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Wednesday, June 22, 2016

Pragmatism And MMT

There has been a certain amount of introspection in the Modern Monetary Theory (MMT) online community recent, revolving around philosophy. As I was recently admonished, the way forward is pragmatism -- focus on areas where the theory actually makes a practical difference.


Gerard MacDonell discussed pragmatism in "No avoiding having a 'philosophy', so choose wisely". He linked to the Internet Encyclopedia of Philosophy entry for pragmatism, which includes this useful summary:
Pragmatism may be presented as a way of clarifying (and in some cases dissolving) intractable metaphysical and epistemological disputes. According to the down-to-earth pragmatist, bickering metaphysicians should get in the habit of posing the following question: “What concrete practical difference would it make if my theory were true and its rival(s) false?” Where there is no such difference, there is no genuine (that is, non-verbal) disagreement, and hence no genuine problem.
He argues that we should not argue about essences -- what something really is -- rather, focus on its effects in the real world.

As an example, he writes that I was wasting my time arguing whether money was an asset or a liability; what matters is how money behaves in the economy. Although I agree that labels should not matter too much, I would point out that it does make a difference in this case. We know that people rebalance portfolios, and that this can be viewed as a driver of economic activity. (Particularly in the stock-flow consistent models of Tobin.) Jumping sides of the balance sheet means that we would not be able to properly analyse money in the context of portfolio rebalancing. (On the other hand, someone could argue that money is somehow an equity instrument; although far-fetched, it would be on the correct side of the balance sheet and portfolio rebalancing would operate as expected. As a result, an equity/liability debate would be largely a semantic debate.)

An Example - Government Debt And Central Bank Purchases

J.W. Mason has an article "How should we count the debt owed to the Fed?" He runs through the numbers, discussing how the Fed has ended up being a major Treasury security owner. Those holdings are considered to be part of "debt held by the public," when in fact the Fed is a subsidiary of the Treasury. Should we net out those holdings (some countries do)? (I should note that J.W. Mason ends up with roughly the same conclusions as I do, but I found it was an example of how we can cut down the length of analysis using pragmatism. I chose his article solely because it was interesting and recent. There are presumably better examples, but that would require digging through the archives.) 

He invokes the analysis of Kotlikoff, who had the bright idea of capitalising one set of Federal cash flows (Social Security payments) but ignoring other cash flows. Why not stick random capitalised cash flows on the government balance sheet, and call it "debt"?

This is where we need to ignore labels, and look at what the concrete effects on the economy are. There is no convincing reason that the debt-to-GDP ratio is a meaningful quantity, using practically any coherent analytical framework. Even in mainstream macro, there is no reason for the level of debt to matter, except for the matter of the Fiscal Theory of the Price Level. (People may invoke the "governmental intertemporal budget constraint," but said people cannot actually say why it matters. Very simply, it is essentially impossible for any reasonable economic model to violate that constraint; it implies that the debt-to-GDP ratio goes to infinity, which implies a completely implausible consumption function.)

Since we cannot isolate any meaningful effect of the economy by the debt-to-GDP ratio, whether or not we include Treasury securities held by the Fed within the "debt" total is a decision that has semantic results, but with no real world implications.

(Of course, not all fiscal ratios are meaningless. The fiscal deficit is an income injection into the non-government sector, and so it has an effect on economic outcomes.)

Whither MMT?

There has been a fair amount of rumination in the online MMT community recently.

Firstly, there was this post by Alexander Douglas, in which he announces that he is returning to focus on philosophy. 

Secondly, there was this article by Tom Hickey, triggered by comments of "JWM" (presumably J.W. Mason UPDATE: that presumption was incorrect).

