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Sunday, January 20, 2019

MMT In The Newsflow Again

Modern Monetary Theory (MMT) has been in the news again (and filled up my Twitter feed...). There have been a number of attempts to "explain" MMT by various American conservatives. As one might expect, those attempts have been pathetic; it is generally a good idea to have at least a reasonable grasp of a topic before attempting to explain it. Critics of MMT generally do not bother with that step. Since I am trying to work on other projects, I will only give a quick response to what I have seen, in case some of my readers are not familiar with MMT. (My working assumption is that most of my readers are, hence the brevity of this article.)

There are two angles of attack to this debate.

  1. Are MMT policy proposals radical?
  2. Is it a radical approach to economic theory?
On the policy side, the conservative attacks on MMT are largely based on a misunderstanding of MMT (which may or may not be deliberate). One could imagine a country with "MMT policymakers" who undertake a series of policy changes that can be related to existing policies in developed countries. Nobody wants to "print an infinite amount of money" which is one of the pathetic recent characterisations I have seen in the lamestream media.*

I will not go through every possible policy, but I will only cover the most important - the Job Guarantee. The key policy variable for the Job Guarantee is the wage paid, and there is no reason that this wage has to be particularly high. After all, it is the de facto minimum wage in the economy. It is entirely likely that the introduction of the programme would lead to a one-time jump in wages, but then low wage jobs in the private sector would effectively trade as a spread off that wage, and that would be it. Once we factor this in, the size of the programme would not be that big relative to existing welfare state programmes. In particular, it would be far less inflationary than a basic income policy, which has been adopted by the free market fundamentalists.

However, if the reader is willing to let me dig deeper into politics, we can see why free market conservatives are unhappy with it. (If one is a free market conservative, one may wish to skip ahead a couple paragraphs.)

Free market conservatives and neoliberals have managed to embrace two policy stances:
  1. We need to cut marginal tax rates on rich people.
  2. Debt is out of control, so we have to stop spending on programmes that benefit poor people.
Roughly speaking, the embrace of these policies has been success in recent decades, and so the neoliberal contingent wants to keep the political train going. However, there is no way that any theory of fiscal policy that embraces concepts like arithmetic are compatible with this stance.

The theory side of MMT is more radical, but it only radical in the sense that the neoclassical consensus has all the attributes of a failed research programme. Modern Monetary Theory is part of a long line of post-Keynesian economics; if you want to understand the theory, there's a lot of reading to do. There's a lot of "MMT primers" on the internet, but they focus on only the juicy bits, and they are mainly aimed at non-economists. (I'm still waiting to get a copy of the MMT textbook, which should have been published years ago...)

The skepticism of MMT towards monetary policy is an area that both shows up in policy and theory. For a normal human being, locking interest rates at zero is not a particularly radical policy -- Japan has been a wonderful policy lab. However, if one is a researcher at a central bank -- or a researcher whose funding gravy train comes from central banks -- the downgrade in importance of monetary policy as a policy tool has extremely nasty implications. As a result, this aspect of MMT will always raise the dander of many economists.

Finally, my Twitter feed has been filled with condescending comments from mainstream economists who state that MMT has no empirical aspects to it. Firstly, if one does not read the literature, one will not find empirical work. Secondly, how much empirical work can we expect from theory in the first place?

Let's take a look at mainstream economics.
  1. It is very easy to find mainstream academics insisting that government debt is a burden on future generations, as this is demonstrated in OLG models. OK, let us to try to fit an OLG model to the post-1940 experience in the United States. Which "generation" ran up the debt? What year exactly did this "generation" live? What year exactly did the next generation live? What was the actual measured burden?
  2. The mainstream insists: all we need for economic stimulus is for the central bank to cut real rates. How come this did not work after the Financial Crisis? Oh, the "natural rate of interest" fell! Why did the "natural rate of interest" fall? Since the economy did not grow as expected, the estimate of the natural rate of interest was pushed below the observed rate of interest. (Falsifiability? Whatever, man.)
Let's be blunt, the empirical record of neoclassical theory is hardly sparkling.

I am currently working on a book on business cycle analysis. I will once again go through mainstream theory, and see whether it offers anything of use. I do not wish to prejudge things, but based on my past experience, I have severe doubts whether we can extract any useful practical insights from neoclassical theory. If someone thinks that assessment is out to lunch, I would be very happy to look into any suggested models.


* I'm a blogger, and I'd be embarrassed to publish something as ridiculous as that.

(c) Brian Romanchuk 2019

1 comment:

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