I am not a historian of economic thought, and so I cannot really comment on the extent of the novelty of MMT. From my readings of MMT authors (Wray, Mosler, Mitchell in particular), they make pains to acknowledge the roots of MMT. As an ex-academic, I understand the concern, but I do not see any particular problem from what I have read. And having been in involved with applied mathematics, I developed the sensibility of a mathematician with regards to "novelty". Within mathematics, re-deriving an existing result in a more elegant fashion is considered to be a good thing.
Thomas Palleys's complaint about the zero rate policy being unsustainable is empirically wrong, as JW Mason notes. Japan has run a zero rate policy for almost two decades without any problems of "sustainability". The yen did not go to zero; if anything, it is still too strong. Portfolio rebalancing effects and trade flows are more important than carry. As for speculation created by zero rates, there would be at most a one-time upward shock to asset prices as the risk-free curve converges to zero, but the prices will still be bounded by the risk premium. (I will point out however, that I think there are negative side effects associated with a zero rate policy. In particular, it increases the need to hoard financial assets to fund retirement.)
I will cover two other issues he raised, both of which are related to "constraints" on policy.
Governmental Budget Constraint
Palley's argued that the MMT formulation of the governmental budget constraint is a special case of the already known general budget constraint for a single time period (e.g., the transition from time t to t+1).
Well, that is exactly what the MMT authors say: they accept the one period transition "constraint", as it is just an accounting relationship. What is rejected by MMT is the condition based on looking at time as it goes to infinity - which gives rise to Ricardian Equivalence. Palley completely ignored that part of the constraint, which is the interesting part of the MMT discussion of the subject. And the MMT authors are undoubtedly correct - I demonstrate here with a counter-example that Ricardian Equivalence does not hold.
Finally, it is also noteworthy that MMT appears more plausible to US audiences than to other country audiences. All countries face inflation and financial sector stability constraints, but the US is essentially free of a foreign exchange market constraint.However, that constraint is very visible in many other countries, which explains their greater intuitive skepticism about MMT.Yes, the foreign exchange constraint is visible in a lot of countries. However, those countries are mis-managed, or else they are very small countries have that inherently difficult economic policy decisions. MMT underlines the freedom of action that is created by having a free-floating exchange rate. But it is necessary that countries guard this freedom by doing things like stopping locals from borrowing in a foreign currency (which is what competent developed country regulators already do).
There appear to be three potential mechanisms for a "constraint" on policy to appear from foreign exchange considerations:
- inflation passthrough from a weak currency;
- government debt holdings by foreigners;
- trade balance considerations.
Can the fact that foreigners hold their debt really constrain governments? Not really. Foreigners can dump domestic bonds and drive down the value of the currency, but all that would accomplishes is that they have destroyed a lot of their own capital. Other investors will be able to snap up a lot of assets that were driven below fair value. In particular, the central bank could engage in some massive open market operations and profit at the expense of the foreigners.
As for trade flows, a country could have its currency driven down so that it moves from a persistent current account deficit to a persistent current account surplus position. This means that the economy would tend to grow faster than it would otherwise, and so if no changes were made to policy, it would be inflationary. But does that really matter? Any structural change to the economy will force a change in policy settings. Policymakers need only react when the changes occur, and so there is no constraint on current behaviour. And even if the change is made, it is only made because domestic conditions have changed (domestic inflation has risen), not because of what some foreigners think.
(c) Brian Romanchuk 2014