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Saturday, January 21, 2017

Misunderestimating MMT

My ex-colleague Gerard MacDonell wrote an article "The trouble with MMT" (Modern Monetary Theory). He offers a wide number of criticisms, however I believe that his substantive ones are unconvincing. I will note from the beginning that I cannot say that his arguments are wrong, they represent one side in a long debate in economics. Instead, I believe that we need to properly understand the debate, and that the MMT wing of post-Keynesian economics offers a lot of insight to that debate.

[Update: Gerard has a followup article here; I will respond to a couple of points in an upcoming short post.]

This article is partly aimed at people who are not familiar with MMT; Gerard's arguments are using concepts and language that are more familiar than MMT, and so I believe that understanding these arguments will be useful for many readers coming to grips with it. Another thing to keep in mind is that MMT did not just appear out of nowhere; it is a branch of broader post-Keynesian economics -- I discuss the relationship here. Since I view MMT as part of this larger tradition -- and not just the output of "MMT economists" -- it has much deeper intellectual pedigree than browsing some articles on the internet would suggest.

(This article dodges the discussion of political strategy that Gerard raises. My feelings on this are mixed. Although I believe in Functional Finance for an analytical strategy, the associated political strategies to justify programmes is more awkward.)

The Disappearing Fiscal Constraint

Gerard took aim at some of Warren Mosler's comments about the fiscal constraint. Since I view MMT as part of a broader tradition, we need to look at what that tradition suggests, and not quotes from a particular popular book. In this case, the MMT tradition relies heavily on Functional Finance, going back to Abba Lerner.

I will now restate my interpretation of what MMT says about the "financial constraint" for governments, using a fairly simple example.

Imagine that I walk into a new shopping mall, with only a $20 bill in my pockets. I can buy whatever I want -- so long as it costs less than $20 (sales taxes included). (I assume that I do not know any of the people running the shops, so they will not extend me credit.) I have a hard $20 constraint on my ability to finance purchases; hence it makes sense that I have a hard financial constraint. A key point to note that this constraint is directly related to a dollar amount, a fact that I will return to.

From a practical perspective, central governments face no such constraint -- the circular nature of governmental finance flows means that they can "finance" practically anything. (OK, under the current institutional framework, there are limitations; the U.S. Treasury could not just write a $100 quadrillion cheque to buy a fancy hotel on a Friday afternoon. I discuss such institutional details in Understanding Government Finance; What matters is that these limitations represent largely uninteresting "corner cases.") 

What stops the government from buying "everything"? Inflation. If the government issues an insane amount of liabilities ("money" and debt) relative to its tax base, the value of those liabilities goes down versus real goods and services. As a result, the constraint on government finances is best described: excessive government purchases and transfers can raise capacity utilisation in the economy beyond "normal" levels, (eventually) giving rise to inflationary pressures.

Since the government is buying stuff with money, is this not financial? If you want "financial" to mean "anything to do with money," I guess you could say that. However, this is a fairly meaningless definition. The constraint has nothing to do with the government's ability to finance purchases, nor does it have anything to do with fixed dollar amounts.

The second point (no relation to dollar amount) is critical, and why I think we need to drop the tag "financial."

I am currently developing my stock-flow consistent (SFC) modelling framework, and I have discovered that it is fairly easy to generate endlessly growing governmental debt levels. All you need to do is to add a sector to the economy, give it a source of cash flow, and forget to add an outflow. It will hoard financial assets, and drive the economy to a state of capacity underutilisation. The automatic stabilisers associated with fiscal policy kick in, and the government runs deficits to counteract the demand drag. Eventually, the economy returns to a "normal" capacity utilisation level, but with higher governmental debt and deficit levels. In other words, we can have wildly different governmental debt levels corresponding to the exact same level of capacity utilisation.

