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Sunday, August 25, 2019

So Are We All MMTists Now?

Larry Summers attracted a great deal of attention with arguments that post-Keynesian theories ought to be taken into account, and the ability of central banks to stimulate the economy are limited. One could argue that the zeitgeist is shifting in the direction of Modern Monetary Theory (MMT): the role of fiscal policy may be increasingly important. However, I am unsure how far actual economics debates will shift.

One may note that Summers dodged discussing MMT in his initial tweets; in fact, he referred to Thomas Palley, whose main contributions in recent years has been his sectarian attacks on MMT. My guess is that this will be a fairly standard approach.

Policy Shifts?

It seems entirely likely that during the next recession, policymakers will not engage in pointless fiddling with monetary policy while the economy burns. Fiscal policy -- probably in the form of tax cuts -- will be discussed far more. It may be that "helicopter money" (the central bank sending money to households somehow) will be floated as an idea, as that is somehow completely different than fiscal policy (even though the effects are indistinguishable in a mathematical model).

Of course, negative rates and quantitative easing will be tried, but very few people will expect them to do much of anything.

Nevertheless, it is unclear how much of a practical difference that makes. Fiscal policy was deployed in response to the Financial Crisis. It was too small to make a big dent in the downturn, but at the same time, it is unclear whether the next recession will be a similar magnitude. Relatively scaled-down fiscal stimulus might be what the consensus views as sufficient.

Secular Shift?

From the point of view of a long-term bond investor, the possibility of more activist fiscal policy does raise the possibility of a secular rise in interest rates. Central banks might be concerned about inflation risks, and so they might actually raise rates at a non-snail's pace. From a MMT perspective, rising interest rates raise the interest income received by the non-government sector, raising domestic demand. This would help sustain any inflation that manages to appear.

The previous scenario is what I believe is the scariest campfire story bond bears can tell. However, I am unsure how large the risks are. Post-Keynesian theory argues that the inflation process is about conflicts between employees and firms over income shares. Unless fiscal policy does something drastic, it is unclear whether employees can make wage increases stick, even with greater domestic demand.

Furthermore, we need to be cautious regarding how widespread the adoption of fiscal-friendly views are. Two of the high profile neoclassicals that are discussing the increasing importance of fiscal policy -- Larry Summers, and Paul Krugman -- are firmly in the Clintonite wing of the Democratic Party. Very few Republicans care what Paul Krugman thinks. As a result, this may just be a shift within the Democratic Party. Such a shift is hardly surprising. The Clintonite's claim to fame is that they won a pair of elections almost 30 years ago. The time separation between now and then is comparable to the separation between Bill Clinton's first victory and JFK's.

The modern free market parties (like the Republicans) are consistent: they are in favour of shrinking the welfare state, and letting businesses get what they want on the regulatory side. Tax cuts fit their agenda, and so there is no problem to enact them when recessions hit. However, it is extremely unlikely that they will not call for cuts to welfare state programmes when fiscal deficits blow out -- no matter what some ivy league academics have to say.

Rise of Post-Keynesian Theory?

In a world where economists followed the conventions of other branches of academia, neoclassical economists would cite post-Keynesian authors, and take their theory into account. One could be optimistic and hope that the younger generation will take this route, particularly if some high profile neoclassicals offer an example.

I have long been cynical that this would happen, but I will put that cynicism aside for now. However, even if (some) neoclassical authors start engaging with post-Keynesians, there is still a large gulf to be crossed.

If we focus on fiscal policy, I expect that the neoclassical bias will still be towards aggregate demand management policies. Although that appears to be a step towards what MMTists are arguing in favour of, it is only a half step. This would only be the mainstream regressing back towards the 1960s Old Keynesian policy mix. Aggregate demand management has its pitfalls, as Minsky and MMTists have argued.

In other words, the question is whether there will be a fundamental re-think to approaches, or perhaps just a cherry-picking of a few concepts, and then returning to business as usual.

(c) Brian Romanchuk 2019


  1. "In other words, the question is whether there will be a fundamental re-think to approaches, or perhaps just a cherry-picking of a few concepts, and then returning to business as usual."

    So far it has been the cherry-picking approach with no acknowledgement whatsoever that MMT might have provided the cherries. Larry Summers recent 'discovery' that monetary policy might be somewhat ineffective is a good example of this.

    But eventually, one of these guys is going to screw up and admit that they have been reading MMT and that they 'discovered' that it is actually correct. Of course at that point they will have known it all along...

    Even so, it will be a good thing. The people who developed the ideas won't get the proper credit but that is a lesser evil in the greater scheme of things. Especially for me since I haven't come up with any of the ideas myself.

