Don’t blame me. Blame Noah Smith who asked me to write more about MMT. I don’t know much about MMT, but I am going to write about it anyway.
First, there seems to be an extremely important disagreement between MMTers. There are definitely some that argue that MMT implies the US Federal Government can (and should) spend more without taxing more.
In contast Stephanie Kelton who seems to be a rather prominent MMTer clearly asserts that a major increase in Federal Government spending should be accompanied by increased taxes here
“MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.”
Now she might consider 4% to be higher than the current US non accelerating inflation rate of unemployment, but I don’t think she thinks it is much higher. Basically, her position is that the current amount of spending is about right. Low unemployment and stable inflation. As far as I know, MMTer’s accept that as a sign of good macro policy. So they should consider a big increase in spending inconsistent with MMT.
I think I understand what is happening here. There was a decade of high unemployment. People advocated policy based (at least in part) on the need for stimulus. Now the US has low unemployment. Serious policy analysts change their proposals given changing conditions. Many other people stick to a proposal when it makes no sense. I don’t want to be rude but consider the W Bush tax cuts which were proposed because the economy was booming, there was a surplus, and then justified as an anti-recession measure. They claimed that the same policy was perfect to solve different problems. He started with a decision to cut taxes on the upper tail (his words) and then looked for justification. Spend till we reach full employment, no spend a lot more on say a green new deal now that we have reached full employment may be “leftist,” but it has nothing to do with any economic theory (because the two statements are contradictory).
I think it is very very slightly unfortunate that MMT has been equated with “deficits are never a problem”. MMTers might say this from time to time, but they definitely also say that deficits can be a problem (when inflation is accelerating).
Given what I wrote above, the implication of MMT I have noted so far is that one should not impose austerity during a recession. Sadly, policymakers disagree. But conventional new Keynesians and conventional Paleo Keynesians agree. There is no daylight between MMTers and conventional Keynesians on what fiscal policy should have been in the recent past and should be now (although there is a huge range of views among MMTers — I mean differering by hundreds of billions a year).
OK what else. MMTers seem to argue that monetary policy is ineffective even when the safe nominal interest rate is positive. I think this is nuts. I think the evidence that it matters is overwhelming. US data from January 1 1980 throught December 31 1982 are enough to prove them wrong.
One of them wrote that monetary policy works by making people borrow. Notice that it is just assumed that macro policy is stimulus. The possibility that an economy might overheat and the policy aim to reduce demand has not come to the mind of the person whom I am quoting (whose name doesn’t come to my mind). Assuming that macro policy must or should always aim to stimulate demand is an embarrassing mental slip.
MMTers note that deficits can be monetized. They note that this implies that countries which borrow in their own currency are not anywhere close to risking default. I agree (the anywhere close is because I think a US debt of $ 1 quintillion in the form of 1 day notes would cause default — I am very reluctant to use the word “impossible”). Here again the position is completely conventional. Not only Keynesians but also Austerians think this. It is just that to Austerians fiscal dominance of monetary policy is a nightmare. I don’t think any macroeconomist thinks it is impossible.
So far we have conventional views and claims about monetary policy which might be accepted by fresh water fanatics but which are inconsistent with the historical evidence.
I think there is a lot of insisting on using words and phrases with unusual definitions. To most macroeconomics “deficit spending” means bond financed deficit spending. Monetized deficits are described as bond financed deficit spending combined with open market operations. In MMT deficit spending means monetized deficit spending and bond financed deficit spending is described as monetized deficit spending combined with bond auctions.
This is a distinction without a difference. It is purely semantic dispute about the definition of deficit spending. The disagreement does not imply different forecasts about observables. I think the fact that MMTers consider this a vitally important distinction implies that they won’t be able to make a useful contribution to the discussion.
Also I read things about the purpose of a bond auction and the natural gravitational effect of deficit spending. I think these are not meaningful statements in social science. I think there is no way to test if they are true. I think there is no way to get testable hypotheses using this kind of reasoning (I use the term “reasoning” in the broad sense of something that someone seems to think has something to do with useful thought).
I guess there is also a discussion of what comes first the bond sales or the government spending. Here I think I recall the word “first” but I know it isn’t about which happened at an earlier time (bond sales happen every week, government spending every minute). It isn’t a statement about causation either. I don’t think it is a meaninful statement.