If we return to the real world, we do see sectors that emulate such hoarding behaviour.
  • Pension funds are relentlessly accumulating financial assets to meet future outflows. Those pension funds will never purchase real goods and services (beyond their technology infrastructure), no matter the level of their financial asset holdings.
  • Foreign central banks have been accumulating reserve assets, with no intention of ever buying real goods and services with those reserves -- they are to be used to purchase a particular financial asset (their domestic currency if it is under attack).
  • Many corporations are mindlessly piling up cash hoards, reflecting the empire-building objectives of the C-suite.
  • Increasing inequality is redistributing income flows to the parts of the household sector with a low propensity to consume, leading to the growth of the stock of financial assets held.
  • If we include various intra-governmental debt holdings within the total, government debt outstanding could become arbitrarily large without any observable effect on economic behaviour.
As a result, we cannot relate the dollar amounts of governmental debt or deficits to real world capacity utilisation. Anything that causes such hoarding behaviour to increase will increase government debt level while keeping "capacity utilisation" essentially the same.

In summary,
  • governments (that control their currency) can always "finance" spending (under plausible limits); and
  • government spending is limited by an inflation constraint, and when that constraint is hit has no relationship to the dollar amounts involved.
Under such circumstances, my view is that anyone who applies the term "financial" to this constraint is using the word "financial" in a manner that bears no resemblance how that word is normally used by speakers of the English language.

With that detour out of the way, I will address what Gerard actually wrote. He appears to agree with the logic I outlined above, but he still thinks that the word "financial" applies. In the version that he has posted at the time of writing (Gerard extensively edits his articles, and so I am unsure what the reader may see in the future):
Finally, imagine that the debt/GDP ratio rises to a level that would otherwise be difficult to carry if funded with even one-week treasury bills.  The reason for defining the debt level in terms of what would be difficult to finance with bills will become obvious below. For concreteness only, call that debt level 200% of GDP.
Why I believe that he is wrong is that he is ascribing a direct relationship between the debt/GDP ratio and real variables ("200% of GDP"). His article makes no explanation of why this is possible, but I would argue that it is clearly wrong (for the reasons given above). For example, if we decide to capitalise actuarial liabilities and inflows onto the Federal government's balance sheet, the "debt" ratio could easily rise above 200% of GDP without it having an observable effect on anything.

The only way that I can make sense of Gerard's argument is to assume that the policy mix is unchanged forever, and so we can relate governmental liabilities to real goods and services in a more reliable fashion. For example, a 1% increase in the governmental deficit will imply a 1% increase in government consumption (which then feeds into capacity utilisation). I cannot guess why he believes this, but I would note that it follows from typical assumptions in mainstream economics. (To be clear, I am not saying that he believes all of the following points, rather this is my characterisation of standard mainstream views, which appear to be consistent with his analysis.)
  • It is typically assumed that there is only one representative household (hence no income distribution effects);
  • there is only a single composite good (which allows for a well-defined production function with a single capacity variable);
  •  the business sector is a cipher that does not accumulate financial assets; and
  •  models typically do not include foreign central banks that hoard reserve assets. 
In a model that embeds these assumptions, we would see a simple relationship between governmental deficits and capacity utilisation. However, since I view those assumptions as dubious, I do not expect such a relationship to exist.

[Update: added this paragraph.] This discussion relates to the MMT/Functional Finance view of financing as it relates to analysis; there is no claim that eliminating the "financing constraint" from analysis opens space for new policy. For example, the government still needs to impose taxes, even if they are technically not "financing" spending. (The MMT view is that taxes drive the value of the currency -- Chartalism.) However, it does eliminate analytical errors that drive policy mistakes. For example, the Maastrict Treaty 60% debt-to-GDP ratio made no sense, nor did the search for the magical 90% debt-to-GDP ratio that appeared in the more lurid corners of economic analysis. In other words, MMT analysis does not offer the prospect of a free lunch (disclaimer follows) -- but it helps avoid wasting food as a result of ignorance. (The Jobs Guarantee can be viewed as providing a free lunch -- the programme offers the possibility of eliminating underemployment while at the same time offering a more humane method to anchor the price level.)

MMT and Money Financing

Gerard then turns to the question of money financing. He discusses two possibilities:
  1. Excess reserves pay the policy rate of interest; and
  2. excess reserves do not pay interest.
He wastes an incredible amount of space on the first possibility -- he apparently missed the part of the MMT proposals that emphasises that the second possibility is what is in mind.

