therefore, have some ulterior motive in doing so, or is just plain stupid.
Now tell us who this well known economist, who no doubt had a very strong vested interest in maintaining the economic status quo that has rewarded him or her well, might be? Or is this just your right-wing prejudice that hates the idea that MMT might promote work on decent income talking? It would seem so…..
It beggars belief how so many MMT critics still can’t figure out how absurd their thinking is even in this current extremely severe crisis.
Here’s the BoE thinking about introducing negative interest rates in which you would be paying the government money to hold their gilts, the price of gold is zooming up, the banks are cautious about lending for fear of defaults and yet the MMT critics expect the private sector to bail itself out from the severe economic effects of this coronavirus crisis.
Cognitive dissonance doesn’t even begin to describe these MMT critics “zombification” of their brains is really the better word, and yes such a word exists!
Hi Richard,
Does the Cantillon Effect suggest that some of the money created through various QE programs has created price inflation in bond and equity markets?
Also, have I understood MMT correctly in that it prevents excessive inflation through taxation? It essentially prevents consumers from driving up prices by taxing them harder so that they cannot afford to buy things?
Remember QE is not really MMT. QE is intended to inflate asset prices and has. It worked in that sense. But it inflated inequality too, and I can’t condone it for that reason. It spillovers into debt cancellation, bit that does not compensate enough. But MMT would focus the spend on productive activity.
MMT argues tax can be used to control inflation at full employment. Inflation can happen at other times e.g. because of Brexit but no fiscal or monetary policy can stop that. And we have no inflation now for the reasons economic policy can control.
Many thanks – that’s helpful.
Is there is a concern that the price inflation in assets will not remain sequestered there but will instead eventually cause price inflation for consumers, as the inequality you’ve referred to enables the rich to eventually book profits and spend the money?
Or is their propensity to consume too low to have enough of an effect?
Possible….I agree
Larry Elliott says ““A nagging concern for the Treasury is that the markets will have a change of heart and make it more expensive for the government to fund its deficit.”
I presume he means that “the market” will drive up the interest rate. Doesnt the MPC of the BoE set the interst rate? Who is in charge here?
What is the MMT response to this?
I have to say that Larry overstates this issue because of QE and the control of rates the BoE because of the volume of debt it now controls
Further to the question Larry Elliott raises about possible future rises in interest rates , I would welcome it if you could expound at length in one of your blogs on the subject of “Who controls interest rates – the government or the markets?” and how this impinges on the sustainability of the national al debt. Mr Chote former head of the ONS is speaking in my city (Bristol) in November via Zoom, and I want to be able to confound him with some cunning questions on one of his speaking topics – “fiscal sustainability”.
To go back to the first one or two comments regarding the difficulty in explaining to people that MMT will not lead to Zimbabwe/Weimar/Greece/Venezuela. The newspaper comment sections in my national paper are full of “BUT HOW ARE WE GOING TO PAY FOR IT???? and if I add my comments explaining the MMT view they are immediately and vociferously denied by the examples of the above countries. It seems to make no difference to explain the differing circumstances of these countries. I guess generally the public in general (including) me have a poor understanding of economics but what little we do understand we cling to with great stubbornness! There needs to be a clear example of how this works. An interesting quote by the late Nobel Laureate Paul Samuelson in conversation with Randall Wray in 2010 called “Time to drop that old time religion” he says ” I think there is an element of truth in the view that the superstition that the budget must be balanced at all times is necessary…one of the functions of old fashioned religion was to scare people… in other words the need to balance the budget over some time period determined by the movements of celestial bodies or over the course of a business cycle is a myth, an old fashioned religion. But that superstition is necessary because if everyone realized that government is not actually constrained by the necessity of balanced budgets then it might spend out of control… it is difficult not to agree with him. But what if the religious belief in budget balance makes it impossible to spend on the scale to achieve the public purpose? (No one apparently questions the need/ability of the Gov to spend regardless of religiosity during wartime) Many might question that position that its OK to run deficits to destroy ones enemy but then surely it makes sense to run deficits to build a strong nation.
Thanks
Ah! Here is Graeber, ‘Debt’ (2011). I have truncated this excerpt, but it is fully developed on ‘Piomordial Debt’, Ch.3: “At first, …. this sense of debt was expressed not through the state but through religion”. Graeber is more presuasive and more perceptive here, than Weber.
Liz,
Yes I have had many similar experiences re trying to explain state money creation. Hyperinflation ,Zimbabwe and the Weimar Republic ALWAYS are mentioned almost within a minute……you can do a count down from 10 seconds in most cases before someone mentions it.
The answer is quite simple, in both cases money printing by the state came AFTER the currency collapsed. Monet printing was a symptom not a cause of monetary collapse ,something else more fundamental went wrong first. In Zimbabwe it was the destruction of the crucial agriculture base and in the Weimar case it was harsh Allied reparations and bank led speculation. This old article helps with the detail.
https://positivemoney.org/2015/12/hyperinflation-how-the-wrong-lessons-were-learned-from-weimar-and-zimbabwe-a-history-of-pqe-part-2-of-8/
As to examples of state money printing there are several successful ones. Recently in the UK we have seen use of the Ways and Means account and Funding for Lending and earlier during WWI we had the issue of the Bradbury pound…a Treasury issued noted.
In addition there was Abraham Lincoln’s administration issued of the “Greenback” dollar during the American civil war, these were Treasury notes that basically paid for the war effort.
https://positivemoney.org/2015/11/historical-examples-of-sovereign-money-creation/
There was also use of it by Nazi Germany to build the nations coffers up in the 1930’s but more positively in Canada 1944-75 as well as New Zealand and Japan during the 1930’s.
https://positivemoney.org/2016/04/canada-nz-a-history-of-qe-for-people-part-8/
A neat framing
There is much to unpack here for the layman to understand. Perhaps you could deal with this in detail in another blog or a video? Who controls the interest rate(s) and how? How does it affect the “sustainability” of the national debt and the deficit etc.
I will be recording on this today….
UPDATE
No I won’t – because Mark, who does the recording is ill…