JWM asks:
So how do things look when we all talk MMT? Are we talking about a complete revolution in the way politics, allocation of resources, taxation policy, etc. are determined? Which probably sounds like hard work to that audience. Or is it simply adopting a different viewpoint as to where the constraints really lie? Which at the moment, for practical minded people (that audience), would be no significant difference at all.
From my perspective, this is a good point, and can only be described as pragmatic. What are the advantages of MMT as an analytical framework? Although I believe that they exist, I think the advantages lie more in the direction of avoiding bad analysis, rather than creating brand new good analysis. (And policy options will follow from the analysis.) Although that may not be as exciting as a brand new paradigm that has completely revolutionised economics, it's better than nothing.
JWM ends with:
"I’d like to see MMT collaborate with other disciplines: political science, sociology, microeconomics. Out of that, develop a modern monetary practice. Something practical minded people can engage with." [end J.W. Mason quote]
Hear, hear.
That would require people in different disciplines agreeing to talk to each other and then reaching out to do so. This would need some unifying purpose.
I doubt that developing a modern monetary practice would provide it other than in a limited way. Is Bill Black making a big difference in law, for instance.
Btw, Mat Forstater has written on Adolph Lowe, for instance, and Randy Wray on Kenneth Boulding.
I would suggest that this unifying purpose be developing a practical philosophy of living a good life in a good societies a basis for liberal policy. Philosophy is about using reason in the most generally way and so it underlies all intellectual fields and disciplines.
This reason-based approach is traditionally not one the instruments but also the purpose of liberalism socially, political and economically. Liberalism is reason-based. It is basically secular and humanistic, although it is tolerant of other approaches, too, to the degree that they do not assert themselves over reason.
This means integration of social, political, and economic liberalism, addressing the paradoxes of liberalism, and unmaking the faux liberalism of elites that fear actual liberalism as an integrated social, political and economic paradigm.
Without beginning with philosophy the project is likely doomed owing to unexamined assumptions that will lead to incompatibilities down the road. As Aquinas stated at the outset of De ente et essentia, paraphrasing Aristotle, “A small mistake at the beginning becomes a great one by the end.

Tom has a lot of good  practical points in the body of the article, although I would be concerned about such grand objectives that he discusses in the quoted section. Creating a new practical philosophy for life is a rather difficult objective; just trying to clean up our understanding of fiscal policy has much higher odds of succeeding.

Furthermore, I do not see a strong linkage between the success of political Liberalism and economics. I see a crude pro-business philosophy being quite successful, because it is supported by deep-pocketed corporations and individuals. The intellectual underpinning of this philosophy has been around for centuries now, and is not really getting any deeper. Changing economics textbooks is not going to make this pro-business faction suddenly disappear.

Take the internet Austrians as an example of the gap between academia and political success. No major university has taught Austrian economics in the last few decades in anything other than a "History of Economic Thought" course; pretty much all of the academic Austrians are long dead. (There are a few Austrians left on the fringe; there are probably outnumbered by Marxists.) Even so, there are far more Austrians working in Finance than there are people who believe that DSGE models are even slightly useful. Austrian economics is extremely attractive to its target audience, and that is completely independent of what academia thinks about it.

(c) Brian Romanchuk 2016


  1. Just for the record, the point I was trying to make in that post was the same one you are trying to make here -- that we should not be looking for the "correct" form of accounting but asking how different analyses matter for the concrete questions we are interested in. The "full Kotlikoff" thing was supposed to be a reductio ad absurdum of a particular form of logical consistency.

    1. Sure, although I guess I was distracted by the back-and-forth in the comments. The more brusque "logical pragmatism says we should ignore this!" would have resulted in a shorter post (one paragraph!). I picked your post not because I disagreed with you, rather because it was an interesting recent article that dovetailed with my article thesis.

  2. Oh also, that "JWM" comment was not me, though I agree with the spirit of it.

    1. Oops. I'll take that guess out of my post in the archive.

  3. Gerard MacDonell is as clueless in June as Noah Smith. What "money" is in any situation and what assets and liabilities are and how they are used in terms of rules are both defined legally and the definitions and rules differ somewhat in different jurisdictions. As law professor Christine Desan has emphasized.

    Hello, modern monetary production economies use state money aka "currency." In the US the FASB sets the accounting rules and it alone can change them. The government says what money is and what the rules are for using it and accounting for it. Because, for one thing, taxes.

    So, no, you can't act pragmatically and just decide for yourself what is an asset and what is a liability.

    This is not about "essences."