Unfortunately, by emphasising the first, he did not take the second seriously. Highlights of his comments:
I don’t want to get into this scenario too deeply because it is so unrealistic and because it is quite a bit more complicated than I am smart.  But we can imagine two ways in which this case quickly goes intolerably inflationary, one following a conventional logic and one following the fiscal theory of the price level. I will be brief – and yes, conclusory – on each.
If an interest rate of zero is too low relative to how the economy is doing, then we get inflation as the Fed falls increasingly “behind the curve”, by virtue of not being able to move.  I will stop there because the story is very familiar to all of you, and I have nothing to add to it.
Essentially Gerard is assuming that locking the policy rate at 0% will cause inflation, because the central bank can no longer do anything with interest rate policy. The basis of this assumption: "it is very familiar to all of you."

Ahem. The effect of interest rates on inflation is along running debate, and was not invented by mainstream "neo-Ricardians." (It only seems that way because they ruthlessly exclude citing anyone other than other mainstream economists.) The MMT position on locking the interest rates at 0% hinges on the argument that interest rate policy has only a limited effect on inflation. If you want to disagree with MMT, you have to take on that argument.

I am agnostic on the question of the effectiveness of interest rates (it's an open debate within post-Keynesian economics, and even within MMT). That said, the modern mainstream literature that I have seen is entirely useless. The effectiveness of interest rate policy is assumed within the mathematical structure; it is literally impossible to debate the topic using DSGE models. The theory is non-falsifiable.

How would we falsify the theory? We would need an episode where the central bank holds the policy rate away from the natural rate. The recent period of zero rates in the United States would have qualified -- if we used pre-crisis estimates of the natural rate. However, the mainstream estimates the natural rate of interest by using techniques that assume that it has the assumed effect on the economy, and so the natural rate was conveniently estimated to be negative, so that the theory appears to predict the lack of inflation. (I discussed this topic at greater length here.)

I am not saying that Gerard is wrong, rather that I see no evidence that his view is right. As a result, he is not in a position that the MMT view is wrong. In any event, I do not see the proposal to lock interest rates at 0% as being a core part of MMT theory.

(He later discusses the Fiscal Theory of the Price Level, which I have discussed elsewhere.)

Concluding Remarks

Gerard MacDonell's article illustrate some of the difficulties MMT faces for broader acceptance. In addition to difficulties with terminology, there is a constant need to discuss how underlying assumptions differ from mainstream economics. Having to fill every single article with discussions of theoretical concepts so as to avoid being misunderstood when being quoted out of context makes writing awkward.

(c) Brian Romanchuk 2017


  1. Not that I fully agree with that critique ... just some parts actually ... but it's a decent critique.

    In that the author rightly picks on the tax point.

    Imagine a government where taxes are only on household income and it is just 1%. This government can spend far less than the government which taxes at 40%.

    So the language that "taxes do not fund expenditures" are quite wrong actually.

    Another way to look at it ... from the beginning of the history of the United States look at how much tax was raised and how much spending is via borrowing. The latter will turn out to be pittance compared to the former.

    1. (Blogger ate my earlier response? Try again.)

      Since MMT is Chartalist, and argues that "taxes drive money," it makes little sense to say that MMT says that taxes are unnecesary. The point about financing is fairly abstract, and my examples show how I think the views about the financing constraint should be interpreted (from a more mainstream point of view).

      In my view, MMT is just fundamentalist Functional Finance, and the earlier Functional Finance types said similar things ("taxes for revenue are obsolete").

      Are some of the writings of some MMT authors unclear or misleading at various points, especially if the quotes are taken out of context? Possibly, but I agree with enough of the MMT world view to not make a big deal about those semantic points. When taken in context, I usually agree with what they are saying.

    2. It's not just a semantic point. Semantic confusions spill over to actual policy.

      Consider this para:

      "Of course, which tax do “liberals” love? Corporate income tax. They all want to increase it to “pay for” all the goodies they want to shower on the poor. In other words, they compound their confusion—not only do they insist on being wrong about the purpose of taxes, but they also embrace one of the worst ones! Maybe a good topic for another blog?"

      Now if I read it as corporate income tax should be zero, will that be a good representation. Why not tax corporate income?

      My point is precisely that a lot of things are beyond semantics. The language MMT uses confuses MMTers themselves.

      So progressives can dismiss MMT for two reasons:

      1. they are still deceived by mainstreams into thinking in certain way
      2. genuine progressive reasons.

