I will start off by noting that he is probably correct in diagnosing that some online comments describing the details of monetary operations are not helpful for advancing the MMT case. In some contexts (as I note below), monetary operations matter -- but they can be a distraction for a great many substantive debates.
Think Of It As The Theory Of "Modern Money"Saying that there is very little new about MMT is a standard mischaracterisation of MMT. The problem seems to be the use of the word "Modern" in the name; there are two explanations for it.
- This refers to a joke by Keynes regarding Chartalism: we have had "modern" government money for thousands of years.
- The wording is ambiguous, one could render it as "The Theory of Modern Money," where "modern money" is money that is not defined with respect to an external store of value. (Note the title of Randall Wray's book -- Understanding Modern Money -- which is consistent with this interpretation.) Since the major currencies were (implicitly or explicitly) pegged to gold up until the early 1970s, those of us a certain age can think of floating currencies as "modern."
The main MMT authors state that MMT is a body of thought within the broad tent of post-Keynesian theory. One can argue that it is unfair to generalise about "mainstream economics" (Professor Wren-Lewis implicitly states this in his article, see below), as there are differences of opinion about policy within the "mainstream" tradition. The exact same thing is true for post-Keynesian economics, which is why MMT needed a label to distinguish itself from other post-Keynesians.
This is not a minor problem. MMT'ers and many other groups of post-Keynesians are seriously divided over the importance of the "external constraint," we need to have to have labels for these groups in order to make sense of such internal debates.
To what extent the MMT authors are developing new theory versus building on existing post-Keynesian thought is an interesting debate for academics, but is not of crucial importance for those of us who are not obsessed about citations in the literature.
MMTers also seem curiously averse to equations.
This is touching upon a rather raw nerve for me. I do not like arguments from authority, and so I do not dwell too much upon my background. However, I will note that have an excellent academic pedigree in applied mathematics.
In my opinion, the post-Keynesian authors that I am most familiar with have a realistic attitude with regards to the application of mathematical models to economics, and the use of mathematics within papers meets the standards of applied mathematics (which is less formal than pure mathematics, but can be translated into a more formal version). I am much less impressed with the use of mathematics in the (mainstream) DSGE literature.
My writing here is informal, and I avoid the use of equations in such writing -- exactly as I was told by my supervisor (who had a training in pure mathematics). For example, I was able to give a basic understanding of how sampling destroys information with a graphical illustration (and no equations) in this article. It would have been easy to regurgitate pages of frequency domain mathematics to explain the concept (and it would be necessary for a formal treatment). However, I doubt that the mathematics would be helpful for anyone who does not already have a good grasp of such techniques. If I were writing an academic article, I might be forced to use more formal mathematics, but that would mean a much smaller potential readership.
Default Fears Not Just "Mediamacro"
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.
I think he correctly pins down why MMT has a cult following amongst people in fixed income (like myself; Edward J. Delzio is another example, I reviewed his book The National Deb(i)t here) -- it explains why floating currency sovereigns do not default. Fixed income practitioners have seen people getting their faces ripped off for decades as they shorted the JGB market. In practice, MMT is the only visible school of thought that offers a coherent explanation.
To be fair to Professor Wren-Lewis, he's been largely correct on fiscal policy. (I am ambivalent towards his academic theories about fiscal policy, such as described in my summary of "optimal fiscal policy.") He was not worried about forced default. That just tells us that one should never make generalisations; not all "mainstream" economists agree with each other. That said, "mainstream" academic economists at universities are training almost all of the people who enter finance or supra-national agencies (which have produced innumerable reports predicting bankruptcy in various developed countries with floating currencies). If the majority of "mainstream" academics are on the right side of the question of sovereign default, there has been a massive failure of pedagogy.
The Budget Constraint Is The Wrong Answer
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.
The standard governmental budget constraint is an equation that holds under the assumption that default cannot happen. If we allow for the possibility of default, the constraint no longer holds; we need to adjust the equation to allow for the loss of value on government bonds. It is straightforward that we cannot apply a mathematical model to a case that the model assumes is impossible.
To judge the odds of a floating currency default, we need to look at the institutional (operational) arrangements around sovereign borrowing. Which is exactly what MMT does, and the standard mathematical frameworks used in DSGE do not. (There are thousands of DSGE models out there; I would not be surprise if some researcher used one to make observations about government default. I have not seen such a model, but I have my doubts that they could get it to work. Sovereign default is a political judgement, not a rational decision.) Once we exclude the possibility of default, there is very little to distinguish MMT and the mathematics of DSGE models -- since both reflect the same underlying accounting reality. I have remarked upon that similarity in previous articles.
Central Bank Independence Debate Shows MMT Non-Empty
This seemed to lead to ideas that I thought were standard bits of macroeconomics
Professor Wren-Lewis had an article "Central Bank Independence and MMT" (published in September 2015). He notes that MMT proponents say that "central bank independence is a sham," whereas the mainstream is greatly excited about the importance of the concept.
Although he disagrees with the MMT view, the fact that he was having a debate about a rather esoteric theoretical topic tells us that MMT is not just following "standard bits of macroeconomics."
I am not going to respond to his comments about how MMT thinks about money-financed expenditures. I would characterise the MMT position as not being massively different than how he might think about the issue, other than the terminology. The reality is that MMT questions a lot of hidden assumptions that are embedded in mainstream models. It would take some time to translate the MMT argument into terminology that he would be happy with. Although I believe that it can be done, I leave that task to someone else.
Although it would be nice for a dialogue between myself and some mainstream economists, I am not particularly hopeful that it will occur. If I see anything useful that can be taken from mainstream theory, I will take advantage of it. Until such a time, I prefer to develop my own research programme within the broad post-Keynesian tradition.
(c) Brian Romanchuk 2015