    Acting "pragmatically" out side the rules is cheating and it’s a crime when it comes to "money" and accounting. That includes acting "rationally" as a utility maximizer. That's what crooks do. They are get utility maximizers. As Bill Black observes CEO running control frauds would be acting irrationally if they did not given the stakes and the odds of anything happening other than some public embarrassment, with a few exceptions like Charles Keating, Ken Lay and Jeff Skilling.

    1. Just so long as it is just the one month.

  4. Hi Brian

    Good post (as always).

    I know this is weird coming from an MMT economist, but I would argue that the intertemporal budget constraint is far from meaningless, though it's certainly true that it is not a "constraint" per se. What the math of the "constraint" tells us is, given a projected path for r, g, and primary budget balance, whether or not debt service is projected to rise in an unbounded fashion relative to the size of the "real economy." It's not well understood even by neoclassicals that this is what the equation "means," but it's true. I explained this in detail here, fwiw

    1. I think there are several issues here that need to be distinguish and this applies to a lot more than the IGBC.

      1. Some conventional argument can be shown to be wrong.

      2. Some can be shown to be irrelevant to the issue under scrutiny.

      3. Some can be shown to be nonsense since they are stated incorrectly.

      It could be that all three are applicable in the case of IGBC, for instance. Some people may just have it wrong, others bring in irrelevancies and yet others may not properly understand it.

      I would put Brian's observation, "People may invoke the "governmental intertemporal budget constraint," but said people cannot actually say why it matters. Very simply, it is essentially impossible for any reasonable economic model to violate that constraint; it implies that the debt-to-GDP ratio goes to infinity, which implies a completely implausible consumption function," under #3 as a nonsense — as sending variables off to infinity generally is. It's a sophisticated appearing "Weimar" or "Zimbabwe" designed to evoke emotion rather than to inform. It's use is rhetorical rather than descriptive and designed to persuade.

      On the other hand, If an objector presents a reasonable model then it would need to be shown either to be wrong or irrelevant to the issues.

      And, of course, a real debate would involve refuting Scott but as far as I am aware, no one has even responded to the paper other than to just diss it.

    2. STF,

      I was covering the topic extremely briefly; and working from memory. Probably should have been phrased slightly differently. My justification of "meaningless" is that it is impossible to find a trajectory that violates the condition, assuming that we have a well-specified model. How could an economy sustain an arbitrarily high debt-to-GDP ratio, without consumption rising in response to the extremely high stock of private sector assets? Since the DSGE literature skips over obvious steps like actually solving the systems of equations that they write down, that they write down, this is all a big muddle, and hard to describe.

    3. What the math of the "constraint" tells us is, given a projected path for r, g, and primary budget balance, whether or not debt service is projected to rise in an unbounded fashion relative to the size of the "real economy."


      I sort of agree, but I would put it the other way. What you describe is not a constraint. There's nothing stopping you from taking the F train to my house even though it says "to Coney Island".

      What the intertemporal budget constraint is actually doing, I think, is substituting for the fact that these models have no actual financial constraints. If in any given period you can borrow without limit, then why not consume to infinity? The intertemporal budget constraint says, "you just can't."

    4. While all making good points, none of these responses actually addressed my core point about debt service. The IGBC is not about the debt ratio, it's about projecting the path of debt service and what needs to occur with the primary budget balance if the path of debt service is to "converge" and not grow in an unbounded fashion. It's not about a financial constraint, it's about an inflation constraint. It is quite true that the equation itself cannot be "violated," though, and also true that the equation becomes meaningless for any attempt at forecasting to an infinite horizon if r<g.

    5. Let me add something here that might help . . .

      The IGBC formula is basically a second semester Calculus infinite series. It is essentially the same equation as one uses for fundamental valuation of companies (with different variables, obviously, but the form is the same). In that sense, the equation is "true." The math is valid, and standard. It is not useful for the purposes it is usually used, but it is a mathematically accurate formula for understanding the path of debt service given r, g, and primary budget balances, provided one does not include an infinite horizon component if r<g.

    6. "While all making good points, none of these responses actually addressed my core point about debt service. The IGBC is not about the debt ratio, it's about projecting the path of debt service and what needs to occur with the primary budget balance if the path of debt service is to "converge" and not grow in an unbounded fashion."