      I understand that MMTers seem to understand point 1 very well. People who would have been otherwise good fail to come out of the mainstream teachings. But even if they were to: it's not enough.

      I don't even agree with: "taxes for revenue are obsolete". That the government can spend higher than the taxes received doesn't nullify "taxes are for revenue". Why? Because a government taxing at 1% is limited as compared to a government taxing at 40%.

    3. Well, Stephanie has had Bernie's ear for the last 2 years, and in the background has successfully become important in many influential circles on the left. There's so much more going on behind the scenes that you and others simply reading the blogs have no idea about. And there are plenty of reasons to support progressive taxation beyond "it finances the govt's spending" in MMT and other progressive publications starting in the 1940s.

    4. "There's so much more going on behind the scenes that you and others simply reading the blogs have no idea about. "

      Deflects the question. Does MMT want zero corporate income tax?

    5. Minsky did. Ruml did. I can't speak for all MMTers, but those that follow Minsky generally do, for the same reasons as Minsky and Ruml. Show me a school of economics where everyone agrees on all policy proposals.

    6. You're basically arguing here that the constraint is inflation, which is what MMT has always said. Straw man.

    7. The thing about straw man is that it's just so easy to say "straw man" and avoid.

      It's possible to both argue about fiscal policy/expansion without getting iota affected by neoclassical economics and yet be dismissive of MMT is my point. Such as the right burden of taxes. Just avoiding what ought to be the tax rate doesn't help because it's an important question.

    8. @Ramanan:

      "So the language that "taxes do not fund expenditures" are quite wrong actually."
      Doesn't that depend on how you define what it means to "fund"? The MMT position, as far as I understand it, is that the government does not need to obtain money through taxation before it can spend. The government does need taxation to give value to the money it issues and to reduce private-sector demand if the latter is too large in relation to the economy's capacity to produce and the government's demand for the economy's output (i.e. to contain inflation). If you define the purpose of taxation as described in the previous sentence as "funding", then, yes, taxation does indeed "fund" government expenditures. However, it seems to me that this is quite different from the way I, as a private individual, use my income to "fund" my expenditures. To me, the two types of "funding" are completey different, both conceptually and operationally. The government has much less constraints when "funding" its expenditures than myself.

      "Imagine a government where taxes are only on household income and it is just 1%. This government can spend far less than the government which taxes at 40%.
      Well, I suppose that would depend on the private sector's desires with respect to saving, wouldn't it? Also, wouldn't it depend on the details of the institutional setup. This setup is not clear to me, but you seem to have in mind a setup where taxation is constrained to be max. 1% in first case and max. 40% in the second, because of politics for example. In such a setup, clearly the second government has more (non-inflationary) spending room than the first, everything else being equal. This seems to me to perfectly consistent with the MMT position, again as far as I understand it (which may not be very far).

  2. And also the progressive part ... that MMT is so loose about taxes is the reason why many progressives won't like to be MMT. I mean one agenda of the progressives is higher taxation and if you come and say, "taxes don't fund expenditures", they are obviously not going to like it. Because "taxes don't fund expenditures" carries the innuendo that lower taxes on the elite is not something to worry about.

    Of course to currently grow, it's not needed to immediately raise taxes but a progressive system of taxation is definitely needed in the future. Since there's a race to the bottom, this has to be coordinated among nations as well.

    1. My article was already long enough, so I did not address his points about political strategy.

      I would note that I have argued (somewhere?) that the financing scheme for Social Security makes little sense from a Functional Finance point of view, but it is amazing political set up. Unlike Obamacare (for example), it was built to survive the political process.

      This makes political advice awkward. One should say stupid stuff, because that's what one's political opponents understand? I like to think of my target audience as being analysts who would rather be correct in their analysis of the economy, and not worry about how to sell the ideas politically. The main MMT authors are not politically aloof like myself, and so this is an issue for them to deal with.

    2. I'm going to disagree with you on SS, Brian. The only reason there is a public discussion about SS is because we pretend we pay for it (financially) with the payroll tax (obviously, legally it's tied to payroll tax revenues and the trust fund). It's quite possible to create a system of "paying into" a public retirement scheme (i.e,. with credits, etc.) without tying it to program revenues funding program expenses (and thus create a politically influential constituency of the program's supporters). Think about it this way--think of your least favorite govt program. Now think about how much easier it is to argue for cuts in that program if taxes earmarked for that program fall below projected spending. You don't even have to argue the merits of the program anymore; you can even argue for cuts under the auspices of pretending you are the one trying to save it.

