I was sent a link to an article by Michael U. Krause, Thomas A. Lubik and Karl Rhodes for the US Richmond Federal Reserve Bank which is one of the twelve regional federal reserve banks that make up the US Federal Reserve. In it the authors said:
Promoters of modern monetary theory (MMT) — including a growing number of pundits and policymakers — are toying with the idea that "deficits don't matter." They are tempted to believe that a government can merge fiscal and monetary policy and simply print currency to pay for its expenditures indefinitely without economic costs or constraints. This core tenet of MMT, which has permeated the public debate, worries economists of all stripes — not just "mainstream" economists, but also traditional Keynesians and heterodox economists.1
They added:
A key aspect of MMT is that it seems to present a cost-free solution to many economic and social problems. While a critique of current monetary and fiscal policy approaches may certainly be warranted, proponents of MMT go one step further. As we argue in this brief, implementing MMT would reverse the role of policy institutions and would fundamentally change the nature of U.S. currency both domestically and internationally. Arguably, implementing MMT policy prescriptions would therefore require a fundamental overhaul of the relationship between the individual and the state, and MMT's outcomes are potentially catastrophic. Nonetheless, some aspects of MMT are perfectly consistent with the dominant monetary paradigm in economics and are, in fact, the subject of much ongoing macroeconomic research and debate. But MMT differs greatly in its policy prescriptions.
After that the said:
The idea that a government, as the monopoly issuer of currency, can always print money to cover budget deficits and fund government spending may appear reasonable. But it flies in the face of mainstream economics and historical experience. We argue that its recent prominence is a product of the economic context of the past 25 years, where both interest rates and inflation were low. But in the end, MMT provides only an untested set of statements about the consequences of monetary policy.
The old maxim that when in a hole a person should stop digging clearly passed these authors by. There claims are, to be polite, wrong, but are typical of many made by opponents of MMT.
First of all, MMT need have no policy prescription attached to it. What it describes is the way that money operates in a fiat money economy. That is it.
What it most definitely adds is that there is a limit to the extent to which money may be created. That limit is reached at full employment. The idea that MMT says there may be money creation without limit is so grossly wrong it is absurd: what it emphatically says is the exact opposite. It recognises the real physical limits of the economy. The authors do not even hint of their awareness of that. It makes one wonder how much they have actually read about MMT. They only reference one MMT article by an MMT author, which is by Stephanie Kelton, but rather more by opponents.
What they have emphatically also not realised, or deliberately ignore, is that MMT has a very strong focus on inflation control.
They also, therefore, ign0re the role of tax in MMT, even though they read an edition of the Real World Economic Review where I had an article that discussed the role of tax within MMT.
And despite all their claims as to the threat to the US way of life that they say MMT represents they do not spell this out, or explain that all it enables is a New Deal in a fiat currency era.
The fact is that these authors have written about a straw man MMT that is wholly unrelated to what MMT says. This is normal, but it still is too readily believed by people like the Labour Party, who'd rather deal with false versions of MMT than real ones.
At some time when these combined neoliberal opponents of MMT realise that their prescriptions don't work they will have to turn to what might. Then MMT will have its day.
And how do I know they are neoliberal? The authors say this:
When inflation is low and inflation expectations are well-anchored by central bank credibility, then the central bank may have more elbow room for expansionary monetary policy. Arguably, none of this analysis is controversial or inconsistent with mainstream macroeconomic thinking or MMT. What distinguishes the latter from the former is an apparent disregard, at least in the public debate, for obvious constraints on government spending.
In other words, they are wedded to the idea that democracy should not be in control of economic policy and that a coterie of central bankers, obsessed with oppressive mechanisms of control for consumer but not asset price inflation should run the economy. That's neoliberal to the core, and they'll make up whatever is necessary to defend it.
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First of all, MMT need have no policy prescription attached to it. What it describes is the way that money operates in a fiat money economy. That is it.
I read that back carefully and it’s a rebuttal of something that was not claimed.
The Richmond Fed’s criticism is against the *proponents* of MMT.