      Because I was discussing the debt-to-GDP ratio, I was not really been thinking about the debt service issue. Since I can hear Gerard snickering at me, I am going to see whether I can address the topic in a way that I can show whether it makes a difference for economic outcomes...

  5. There are just so many issues here and most of them have nothing to do with MMT. MMT doesn't do anything on its own except provide a basis to refute excuses to practical solutions to problems. Does it matter that you have a refutation? Probably not.

    We become beholden to systems and use the systems themselves as justification for inaction. That and we can't get over our moral righteousness. ("They don't work hard enough." "They aren't like us." "They have a color TV and air conditioning." "When I was a kid I used to deliver newspapers in the snow." Etc. Etc.)

  6. We should argue about essences because the essence is the first step to understanding the world around us. If we can't make that first step, everything else will be in danger.

    For example, we will not be able to make good public finance policies while we are unable to understand the essence of money. Politicians will try to do something and tell everyone that they know exacly what they are doing, when they actually do not have a clue - because they do not understand the essence of money, debt, treasury-cb relation, etc.

    Analyzing the real world and doing empirical research are good ways for one to grasp better the essence, but are no substitute.

    If you want to understand MMT's Job Guarantee Program you have to understand MMT theory. If not, you will see it as some nonsense or maybe some inflationary populist program. So MMT seems more than "simply adopting a different viewpoint as to where the constraints really lie".

    "whether or not we include Treasury securities held by the Fed within the 'debt' total is a decision that has semantic results, but with no real world implications"

    It matters when you are doing policies - including creating some limits on 'debt'. Policymakers will face some questions: "Should I really create a debt limit? Why? What debt should I limit? Should I include or not Treasury securities held by the Fed within that debt?". Then you have to understand the essence of the debt, and understand that every profit that the central bank makes with Treasuries will be sent back to the Treasury sooner or later, so the Treasury is actually paying itself - which is different from paying any other kind of Treasury holder because the profit will not be sent back to the Treasury (the private holder will decide what he/she wants to do with the payments he/she recieves).

    And maybe you really understand the essence of public spending, taxes and debt, you may reach the understanding that there is no sense in creating debt limits...

    1. Anonymous,

      1) MMT offers reasons why the Job Guarantee is not inflationary. This means that there are concrete empirical statements being offered, which can be tested. The JWM quote was deliberately provocative, but is consistent with this. A lot of people could accept that the Job Guarantee is not inflationary for the reasons given by MMT, while at the same time not viewing those arguments as a revolutionary paradigm shift within economics. So what? All that matters is that they agree about the policy shift.

      2) Debt limits. I was discussing how we analyse government debt,not the legal infrastructure. Obviously, legal institutions have to be careful how things are defined, but that may have little bearing on how we analyse the economy.

      I would argue that the pragmatic argument is that there is no reason for a debt limit, since there is no evidence that government "debt" (however defined) needs to be limited. This eliminates the arguments about the essences of instruments; that is, whether or not they are really "debt" and need to be limited. Backers of a debt limit would need to explain exactly what instruments are subject to the limit, and why the limit needs to exist; they can't just wave their hands about "all this debt!"

      (That said, I understand that there appear to be good Constitutional reasons for the existence of the debt limit. Congress sets the budget and borrowing; but they have delegated debt issuance to the Treasury. The debt limit is how Congress keeps the Treasury (which reports to the President) in check. As a Canadian, I am not hugely interested in the details of American constitutional law, and so I have no idea how to preserve this oversight while being economically sensible.)

    2. "I would argue that the pragmatic argument is that there is no reason for a debt limit, since there is no evidence that government "debt" (however defined) needs to be limited."

      It's extremely hard to find evidence on this kind of issue. I find it very hard to claim that there are no evidences that government debt needs to be limited. You have a thesis about debt limits, but do not have proofs. And things are like this in "sciences" that try to understand human behaviour.