    3. Let's leave out social security out for a moment Brian.

      Wouldn't MMT want higher taxes?

      Sure you can boost the economy without raising the tax rates ... how is the distribution of the national income compared to say higher taxes?

    4. MMT'ers have provided many reasons, and many proposals for progressive taxation.

    5. STF:
      "I'm going to disagree with you on SS, Brian. The only reason there is a public discussion about SS is because we pretend we pay for it (financially) with the payroll tax (obviously, legally it's tied to payroll tax revenues and the trust fund). It's quite possible to create a system of "paying into" a public retirement scheme (i.e,. with credits, etc.) without tying it to program revenues funding program expenses (and thus create a politically influential constituency of the program's supporters). ..."

      Admittedly, I am looking at this from a Canadian perspective (Canada Pension Plan/ Quebec Pension Plan), and so I might be getting the U.S. political developments wrong. However, I agree that various Republicans have been targeting SS (for decades): but my feeling is that touching SS has been and always will be political suicide.

      The advantage of the current SS system is that citizens feel that they have paid into the system, and they want to get what they deserve. Taking away promised payments from them is extremely difficult. The strategy of suggesting that the plan is underfunded only works if the actuaries go along with it.

      In my view, it's a lot easier to starve programmes of transfer payments in which it is seen that the payout is entirely a discretionary expenditure. The rest of the welfare state look like they are in pretty rough shape when compared to SS and unemployment insurance (which is also structured to look like an insurance scheme, flouting Functional Finance).

    6. Perry Mehrling wrote one of the best papers I have ever read since it accurately describes financial systems as dealer networks and accurately describes the State as a very unique type of financial intermediary:

      One argument on the third page is that the state invests in human capital (via spending for education and training) such that social security is "funded" by this capital which does not otherwise appear as an asset on private or public books.

      In the United States the families now go into direct federal debt to the Education Department (ED) which pays schools. ED borrows from the Treasury which sells Treasuries if necessary to spend funds tied to direct student loans. The financial markets get more secure federal savings instruments in the Treasuries float. The so-called "job creators" get to cherry-pick the talent pool. The honest but unfortunate student borrowers, who are the least sophisticated members of society, are effectively prevented from obtaining a discharge of educational debt in bankruptcy on a statistical basis, and the this is due to the fact that ED would be in perpetual debt to Treasury inside the government if it cannot recapture funds from student borrowers without another source of revenue to ED such as a share of progressive taxes or some earmark.

      If human capital were to be recorded somewhere the unavoidable loss on the student loan portfolio might be seen as a write-off that is smaller then the capitalized value of the educated workforce.

    7. "The advantage of the current SS system is that citizens feel that they have paid into the system, and they want to get what they deserve. Taking away promised payments from them is extremely difficult. The strategy of suggesting that the plan is underfunded only works if the actuaries go along with it."

      Which they do. And they go along with it because legally the payroll tax revenues fund the system. Note I very carefully did not say that you shouldn't tie some sort of pay-in to the rights to later benefits. I said you should not make a law that says the current benefits can't be paid if the current and past (via trust funds) revenues aren't high enough. Some parts of Medicare do not make this mistake, actually.

  3. Brian, I think my insights into MMT, well, they have a great deal of validity.

    1. There's a lot of MMT literature that addresses the points you make, not to mention all the literature (MMT and non-MMT) that has thoroughly debunked Reinhart/Rogoff. But you only cited Warren's book intended for the lay public, which is inappropriate and frankly unscholarly given the detailed approach you want to take here.

      Just 2 examples.
      (1) if you understood the MMT approach to macro policy (functional finance), you'd know that if deficits or debt service on them is inflationary, MMT would advocate spending cuts or tax increases. Inflation is the constraint, not so-called "sound finance."
      (2) There's a good deal of MMT literature on exploding debt service and operations (e.g., paying interest on excess reserves vs. interest rate target=0). You cite none of it, but your points are already dealt with therein.

