I have been battling with installing a locking floating floor, which is an engineering task that I discovered that my doctorate in engineering provided little training. As a result, I have been somewhat distracted, and only quickly read the article.
I am unsure how the academic MMT community will view the paper; being portrayed as orthodox is perhaps not the way that they think of themselves. Furthermore, some of the theoretical points run into the thorny questions of academic originality. As an ex-academic, I understand concerns about originality and distinctiveness. Since I only browse the economic academic literature looking for useful tidbits, I cannot comment on the academic originality of MMT.
From my decidedly ex-academic perch, I am open to the idea that the gulf between the mainstream and MMT in policy terms is more a question of political economy and terminology. If mainstream economists actually paid attention to the mathematics that they say is so important, a lot of the distinctions with MMT would disappear. Essentially, they have built qualitative folklore around not particularly useful mathematics. Modern Monetary Theory is battling with the folklore, not the mathematics.
I just want to comment briefly on a few points that I saw some disagreements. (These are the points that stuck out to me when I was sprawled on top of a pile of building materials, and are not necessarily the most important parts of the paper.)
InflationThey state the following:
Output below this level implies unacceptably high unemployment and perhaps deflation; output above this level implies unacceptably high and/or rising inflation. This assumption can be represented as a Phillips curve, the same general form of which is used by MMT as in conventional textbook presentations. A corollary is that policy affects inflation only via the level of output.From what I have seen, the MMT story on inflation is more complex than that text suggests. The "nominal price level anchor" provided by the Job Guarantee wage is constantly emphasised. My interpretation of the Functional Finance part of MMT as suggesting that "large enough" fiscal loosening leads to inflation -- but until we hit that "large enough" level, inflation may do whatever it does. The psychological anchoring of wages relative to a Job Guarantee wage may be far more effective tool for inflation stability than changing the overnight rate on risk-free collateral.
If the MMT inflation story was as simple as just a Phillips curve, why don't they say that themselves?
Aggregate Demand ManagementThe article was premised entirely on aggregate demand management. And MMT economists have discussed such aggregate management with respect to current events. However, the emphasis in MMT is on using a decentralised automatic stabiliser -- the Job Guarantee. The key advantage of the Job Guarantee is that it is spatially targeted at the areas of greater need.
The Debt Ratio (My Perspective...)
We noted above that while MMT advocates would probably agree that the debt ratio should not rise without limit, in general, they do not see the debt ratio as an important target for policy.I cannot speak for MMT academics, but I am far more worried about a Martian invasion than a country's debt ratio rising without limit.
If we start from a stock-flow consistent modelling perspective, we assume that the stock of private sector wealth enters into consumption decisions. As the government debt ratio rises, by definition, private sector wealth is rising. Eventually, the drawdown from saving will dwarf spending out of income if it is not otherwise budging. The increased spending creates a circular flow of income, driving nominal GDP above expectations. Since the duration of government debt is not zero, the debt-to-GDP ratio will fall -- as exactly happened in the post-war uplift in inflation.
As always, inflation is the limit for fiscal policy.
This allegedly does not happen in mainstream DSGE models, mainly because the mainstream economists make no real effort to solve the models. If they actually did the math, they would probably see the same effect.
(c) Brian Romanchuk 2018