      What we have are a lot of economics schools, and some of them claim that it's obvious that we need some kind of debt limits. Other schools are going to say that it's obvious we don't. And it's all hard to proof. There is no such a thing as "pragmatic argument". We have some limited data and a lot of ideology. Some ideology is based on essence and some on emotions, but that's it.

      Each school of economics is unique. There are some school that share a lot with others, but they are unique in a lot of issues. So, the Orthodox Neoliberal school theory is different from the Austrian School, which is not the same as the Keynesian School or the MMT School. They are all different theories that leads, for example, to completely distinct policy advise. So, even if Austrian and Neoliberal agree that there should be less government, they don't agree how and by how much. So they are not all the same thing. MMT is very, very different from Neoliberal, Austrian, Keynesian, and many others.

      If you think MMT is the same thing said in different words, you probably did not try to understand MMT thoery.

    3. The people who think a debt limit is needed for economic reasons can list them, and we can examine the evidence. The burden of proof is upon those pushing for the limit.

      I have not see any evidence that a debt limit makes any sense (other than the Constitutional argument), but I am not ruling out the possibility of someone finding a reason. However, given the experience of Japan, and the post-war Anglo economies, it's pretty clear that the idea that something like a 100% debt-to-GDP ratio is economically meaningful is wrong.

      With regards to your comments on the uniqueness of MMT, I am unsure whether it always matters. Although I am in the MMT camp, it would be easy to come up with the similar policy recommendations working from another economic tradition. (For example, the Job Guarantee is based on old Keynesian experiments.) Although arguing about the details of economic theory can be fun, what matters in the policy arena is building a coalition. Unless you are an academic, there is no practical advantage to clinging to theoretical differences that have no effect on suggested policy.

    4. "The burden of proof is upon those pushing for the limit."

      There is no burden of proof in this case. For me it feels like you are saying something like this: "The earth feels flat, so we should assume that the earth is flat. If anyone is telling me that the earth is round, he/she has the burden of proof. He/she needs to prove that the earth is round, while I don't need to prove that the earth is flat". We all, both flat-earthers and round-earthers have the burden of proof.

      "Although arguing about the details of economic theory can be fun, what matters in the policy arena is building a coalition."

      Well, building a coalition is a big matter, but the technical framework of the policy proposal is also a big matter.

      There are multiple ways of doing a Job Guarantee Program, but MMT Job Guarantee Program is very specific, and very different from what would be some sort of Job Guarantee Program for a Marxist Economist or a NeoLiberal Economist. NeoLiberals probably wouldn't propose a Job Guarantee at all, or they would propose some sort of Job Guarantee that supposedly benefits the more productive and efficient persons - and cut the ones that are not efficient enough. That's a way of doing it.

      What I'm saying is that theoretical differences always do have a lot of effects on suggested policy.

      In my view, you are oversimplistic when you assume that MMTers and Keynesians reach the same policy proposals - and so their internal theoretical differences can be ignored. In fact, MMTers and Keynesians reach different policy proposals that seems more or less the samething for inattentive people, but are actually very different if you analyze it a little closer.

      And some of MMTers policy proposals are actually very unique and criticized by all other economic schools...

    5. By default, there is no debt limit. The people proposing the limit have to come up with answers to (a) what instruments ars covered by the limit? And (b) what is the limit amount?

      They have to come up with analysis for both of those parameters, which lets us then see why the analysis is justified.

      Conversely, the no limit position is easily justified - there is no problem that can be identified that is created by the lack of the limit. Nothing to analyse, no policy step to take.

      Obviously, not everyone agrees with MMT proposals, such as Austrians. But since Keynesians already looked at things like a Job Guarantee, they would not be easily convinced that they need to embrace all aspects of MMT to support the program. And the point remains - why waste time antagonising potential allies arguing about theory when they might actually agree on the policy proposal? The only time theory matters if there are substantive policy disputes as a result of it. MMT has such policy disputes, even with other post-Keynesians on many issues, but it is probably best not to accentuate those differences.

      If you are writing an economics textbook, you need to have a consistent economic theory, and you will have difficulties with other theoretical frameworks. But we are not all writing textbooks.

    6. "By default, there is no debt limit."