    2. Clearly, I know nothing of that work.

    3. (Brian--for whatever reason, some of my posts are not showing up. It appears random to me which ones do vs. do not.)

      Whether you do or not, you clearly did not cite any of it. And you clearly made arguments against that work without acknowledging the MMT counters to those points. That's basically the definition of unscholarly.

    4. Scholar,

      I think you are confusing Growth in a Time of Debt with This Time is Different. It is hard to say given that you did not provide proper scholarly citations of everything R&R have ever written. But based on your comment, that would be my guess.

      I don't think R&R's factual comments on base money defaults have been "debunked", although I concede I am not the least familiar with any of those incidents. They would make a nice separate study, I think.

    5. STF, lighten up a bit. Mr. MacDonell does not claim to be an economics professor and makes some reasonable criticisms of MMT based unfortunately on some common misperceptions. Contrast that with Richard Holden's idiotic rant from a few days ago. Holden is an academic and claims to be an economist. That piece is an example of someone acting in an unscholarly way. And it is a load of garbage besides that.

      Mr. MacDonell does make defensible points. They are political rather than economic in my view, but they are valid criticisms.

    6. Gerald,

      "This Time is Different", which is the R&R you mention in your paper, has been thoroughly debunked. For example, Forget Excel: This Was Reinhart and Rogoff's Biggest Mistake --
      Correlation is not causation


      the best argument against taking R-R as austerity's gospel truth was it was just a correlation. Of course a ratio tends to increase more when its denominator increases less. That's how fractions work. But it doesn't prove that the rising ratio causes the stagnating denominator. If anything, the causality runs the other way -- lower growth tends to cause higher debt, as tax revenue falls and safety-net spending rises during a slump.

    7. {Technical point...}

      [STF wrote: (Brian--for whatever reason, some of my posts are not showing up. It appears random to me which ones do vs. do not.)]

      One of mine got eaten as well; ouch. I looked in the "spambox," and they were not put there. I have had issues with anonymous comments disappearing into the spam box, but I have not noticed this issue before. I hope it will be fixed by Google, as it is something I have no real control over...

    8. Gerard MacDonell: "I don't think R&R's factual comments on base money defaults have been "debunked", although I concede I am not the least familiar with any of those incidents. They would make a nice separate study, I think."

      Ever since I found that R&R listed Alberta as a *sovereign* default in one of the working papers, I feel that it is necessary to do a lot of fact-checking of their claims. They also listed a gilt reorganisation as being a default, which is not what the British court system ruled. If you took every time some whiner bond holders lost a court case as a "default", then you could get a lot of them.

      In any event, governments can always voluntarily default on any of their liabilities, whether it is "money" or "debt." The key is that it is voluntary, and not something that is imposed by "markets." This is very different than the case of a corporation.

    9. This comment has been removed by the author.

    10. Jerry Brown . .

      I see the two pieces similarly--both are unscholarly. It's certainly the case, though, that Mr. Holden has an absolute perfect grasp on what is scholarly and isn't though, whereas Mr. MacDonall might be offered some space on that point.

      What I see as the big difference, though, is that Mr. Holden essentially "went Trump" on commenters that proved he was misrepresenting MMT by misrepresenting them, claiming they'd written something they didn't, etc. Further, the quote from an earlier Billy Blog on inflation to back his point was such an obvious misinterpretation, and again, when others called him on it, he "went Trump" on them.

      On the other hand, Mr. MacDonell's comments here have not been disingenuous, regardless whether or not I agree with them.

    11. STF, thank you for the explanation.

      I should not have told you to lighten up. I felt somewhat responsible for inspiring Mr. MacDonell's discussion of MMT, (I assume I was the reader he mentioned in his post) and was concerned that the lambasting he was experiencing here might be due to my request to him. This is silly of course, and in any case, it is pretty clear from his reply article that Mr. MacDonell does not agree with your criticism or mine either.

      Aside from that, if STF is short for Scott Fullwiler, I want to thank you for the many articles and comments you have written over the years that have helped me to learn about MMT.

  4. Thanks Brian (and STF). I've been following MMT for 8 years now and haven't yet found any significant holes. It's the best economic school, in my opinion.