    1. To be fair, if all that is happening is a reversion to Functional Finance, then the person to be properly credited is Lerner. Functional Finance may not have been consensus, but it was "mainstream" in the early post-war period.

      The New Keynesians do have a lineage going back to the Old Keynesians. They could legitimately revert to some earlier thinking without crediting the post-Keynesian school that developed largely in parallel. I would argue that accepted academic standards in other fields would force them to cite more recent PK work as well as the Old Keynesians. However, the mainstream journals already broke those standards when they air-brushed the post-Keynesians out of existence in the first place.

    2. To be fair... Well I have been called a cult member because I think MMT is correct. And not just once by some random commenter but by 'actual' economists. 'Actual' in their thinking at least. I'm very fair in comparison to that behavior.

      Point out the MMT economist that does not acknowledge Abba Lerner's ideas. That can't be done. I'm not interested in being more fair to economists than I already have been.

  2. Brian,

    "Aggregate demand management has its pitfalls, as Minsky and MMTists have argued."

    Could you expand on that point?

    Henry Rech

    1. I know you didn't ask me, and I hope Brian answers your question, but anyways.

      MMT has some issues with Keynesian aggregate demand stimulus programs. In my limited understanding the complaint is that when the government bids for resources at market prices it will tend to inflate those prices in those sectors that the spending is directed at- maybe before it has improved the broader economic problems that the stimulus was designed for in the first place .

      I think Randall Wray put it sort of like this- how many nuclear missiles would the government need to order before the last unemployed person got a job? And what would be the inflation rate at that point? And at what real cost in terms of resources would be necessary to reduce unemployment that way?

      Anyways- I'm not sure that was what Brian was meaning. And to be fair to Randall Wray (since he is one of the economists I want to be fair to), I'm going from memory on that explanation and I don't have the best memory. I'm sure it sounded better when he said it in his own words.

    2. As Jerry noted, the issue is that aggregate demand management in practice often involves handing money to sectors/households that are doing well, and hoping that the extra spending trickles down to the households/firms facing problems.

      As an example, take an income tax cut. It only helps people paying taxes, and does nothing directly for people who have too low an income to pay income taxes.

      Minsky’s argument was that gave the economy an inflationary bias. Stimulates sectors/regions that are already doing well, so they have pricing power.

    3. So what is the alternative?


    4. Job Guarantee targets only people without jobs. Since wages would be a markup over the JG wage already, doesn’t bid up wages any further.

    5. Brian,

      So government should accept a private sector operating at below capacity and fill the unemployment gap with JG jobs?


    6. The lowest the unemployment rate gets is around 2%. So it’s never at theoretical capacity. Instead of paying people to do nothing - and making them unemployable - pay them to do something.

    7. What if unemployment is at 7%?

      Does the government avoid stimulus and soak up the unemployed in JG jobs?

      It would seem to me that the government priority would be to get the private sector to full capacity, in other words with demand management.


    8. I misunderstood what you meant. If there's a big downturn, you are stuck with aggregate demand management on top of the Job Guarantee to turn things around. That seems relatively straightforward. The question is what happens after the initial recovery.

    9. Note that if there is a Job Guarantee, the unemployment rate is technically 0% - there would be no involuntary unemployment (other than people crashing out of the JG). If the pace of recovery is unsatisfactory, one could either cut taxes (aggregate demand management), give JG workers a bonus, or launch targeted programmes to create somewhat higher-paying jobs.

  3. MMT is a complete scam, period. Anyone who believes in its nonsensical ideas cannot and should not be taken seriously. It is an "in case of emergency break glass" option that will not save anything or anyone.

    1. I can understand why people would dislike/disagree with MMT. However, one of the interesting things about MMT is that the people who attack it tend to write nonsensical content-free rants like the one above.

  4. MMT understanding suffers from a deficit of micro-economic analogues.

    I think that the circumstances surrounding a small business offering coupons can be used to form a complementing model. I today posted an outline of the concept at

  5. Regarding this statement: "From a MMT perspective, rising interest rates raise the interest income received by the non-government sector, raising domestic demand. This would help sustain any inflation that manages to appear." —isn't the MMT perspective that it's the increased spending that raises the net financial assets of the non-government sector but rather than raising interest rates, puts downward pressure on them? Stephanie Kelton makes the argument for increased spending putting that pressure on rates here:

    1. Yes, but that's an "all else equal" argument. The path of short-term rates is more important than that effect, and so rate hikes will push up the yield curve. That whole discussion about deficits lowering rates is a dissent from the usual argument that increased supply raises bond yields.

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