Further on though I don’t see how you reconcile the claim that MMT is a description of reality, and then claim that it hasn’t been tried – it will ‘have its day’. Again, I think you are not noting that criticising the proponents of MMT, and criticising MMT are not identical.
I hope you get an invitation to go to the USA and debate with them.
Can you give me an example of a “promoter of MMT” who believes that “a government can … simply print currency to pay for its expenditures indefinitely without economic costs or constraints”.
The first part is patently true – clearly a government with a fiat currency can continue to “print money” as long as it likes – although these days no printing press is required, just some electrons in a computer.
But just as patently the second part isn’t. There are consequences of action, or of inaction. Does anyone say there are not?
And then the decision between the two courses – action or inaction – is a political one.
It’s interesting how the main criticisms of MMT are always things are addressed within the first few pages of any basic MMT literature. I do however have a question about the relation ship between citizen and state… Even though we don’t need taxes to pay for public services directly, is it a useful myth? Does the idea that peoples money pay for public services, even if it doesn’t need to, create a degree of accountability between citizen and state? I suspect it could be much harder to justify taxation on the basis of it controlling inflation that people would accept and could therefore become politically difficult to implement new taxes. I’m playing devil’s advocate to an extent here, as I think that changing our approaches to deficits is essential for tackling today’s challenges, but id be keen to get your thoughts on the political and accountability based implications for MMT?
I hope my post this morning answers your questions
They are obviously rattled. They do not spell out exactly what “catastrophes” await the use of MMT in economic policy. Clearly, mainstream economics did not anticipate or analyse the crash of 2007/8 and won’t admit that QE came to the rescue (of the banks) which an anti-MMT thinker would have said would have been a disaster.
Oh ‘ mainstream economics’?
Oh I see – if it’s ‘mainstream’ there’s nothing wrong with it then, as if its ‘mainstream’ it can’t possible be wrong.
Hmmm – OK, perhaps we need to look at the history of some ‘mainstream’ ideas shall we?
Nazism in Germany – that was pretty mainstream wasn’t it? And look what happened there.
Soviet-style communism – hmmm – nice job! Need I say more?
BREXIT – that was ‘mainstream’ wasn’t it? Oops!
And what about the wisdom of crowds as put forth by market fundamentalists – all that brain power analysing and acting (what was it?) ‘in their own rational interests’ which resulted in 2008 and all that. Hmmm…………
Yeah – ‘mainstream’. You can’t beat it can you? Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz…………………………………………….
Tossers.
My favourite mainstream theory, which turned out to be nonsense, is the phlogiston theory of combustion.
There will soon be more literature misrepresenting MMT than MMT literature.
🙂
What you do NOT say is that the increasing ‘threat’ of MMT is being met with an orchestrated campaign of lies and distortions. This is particularly effective where economic literacy is as low as places like the Labour Party. There are no misunderstandings here. ‘They’ know exactly what ‘they’ are doing. I am confident you understand this better than I, but I still think it needs spelling out. This is also a propaganda war, as well as an intellectual discussion, which is the inevitable result of any theory or debate that threatens the hegemony of the elite to present economics as a black art reserved for specialists who understand the complexities of controlling the “forces of nature” that, like the weather, control our destinies. MMT is an enemy on a level with Marxism and, in this sense, for much the same reasons. Bolsheviks ate babies and it won’t be long before MMTers will be doing the same!
When “proper” economists’ criticism of MMT is based on false assumptions, you wonder how much else of their thinking is based on false assumptions.
I have one particular worry. In order to buy goods and services from other countries, you have to sell goods and services of equivalent value. Brexit has made it harder for the UK to export and the Government’s short term response is to make it easier to import. Could this just possibly lead to inflation? When it does, will it be diagnosed as “printing too much money”? Will it be treated by the conventional remedy of tightening the screw of austerity?
This government will like about it
But again they may not, because they created the money and still are
And if the phenomenon is peculiar to the UK and not seen in other countries that did QE we will have the control to prove that money creation was not the cause and political factors were
O wad some Pow’r the giftie gie us
To see oursels as ithers see us!