  5. Very good post Professor Romanchuck. I liked especially the part where you state that pension funds, foreign central banks, empire building corporations etc. are building up financial assets, savings basically, that enable a government to deficit spend more than otherwise. I had not considered that at all in my brief comment at Mr. MacDonnell's site. But is it fair to ask what happens when and if those activities reverse?

    1. Ex-professor... (Although Doctor Romanchuk sounds good; I spent four years getting that degree.)

      If the hoarding behaviour reverses, it presumably would increase demand, and so government fiscal policy would need to tighten to keep things at a steady state. You could interpret that as "there is no free lunch." However, there is no point in tightening policy in 2017 to prepare for increased demand in 2027, which a finance-oriented approach would suggest makes sense (since discounted cash flows allegedly rule).

    2. Well Dr. Romanchuck, perhaps I was using the term professor loosely. In any event, thanks for addressing my question. I think you would admit that fiscal policy might have to pivot fairly quickly to respond to changes in those overall trends should they occur. And getting fiscal policy to respond has been a problem here in the US, let alone places like the EU.

      But I see that as a political problem unrelated to MMT's description of how the economy works and whether that is true or not. In my opinion, a problem for MMT is that many people say OMG what would happen if people realized MMT was correct. They don't always try to refute the theory, they base their opinion on what they imagine the consequences of accepting the theory would entail. That was my biggest criticism of Mr. MacDonell's piece.

      Thanks again.

    3. The pension savings, and particularly govt tax preferences for them, is something Mosler has harped on for years as requiring larger govt deficits.

  6. What I try to do is remember to always copy my blog posts to the clipboard before hitting the publish button.

    This is a great post. The key insight is how financial assets start to accumulate in sectors of the economy and how this might change the government policy via efforts to stabilize output of GDP.

    I witnessed the debate over whether taxes and government securities are necessary to "finance" government spending several times on the Understanding Money threads. My view is that the central bank and Treasury of a fiat sovereign government must emit instruments that are similar to other financial instruments and therefore these are financial operations. However they are financial operations of a super-organism which does not have to raise taxes to repay its debts but can rollover debt in perpetuity compared to any economic unit that saves today to spend in the future.

    Does a hive of bees need to save money in a bank account? No. The bees go to work with and against nature and accumulate honey, for whatever real purpose that serves the hive (I'm not a biologist). Does a fiat sovereign government need to hold a bank account for any reason other than to transact with other units in the economy? No. The society is like a hive of bees engaging the natural world and attempting to save financial assets for future spending plans in the private and non-sovereign government sectors. The fiat sovereign exists to stabilize the savings and plans of the society and does not need its own store of financial savings.

  7. Is the substantive argument essentially the same one DeLong made here: ?

    1. There were a few substantive points made my Gerard; some were about political strategy that I did not address.

      On the analytical side, his complaint was that you cannot lock interest rates at zero because the central bank cannot respond to inflation, and "everyone" knows that is bad. That's a standard mainstream view, but that is what he needed to discuss.

  8. In my opinion, a problem for MMT is that many people say OMG what would happen if people realized MMT was correct. They don't always try to refute the theory, they base their opinion on what they imagine the consequences of accepting the theory would entail. [Jerry Brown]

    It's similar to religion in that regard. Actually, the current public discourse about religion in western countries has moved beyond that of economics, in my opinion. But up until the last 100 or 200 years in western civilizations, it was considered unacceptable to criticize the logic or historical truth of the Bible because this would undermine the moral bedrock of society. (And that concern was not wholly unfounded, although most people today agree that no one authority should have a monopoly on the truth.)

    A couple months ago I tried to write an explanation of the national debt which would deal sympathetically with common questions:

    The Socrates Show, with guest Pete Peterson

    1. Thanks Dan. I had read that previously and enjoyed it. Unfortunately Peterson needs a remedial session with Socrates.

    2. Thanks Jerry. Mr. Peterson seemed quite reasonable in his interview with Socarates, but he is getting on in years...

  9. On R/R, Timothy Sharpe and Martin Watts have published 2 papers that do the identical regressions as R/R in their book, but unlike R/R they separate sovereign/non-sovereign monetary systems. The results are what MMT says they would be--R/R results hold for non-sovereigns but not for sovereigns.


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