MMT: Not So Modern

Wren-Lewis sums up the same sort of feelings I have about MMT. It seems to be describing what basically happens in the economy now. That would be fine if it then didn’t present itself as both revolutionary and anti-neoliberal. Neoliberal governments and economies have almost always ran deficits. The reason is for what MMTers say. That of sectoral balancing and providing a private sector surplus. But much of this surplus recreates the corporate economy, through R&D funding, soaking up of excess production and transport subsidisation. To describe this as anti-neoliberal is laughable. On money, they seem to recycle chartalism, frankly an ahistorical theory. Money certainly has institutional bases and characteristics, but to see that as purely state-based is like looking into a void. How does it explain town-based mutual credit-clearing systems, or early commodity exchange, or the fact large-scale monetary control through empires was usually disastrous while the monetary anarchy of the Middle Ages had some good success. Successful free banking systems in the 19th and 20th centuries also create holes that are never explained. If you like corporate expropriation of the economy, and baseless monetary theories which maintain support for the neoliberal status quo, then MMT is for you. (by the blog author)

by Simon Wren-Lewis

Followers of Modern Monetary Theory (MMT) often comment on my posts. I had never heard of MMT before I started this blog. From what I could gather from comments

  1. MMT seems obsessed with the accounting detail of government transactions
  2. This seemed to lead to ideas that I thought were standard bits of macroeconomics

Occasionally I would out of curiosity try and read something by MMT’s leading lights, which reinforced these impressions. For example MMTers seemed to think that they had discovered that a government with its own central bank need never default on its debt, but as far as I was concerned that was a standard and rather trivial implication of the government’s consolidated budget constraint. MMTers also seem curiously averse to equations.

Lately these MMT comments have been getting rather annoying, so I thought I would write all this down. Luckily I do not have to, as Thomas Palley has already done it for me (here and here). I have absolutely nothing to add, except to note that the upshot is not that what MMT says about this budget constraint is wrong, but that it was well known long before MMT and that it is hardly a complete macro theory.

Let me give an illustration of this last point. Some have commented that my recent discussion of fiscal rules ignores the fact that governments can finance investment, or anything else, by creating money. What would happen if the government started doing exactly that: stopped issuing debt and just created money. Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why. Of course in a recession with interest rates at their zero lower bound (ZLB) things are different, but MMT does not pretend to be just ZLB macro.

This raises the question of why MMT seems to have quite a following. Perhaps it is a reaction to mediamacro’s often implicit assumption that a country like the UK or US could go bust through a forced default. And, to be fair, some mainstream economists seem to want to keep that misapprehension alive, while others take the existence of independent central banks as a binding constraint. It is suggested too often that the government cannot create money in reaction to a funding crisis because this would cause inflation, even when we are at the ZLB, inflation is well below target and the central bank is creating huge amounts of money.

Finally a request. I am bound to get comments on this post disputing what I say, which is fine. But please, for the sake of those people who may still have an open mind, keep these short and to the point. If you accept that a government’s deficit must equal new borrowing plus the creation of new (base) money, there is no need to go into the accounting or transaction details therein.

2 thoughts on “MMT: Not So Modern

  1. “Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why.”

    After reading this, one has to ask which is the lie – is it a lie that you have familiarized yourself with what MMT advocates have to say, or have you actually done so and are deliberately misrepresenting it? Because nothing could be farther from the truth than to claim MMT’ers “ignore” the inflationary risks of spending beyond full employment. Indeed, it is hard to find an MMT article, blog, or publication in which the inflationary nature of spending beyond the constraint of full employment is not explicitly discussed.

    I think we should zero in on the “assumption” that you so blithely dropped before skipping merrily on your way: “Let’s ASSUME that real output is at its ‘full employment’ level”. Why would anyone assume that? Anyone can simply google “capacity utilization” and see quite quickly that most estimates put the US economic production at 75-80% of full capacity (and the general trend is downward). Thus, it seems like a particularly egregious example of hand-waving to just “assume” that real output is at full employment level, in utter contradiction of fact.

    The US GDP is around $18 trillion. That leaves about $4.5-6 trillion of unused capacity. But let’s just “assume” that excess capacity out of existence, shall we? Because it’s trivial and unimportant. And it’s silly of MMT advocates to point to that excess capacity as domestic policy space that can be tapped by spending without resorting to “theft by taxation”.

    Your central assumption – that we should think of the economy as if it is already at “full production” and reject out of hand any viewpoint that suggests we can tap unused capacity – is the very reason that MMT is an important perspective that sheds light where conventional approaches only obfuscate. That there is a sound economic basis for reduced taxation should be embraced – not resisted – by libertarians.


    • One, you seem to be assuming that I wrote the entire article, which I haven’t. It was written by Simon Wren-Lewis, and the original is provided via the link. I’ve written the addendum that is at the top of the page.

      Two, on your point of the author making an assumption about full employment and utilisation of full capacity, I’d agree that its a fallacious error relative to what some MMTers say. However, I’ve encountered debates with others where its suggested that going beyond the ZLB is also feasible, which then ignores the tendencies of inflation. The main point of this of article however is to simply show that the major areas of MMT that are seen as somehow radical are not so, and in fact much of it is excepted as relatively well known in economics. This has been Palley’s major criticism of MMT. Also, Murphy has some interesting criticisms of the basic assumptions of MMT.

      Again, my main critique of MMT is its own assumptive radicalism, which is frankly mendacious outside of the parameters that MMT sets itself. Also, on your last point of a seeming justification for tax cuts through MMT, that works both ways. Let’s not simply assume a libertarian connection with MMT because of a simplistic presumption.


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