So I see conventional views, confusing jargon, and meaningless distinctions. Also extreme rudeness. I don’t think that this is (or should be) typical academic debate
In other words the MMT crowd is all over the map lost in their own word salad. Sounds about right!
Its nothing more than mumble. A real leftist doesn’t believe in usury or “debt” anyway. That is why, as I joked about the unabomber, he was so old school “leftist” people had forgotten what they really were(despite his primitive outlook).
Debt is the bourgeois way, the only way. Look at debt expansion that started in the middle of 2016 and crested in the 3rd quarter of 2018…………….Growth!!!!!
Debt is how the system runs.
The essence of the MMT argument is that money is spent into existence, and what that money is spent on comprises the political argument.
Currently, and for the last 75 years or so, what has been possible are the projects that further the interests of the MIC, and the investor class.
You could say that American politics consists of the arguments surrounding what conditions our government spends into being, and why.
The reason MMT is a current topic is that it’s the natural outcome of large portions of the populace finally asking why it is that any amount of funding can be found for bombing dark skinned people into the stone age, while seemingly, nothing can be done about rotting infrastructure and the declining quality of life for average Americans.
We’re approaching $6 trillion dollars spent on war since 9/11, and we have nothing to show for that all that money that was simply imagined into existence by a government that doesn’t find it possible to spend on improving the lives of its people.
MMT is the observation that our economy has become a trough that’s always over flowing when the rich and powerful ask, but that We the People are not allowed to approach under any circumstances.
Umm, in no way, shape or form does MMT have anything at all to do with the spending choices of the government.
So do you think that there were a lot of questions asked about where we were going to get the $6 trillion we’ve spent bombing the ME?
I remember Cheney saying Iraq’s oil was going to pay for it?
That decision was part of a serious discussion?
No, that money was, and is being spent into existence because it’s the will of powerful interests. The same powerful interests who decide you and I have no input in the decision.
I hope all is well with you. It has been a bit. By the way, EMichael is a pretty good guy to talk to at AB.
All is well with me, I hope the same for you.
I don’t know where you stand on this topic, but it’s clear to me that congress critters have no trouble spending as much of the money we don’t have to make working class lives more secure, to make their owners richer.
For instance, the technique used to create money for war, or to save the banks works at light speed, while creating the money to pay back funds ‘borrowed’ from SS moves at a snails pace if at all.
I prefer to face the truth, that it is not that we can’t afford a better life for our people, we can, but that option is closed to us because it doesn’t make rich people richer.
Many smart, serious people are evidently so in love with the Golden Calf that they’ll die before questioning the fairy tale that underpins socialism for the rich and austerity for We the People.
So I’ll keep asking; were there as many questions asked about where we were going to get the $6 trillion we’ve spent oon never-ending war, as there are about where we’re going to get the money to pay for Medicare for All?
All I am talking about is that MMT has no relation to what Congress spends money on. Not fighting against your thoughts on spending, just stating that MMT is simply monetary policy.
Yes, exactly, an thank you.
MMT is simply a clear explanation of the secret-hiding-in-plain-sight that is our monetary policy.
The folks who profit from our ability to spend as much as we want on anything we want, wish to keep that fact a secret.
Can someone explain how to cool an overheated economy following the MMT paradigm? Every time I hear someone advocating an MMT position it’s always assumed that the economy is operating below the point at which inflation starts to accelerate. Granted, accelerating inflation isn’t an immediate concern, but it could happen in the future and it has happened in the past. I just don’t understand the mechanics of how an MMTer would cool down the economy.
My sense is that today’s fascination with MMT has more to do with trying to justify a painless way to implement Green New Deal policies. I support a lot of the Green New Deal objectives, but I certainly don’t think those policies will be painless or politically popular. In other words, should we think of the current interest in MMT as a kind of noble lie that’s needed to gather political support for GND initiatives?
Consider the situation with commodity speculation fueled by ZIRP for the last decade or so, why is it that the impact of giving Wall $treet free money is never questioned?
The cost of the endless war includes massive profits going into the pockets of people cheering what could be considered ‘inflation’ of the cost of defense.
Inflation fear mongering is a boogey-man rolled out to stop what is actually a common sense discussion of spending priorities.
If the FED was relieved from certain regulations, why could they not just fund the government directly without issuing bonds or lending money to do it? Let us say that we wanted to retire the entire sovereign debt of the United States tomorrow. Why not just do it? It’s all just a keystroke away is it not? Does anyone really believe we will ever retire 22 trillion and counting via growth and taxation? If the answer is to control inflation, would the owners of Tbills suddenly spend 22 trillion dollars on goods and services or just reinvest it? I can see how this influx of cash could cause real estate prices to rise but would this extra cash not just kick start demand and raise output levels everywhere?
