Modern Monetary Theory (MMT) seems to provoke a visceral reaction amongst the ‘great and the good’ such as Rogoff, Krugman, and Summers. However, when reading their criticism I am often left with the impression that they haven’t actually bothered reading anything on the subject of their critique. Rather, they seem to prefer to knock down straw men based on massively caricatured paraphrasing, and by using name-calling and scary (but empty) stories to make their case. These are not the actions of people interested in open and honest debate, but are more reminiscent of the actions of ‘mind guards’ in defense of groupthink. In my experience, MMT provides a much more accurate and insightful framework for understanding the economy than the precepts of neoclassical economics.
GIVEN THE OUTPOURING OF ARTICLES (NOT TO MENTION TWEETS, ETC.) IN THE LAST FEW WEEKS YOU WOULD BE HARDPRESSED NOT TO HAVE HEARD THE TERM MODERN MONETARY THEORY (MMT), OFTEN ACCOMPANIED BY WORDS LIKE MADNESS, NONSENSE, MESS, GARBAGE, AND EVEN VOODOO. Such is the visceral reaction that MMT seems to produce amongst the ‘mind guards’ of standard economics.
As I have noted before, I was fortunate enough to have gone to university a long time ago when a pluralist approach to economics was still the norm, before neoclassical hegemony really took grip. As such, I am used to exploring differing schools of economics, but this tradition is largely extinct today. Instead economics seems to be taught as if it were a ‘hard’ science.
Ultimately I have come to judge economic theories by their usefulness at framing and explaining the world, not their mathematical elegance. For me an economic approach must help me understand the world, and provide me with some useful insights (preferably about my day job – investing). On those measures let me assure you that MMT thrashes neoclassical economics, hands down
Many of the negative articles I’ve read about MMT use the tried and tested method of setting up a straw man purely for the purposes of knocking him down. So, to avoid confusion, I will lay out a simple and straightforward description of what MMT is, or at least what I believe the most important elements of MMT are.
1. Money is a creature of the state. Money is effectively an IOU. Anyone can issue money; the trouble is getting it accepted. The ability to impose taxes (or other obligations) makes a country’s ‘money’ valuable.
2. Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating currency can be thought of as being monetarily sovereign. This means it cannot be forced to default on its debt (i.e. the U.S., Japan, and the UK, but not the Eurozone or most emerging markets).
3. An operational description of the monetary system is critical. Understanding that loans create deposits (which in turn create reserves, aka endogenous money) is a much more realistic starting point than the mainstream view that deposits create loans. For example, knowing that government deficit spending creates reserves and drives down interest rates is vital to understanding Japan’s bond market.
4. Functional finance, not sound finance.1 Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation (rather than, say, achieving a balanced budget position). A Job Guarantee scheme is an example of a useful policy option to effect this outcome (acting like a buffer stock in a commodity market) in the eyes of MMT.
5. Limits are real resource and ecological limits. If any sector of the economy pushes it beyond the limits of capacity, then inflation will result. If a government spends too much or taxes too little, it can create inflation, but there is nothing unique about the government sector in this regard. These are the limits that matter – people, machines, factories – not ‘financing’ constraints.
6. Private debt matters. Even in a monetarily sovereign state, private debt matters. The private sector cannot print money to repay its debts. As such, it has the potential to create a systemic vulnerability. Think Minsky’s financial instability hypothesis: stability begets instability.
7. Macro accounting (Godley style) keeps us honest. One sector’s debt is another’s asset. So, the government’s debt is the private sector’s asset. Understanding how one sector relates to another using a sectoral balance framework is very helpful, as is understanding the Kalecki profits equation, or the way reserves work in a financial system. Accounting isn’t glamourous and identities shouldn’t be taken as behaviours, but they can help us spot unsustainable situations.