      Well, there is no such a thing as default. By "default" cars didn't have seat belts, and eventually seat belts become law. In the beggining people were really unsafe inside their vehicles, but now they are a bit safer. When people realized the dangers of driving, maybe the burden of proof was upon the manufactures that should prove that seat belts were unecessary - and if they couldn't prove it, then they would be obligated to put seat belts in cars.

      When you are pragmatic, there is no "burden of proof": there are different policy options that you need to assess in a very objective manner, with facts and evidences.

      If the seat belt policy is difficult assess (even today there are people that believe that seat belts are dangerous) then economic policy is for sure much more problematic.

      "But since Keynesians already looked at things like a Job Guarantee, they would not be easily convinced that they need to embrace all aspects of MMT to support the program".

      The Keynesian Job Guarantee is different from MMT Job Guarantee. They are not all the same stuff - you have a simplist approach if you believe so. For example, a lot of Keynesians believe that there is a budget limit that needs to be accomplished in the long run, but in the short run the government should behave in a countercyclical way. Maybe Keynesians would impose a budget limit in the Job Guarantee, while in MMT JG it's essential to have unlimited budget for the JG. That's only one example of possible differences.

      Each school thinks their program is better than the other. Which one is better? I don't know. How to assess both programs with an objective and pragmatic approach? I don't know. But at least the start would be the challenge to understand in detail both theories and then both programs.

  7. Nice post.

    Although I enjoy the philosophical arguments from time to time, I'd agree it's essential to come back to the pragmatic position. It doesn't matter what label we attach to it, it's what it does that matters. Actually, I think the worst cases of this principle being ignored are in relation to the question of what constitutes money.

  8. A basic MMT argument: When the private market sector does not generate the level of desired financial savings this results in unemployment of workers and spare capacity in the real economy. In a country with floating currency the government can afford to employ all its domestic resources by creating enough desired financial savings via a government deficit. If the country is rich it can also finance net imports by creating the savings in its currency desired by export nations. This type of government resembles a high powered bank. But a poor country may not have the option of financing its net imports that way. This all makes sense given that "money" and other financial assets are issued as liabilities and the most secure liabilities in a nation are issued by the national government.

    Many practical problems are caused by the unstable financial structures in the private market sector. If a financial crash occurs how should the government allocate the unavoidable loss? If money is debt then the creditor does not expect to take a loss but may get "crammed down" in bankruptcy. If money is equity then the investors get "crammed down" when the debt system fails to rollover the liabilities in aggregate. Abstracting away from the properties of money, debt, and equity gets you a bad model of reality because these features drive the system dynamics in a boom-bust economy. Equity is the difference between asset prices and liabilities and the thing that drives up asset prices is finance and refinance activity via the ability to rollover and increase debt in the system.

    When the private debt refuses to rollover and grow how should the government allocate the loss to investors who can afford the write-down (rich people who now have an equity stake) and how does the government allocate bankruptcy among the rich and working class? If MMT is correct then the government is in the cash flow and savings insurance business and must allocate the rights to future cash flow and bankruptcy relief under various economic conditions. The rules appear clear until a crisis erupts ...

    I am not sure how Congress can plan for matched spending and taxes in a complex political and financial economy. This means a debt ceiling can hinder Treasury from financing the deficit authorized by Congress under its OWN spending, credit, and tax policies which are not well coordinated!

    1. The Constitutional issue is that the Treasury is under the control of the Presidency, while the Congress has the authority to borrow. In earlier years (? No idea when), Congress had to authorise every debt issue. They delegated the issuance to the Treasury, but they still need to control borrowing somehow. The debt limit is that control.

      Sure it makes no economic sense, but that's you a problem for you wacky Americans and your zany Constitution.

    2. There is a paper from 1972 explaining the many problems Congress has attempting to control the discretionary and mandatory spending of the Executive branch since the founding of the nation. The debt ceiling simply forces the Treasury to stop issuing debt beyond a certain level but does not specify the spending mix under the debt limit. I see the debt ceiling as a political device used mostly for political purposes. But it could force some agencies and programs out of business and perhaps that is its main purpose to force compromise on budgets inside the government.


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