contra MMT Anopinion III

Noah Smith (and many others) is irritated by a puff piece about Stephanie Kelton and modern monetery theory MMT by Jeanna Smialak in the New York Times. I am not interested in Smialak’s article. I think that Noah sums up his critique here very well

“The article then demonstrates that it has little notion of what separates MMT from mainstream thinking: ‘M.M.T. theorists argue that society should feel capable of spending to achieve its goals to the extent that there are resources available to fulfill them. Deficit spending need not be constrained to recessions, even theoretically.'” In Smialak’s defence, Kelton et al have no ability to explain how MMT differs from mainstream thinking either. I agree entirely with Noah that MMT is not theory and is debating policy with non-economists — it is the combination of a policy recommendation and dismissal of everyone else.

The policy recommendation is, roughly, that the national debt should be higher, that deficit spending isn’t as bad as some say. One problem is that those “some” are assumed to include mainstream Keynesian Macroeconomists. Now there isn’t anything closer to established mainstream opinion than an American Economic Association Presidential Address. In 2019 OJ Blanchard presented data suggesting that much higher debt was sustainable and might be desirable even if it is assumed that there is always full employment and there is no useful role for public spending. Brad DeLong and Martin Hellwig (neither of whom is a fringe figure especially not Hellwig) (and I who am a fringe figure) argue that Blanchard understated his case.

There are extremely important and powerful people who argue that deficits are terrible and unsustainable. But they are not academic economists. The case against them is strengthened (a bit) if one notes this (only a bit because most people have little respect for academic economists [I am both an academic economist and one of those people]). One is named Joe Manchin, there are a lot of them in Germany and in Brussels. They matter, but a new macroeconomic theory is not needed by those who disagree with them.

I am now going to dump on MMT. First, I agree with Noah that it is a policy proposal not a theory at all. The proposal seems to be “deficits should be increased”. In particular, MMTers insist that MMT is not functional finance and they do not agree with Abba Lerner, who argued that deficits should be increased unless and until inflation is undesirably high. Now the proposal “deficits should be increased” does not imply an optimal policy. If no matter how high the debt is, it should be higher, then there is no best policy. To be rude, this reminds me of supply siders who argue that taxes should be cut, evidently to zero. To be ruder, I don’t see any substantive point of disagreement between Kelton and Laffer. I am sure Kelton approves of taxation, but I don’t see how she gets there. As policy analysis MMT seems to me to be tugging on the Overton window, advocacy not analysis.

On the other hand, such tugging is needed right now, especially here in Europe. There is a powerful anti deficit orthodoxy (the ordo liberal ordodoxy). But it is not related to economic theory of any sort and it has been thoroughly rejected by mainstream new Keynsians and somewhat heterodox paleo Keynsians. The case against is weakened (somewhat) by pretending that it is the orthodoxy of academic economists.

I guess I ask Kelton how she disagrees with Krugman — her effort to explain this was spectacularly unsuccessful.