It is unfortunate that Michael U. Krause, Thomas A. Lubik and Karl Rhodes have not read more Burns. That said, staying silent leaves people speculating, opening your mouth (or picking up the pen (as in this case) ) confirms what one suspected. Or quoting from a cowboy film “man’s gotta know his limitations” it is sad that Krause et al do not know theirs – or maybe they were paid to write what they did – thus confirming their membership of the world’s oldest “profession”.
Sorry but you are not quoting a cowboy but Clint Eastwood as ‘Dirty’ Harry Callahan.
Excellent counter sir. They are obviously circling their wagons by their ‘strawman’ – pardon the mixed metaphors.
They don’t mention that more than a decade of QE and recent Covid splurge has not only seen the most robust rebuttal to a obvious otherwise Recession, but hasn’t devalued currency in exchange rates never mind runaway (or any inflation). There is a move by cartel to seed inflation so they have an excuse to ‘control’ it with interest rate rises.
A bit like firemen starting fires to justify their continued income stream. (Another metaphor that I just made up).
There is no hope unless grassroots politics gets the message to the man, woman and child in the street and their grandparents to finally climb out of Maggies handbag and start to see the light – no matter how painful it is to realise they have been living in a cave these last decades. (sorry another one).
Seeing the left right and centre stop their cartoon wrestling each other to collectively aim their fire at something that threatens their cosy vaudeville, bread and circus act – you know you are over their cushy target , keep firing!
[…] Cross-posted from Tax Research UK […]
Opponents of money reform and protectors of the status quo always have to use fearmongering terms like catastrophic and indefinitely, not to mention endless and infinite and inflationary, to protect their position, while ignoring the “catastrophic” results of the present debt-soaked situation.
A laughable misrepresentation of MMT or (as the first comment whined) MMT proponents. I know these guys are talking for power, but when your arguments are so transparently idiotic how long can you keep your job?
Ah!
But that’s the point.
Their job IS to obfuscate, spread doubt, create confusion and shatter commitment.
That is what agnotology is all about.
It pays well I understand.
As a non-economist, what is striking about the establishment arguments is that they never address the reasons for their position. They are restricted to attacking the case for MMT. It seems that they have no logical or moral case for the present stated (and it seems to consist more of political necessity and rhetoric than actual practice) establishment policies. As others have noted, the ant-MMT tactics are based on a strawman fallacy, arguing against their own misrepresentation and not the actual words and ideas used.
Ms Kelton’s talks have been absolutely clear that the duty of the currency issuers is to avoid over-inflation, which is ruinous to those that do useful work, but manna from heaven to those that hoard capital. Detractors are wont to cite the horrors of hyperinflation, but silent on the failure of governments to curb it. She made it obvious that the deficit problem for the masses is the apportionment of the new cash to the wealth aggregators and the interest debt to the wealth creators. (The only real source of the wealth that currency represents is useful work, the rest is just skimming under the guise of reallocation.) But that instead of QE, which is handouts to the wealthy under the cover of the discredited “trickle down” (or pissing on the poor) effect (affectation).
If only Karl had been as lucid as Stephanie, we might be living in a happier (for the multitude, if not the few) world by now.
What people forget or most don’t even know, is that when private banks make loans, they don’t first enquire whether inflation is getting out of control, or that the economy can’t sustain it, the only criteria they are concerned about is, whether the borrower can repay the loan.
So if we are content to accept that, what is their argument against government following the same principle?
That of course doesn’t mean governments should, but does prove they either don’t know how the banks issue debt, or they just accept that the banking system can do whatever it likes whenever it likes.
Interestingly, and I am not suggesting we should ignore inflation, but even when we observe Zimbabwe’s inflation rate and compare its growth rates, perhaps high inflation has also some benefits.
Inflation:
https://tradingeconomics.com/zimbabwe/inflation-cpi
Growth:
https://tradingeconomics.com/zimbabwe/gdp-growth-annual