If we look at economic theory, there are no credible challenges to the MMT story at present; at most, one can debate terminology. Since many economists are keen to present economics as a highly mathematical, scientific discipline, getting into long-winded, arcane debates about linguistic issues does not fit the narrative. However, there are plenty of reasons for there to be a strong debate in popular discourse: not everyone agrees on the proper role of government in the economy. However, we cannot appeal to any formal theory to adjudicate the popular debates.
(This article is a brief introduction to a cycle of articles that are expected to be re-worked into a chapter in a brief intermediate-level introduction to MMT.)
The main issue is the question of the fiscal constraint. There are two definitions in use, but I am focused on this definition: what are the practical limits on government spending? (What happens when those limits are hit?) I discuss the second definition (a mathematical definition) later.
It is relatively commonplace to note that floating currency sovereigns are supposed to be invulnerable to default. For example, I have seen finance textbooks that refer to the government curve as a "risk-free curve" (technically, default risk free), and offer a hand-waving explanation about "printing money".
If the government cannot default on (local currency) borrowing (like a household or business), why not give everyone a free pony?
Although MMT proponents emphasise that default is not the issue, they are not saying that everyone can get a free pony. (And in response, critics will point to particular statements in popular articles that appear to imply that everyone can get a free pony. I am not attempting to police the truthfulness of every statement on the internet, and I do not care what other primers might say, only what I write.)
Since the main divide in developed country politics revolves around the proper role of the government in the economy, any discussion of the limits of governmental policy is going to be a minefield of conflicting opinions. In the absence of divine revelation, I see no way to adjudicate such arguments.
The question is whether we can relate this debate to economic theory -- and that is where this topic gets extremely awkward.
Popular Discussion: What Does that Mean?I distinguish between popular discussion and scholarly discussion, since the two areas of debate are completely different. For most people, what I call popular debate is the only thing they will hear about. It includes:
- Financial market commentary.
- Comments by politicians and political activists.
- Comments by people at "think tanks."
- Internet wrangling and opinion pieces in legacy media -- including such pieces written by academics.
Scholarly discussion is solely the discussion of articles written by other scholars, which normally appear in peer-reviewed journals or textbooks in the modern era. I use "scholarly" rather than "academic" since the collapse in academic standards has meant that some academics have written articles criticising MMT without undertaking even a cursory survey of the literature.
It might surprising that people whose reputations depend upon being a member of academia in the area of economic theory would discuss fiscal policy without reference to the actual theory in their field, but people are rather surprising animals.
Scholarly Debate: Is There One?
If we look at the theoretical literature in a scholarly manner, the debate over fiscal policy options for floating currency sovereigns is not particularly interesting. To what extent the literature disagreed with the MMT arguments, the theories have been largely abandoned, or empirical studies collapsed.
The core MMT position is that the ultimate constraint on fiscal policy is inflation, a stance that has its roots in Functional Finance, a school of thinking within the post-World II Keynesian consensus. There was a politically-motivated move to purge Functional Finance from mainstream economic textbooks, but that has not affected reality. Theories about fiscal policy limitations ultimately devolve to stories about hyperinflation -- which is exactly what the MMT stance is.
After that, the debate comes down to sniping over language. Since I am writing popularisations, I do not care about the exact wording others use -- I am translating it into what I see as the clearest exposition anyway.
To what extent there is a debate, it involves the mathematical definition of a financial constraint: an equation that allegedly applies to the sequence of (primary) fiscal balances over an infinite model time axis. However, this constraint is essentially an assumption that is being applied to a mathematical model: it is true by defining it to be true. The debate is whether real-world governments need to heed this equation; and the argument of MMT proponents is that they do not.
Popular economic commentary is full of lots of opinions by people with economics degrees. One might hope that economic theory -- which is popularly presented as a science, like physics -- could offer some illumination on those debates. Unfortunately, writing down a mathematical model does not eliminate political economy, and that is really what those debates are about. As a result, we are in the domain of opinion, not in the domain of falsifiable theories.
Later articles in this sequence will discuss what MMT says about fiscal policy, and then try to relate this to the debates that continuously rise and fall on the internet. However, the distinction between popular debate and scholarly debate needs to be kept in mind if the reader wants to asses the "correctness" of MMT.
(c) Brian Romanchuk 2020