“One of them wrote that monetary policy works by making people borrow.”
I agree with that. But that means, I think it is not either monetary policy or fiscal policy that matter but that both monetary policy and fiscal policy matter, AND the mix of the two matters.
I’m with Adair Turner (and Milton Friedman) – you run deficits and print money to expand the money supply for the long term – you use monetary policy in the short term and to target the exchange rate. Secularly encouraging expanding private debt (as a percentage of GDP) is nuts, particularly if population growth is low.
@reason the point is that MMTers define monetary policy as expansionary monetary policy. Volcker’s ruthless anti inflation campaign did not work by making people borrow. He deliberately caused two recessions by discouraging borrowing with a Federal Funds rate as high as (roughly from memory) of 20%.
A discussion of macro policy based on assuming it is (whether or not it should be) an aim to stimulate and never to cool down an overheated economy is a howler.
It is possible some of us were not around for this to understand 12% and higher mortgage rates existing in the early eighties to which we were constantly told they were not impacted by what the Fed did with a wry banker smile. 15% salary increases were in vogue then too. 1981 is a long time ago and the economy did dry up. 20% is correct as a Fed high. Some comments by past Fed Chairs.
Volcker “The standard of living of the average American has to decline”
Greenspan in keeping Labor traumatized, “‘extraordinary and “exceptional’ performance of the nineties economy to ‘a heightened sense of job insecurity’ among workers ‘and, as a consequence, subdued wages.’”
Janet Yellen: “while the labor market is tight, job insecurity also seems alive and well. Real wage aspirations appear modest, and the bargaining power of workers is surprisingly low . . . senior workers and particularly those who have earned wage premia in the past, whether it is due to the power of their unions or the generous compensation policies of their employers, seem to be struggling to defend their jobs . . . auto workers are focused on securing their own benefits during their lifetimes but appear reconciled to accepting two-tier wage structures (me: $14/hour new workers and $28 for old workers as opposed to the $73/hour Delphi Miller tossed out).
Ron Gettelfinger: “UAW labor costs account for about 10 percent of the cost of producing a vehicle; the remaining 90 percent includes research and development, parts, advertising, marketing and management overhead.” I was listening to his testimony to Congress when he made this remark. I would only add to his comment Labor Overhead. This is the same as what Drucker would tell you and the same as what I as a consultant to major firms have discovered too.
Modern economics going back to 1980 attacks Labor as the major inflationary factor. It is also the easiest to attack as Congress has blocked them with a vengeance especially in 2008.
Vas Narasimhan, CEO of Novartis: “The value of medicine to patients, health care system and society; Ignoring the setting prices according to the value of medicines, pharmaceutical companies often place more emphasis on setting prices according to income expectations or they attempt to reach their profit goals by setting prices as high as the market will bear.”
Has this occurred? Recent 2017 JAMA study; From 1996 to 2013, the cost of healthcare increased by $1 trillion of which 50% was due solely to price increases. Granted this is not pharma; however in the treatment of diabetes, the increases in the treatment of it with phamaceuticals was the leader in cost increases. A more recent Commonwealth funded 2007 – 2014 Health Affairs study citing the JAMA study also found 60% of the increase in hospital cost was due solely to pricing.
Nary a peep out of modern day economics on the cause of the rising healthcare impacting the economy other than we need to use less of it. Krugman’s toss – them – a – bone on Medicare for All is in itself is a placebo. There are huge amounts of waste in it and it does little to control healthcare abuse by doctors and hospitals. Annual Wellness visit is a joke meant to allow clinics to profit from conversations with patients and billing Medicare at an inflated cost.
I still see the emphasis on Labor and not the actual inlationary costs in the economy.
Sorry, I am on a rant.
don’t disagree that the worst thing about MMT is the people that support it.
Monetary policy doesn’t only work by changing borrowing (up or down), it also changes relative prices, including importantly the exchange rate. But monetary policy perhaps more importantly has a major role in managing expectations (i.e. the threat of monetary policy is just as important as the reality).
My argument though is with the Washington concensus which was to avoid deficits (almost at all costs) and use primarily monetary policy for macro stabilization. I think it deserves a large part of the blame for many of the problems of the last 30 years.