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Wednesday, June 24, 2020

Looking At Some MMT Criticism

Work is proceeding on my "MMT primer" manuscript. One chapter I am working on (in parallel with the labour market analysis) are a discussion of what I view as serious objections to MMT as a theory. Although I want to finish off that chapter later, I am adding to it as I run into interesting criticisms. I discuss a couple of recent entries in this article. Although I do not want to derail my book with lengthy discussions of MMT critiques that are coming from every random direction, I also want to have at least some quotations of critics so that my comments are not viewed as attacks on straw men.

[Update: here is a link to this Daniel de Voss article on Twitter wars. The complaints about MMT are weak, providing examples for my complaints about low quality criticism. I certainly will not want to crowd my book with low quality targets like that, but it is fun to read.]

Robert Murphy Review

 Robert P. Murphy wrote a review of Stephanie Kelton's the Deficit Myth (Amazon affiliate link). The part of the review that catches the eye is that Murphy warns the readers at that it is a mistake to dismiss the book, which was the usual response.

This matches my view -- the strategy taken by mainstream economists was to follow the line of Paul Krugman and attack straw man versions of MMT. Although this has a signalling effect -- if you want to be part of the mainstream club, you cannot take MMT seriously -- attempts to police the boundaries of acceptable discourse fall flat on those outside the neoclassical bubble. In the case of free market advocates who are the likely readers on, the usual dismissal was made largely on ideological grounds -- "MMT is socialism!" Although this might work to police the ideological boundaries of libertarianism, one runs into the reality that most major parties outside the United States are also viewed as "socialist" by libertarians. With opponents counter-attacking purely on the basis of affiliation signalling, MMT has expanded with almost no serious critical scrutiny (other than a handful of post-Keynesians).

I am not going to attempt to discuss Murphy's criticism of MMT here -- the review is long, and contains many points. The differences revolve around the underlying economic "models" (which are verbal, not equations), and it will not be a surprise to the reader that I disagree with Murphy's models. A longer discussion will follow at a later point, I just wanted to highlight this review to my readers.

Some Comments on Matthew C. Klein's Articles

Matthew C. Klein wrote two articles on MMT, one a primer, and a review of the Deficit Myth. They outline MMT from an outsider's perspective. The articles are not deeply critical, rather they lay out the issues.

The observations on MMT policy proposals are interesting. Klein's discussions of MMT policies is one of the few available that is not written by MMTers (who unexpectedly support the programmes) that is based on what MMTers have said themselves about the proposals. As such, there is a clearer idea of the trade-offs of the proposals (i.e., a less sunny view than the advocates).

However, my focus is on getting my own primer done. Right now, there was one criticism that caught my eye, and I believe that I can work into a section on complaints about MMT rhetoric. It overlaps an earlier criticism I discussed by John Quiggin. The rest of this article is an unedited draft of my comments on that topic. I think the text is too long, but I will worry about cutting it down once I work in the Quiggin material as well.

Rhetorical Tricks?

Matthew C. Klein writes in the article “MMT's Stephanie Kelton Advocates for Permanent Wartime Economics” (which is a review of The Deficit Myth):
Kelton sometimes relies on sleight of hand to make her case. She rightly notes that the government is financially unconstrained when it comes to paying Medicare beneficiaries, for example, because it can’t run out of money. But that doesn’t tell us whether Medicare is sustainable as currently structured. Population aging, trends in obesity, and the persistent increase in the relative cost of healthcare all mean that Medicare will, on its current trajectory, end up eating more of the rest of society’s resources. Elsewhere, Kelton suggests the answer is to shift more and more of the workforce into medicine and elder care. But that’s quite different from saying that “the biggest challenges facing these programs have nothing to do with affordability.”
I see two legs to these statements: the substantive policy concerns, and then the narrow question is whether there is a rhetorical trick.

With regards to the substantive policy issues around Medicare in the United States, I do not see a reason to disagree with Klein’s assessment. The sustainability debate around Medicare does not really fit the Canadian situation; the expensive parts of medical care are under government control, and governments already grasped the political nettle of the decisions associated with the ageing population. Adjustments will be made as needed – but there is no constituency in Canada that expects otherwise.

The problem with the United States is that the ruling elites have a hard time dealing with adjusting policies. If we assume that the current structure of medical provision in the United States is extended forward – itself a dangerous assumption – Klein’s assessment seems to capture the challenges faced by the system. It seems exceedingly likely that Medicate will take increasing amounts of real resources as the population ages. Meanwhile, the “persistent increase in the relative cost of healthcare” is a direct result of the design of the system.

As a fan of the economist Herb Stein’s dictum that “if it can’t go on forever, it will stop,” I expect that the assumption that something will change. Given the high cost of American health care versus developed country peers, it is clear that there is no inherent law of nature that medical costs must spiral out of control. In summary, I do not see that there is a substantive policy dispute (other than the possibility that the situation is better than suggested).

Instead, the disagreement is whether saying this has “nothing to do with affordability” is a “rhetorical trick.”

I will first note that the substantive issue is that this is a question of real resources, and Klein’s description of the problem matches this. I would argue that there are many linguistic precedents for treating real resource constraints as not being an issue of “affordability.”

Since everyone loves household analogies, I will use one. Imagine that we have cooked supper for our family, but. I then discover that one of my children has invited friends over to eat at the last minute. There is a definite concern that we might run out of prepared food, but there is no question of our being able to “afford” the extra food – unless these friends have extremely large appetites.
So why is discarding “affordability” seen as rhetorical trick? I would guess that this is the result of conventional economists framing what are really real resource limits as being about “affordability.” So by denying “affordability,” people who do not understand the distinction will believe that there are no constraints on spending – including real resource constraints.

Although it is unfortunate that people draw the wrong conclusions, I also do not have a lot of sympathy for the conventional economists’ position here. All they need to do is use language properly and admit that floating currency sovereigns do not face nominal constraints, rather real constraints. In the meantime, all that can be done is to correct over-exuberant activists and point out that real resource constraints still exist.

(c) Brian Romanchuk 2020


  1. Will any one be responding to Giacomo Rondina's MMT Blue Paper? Seems like a good faith attempt to assess MMT from a mainstream perspective. The guy clearly dove into the actual MMT and PK literature to an extent most others have not. He even adopted Godley's stock-flow matrices..

    1. It’s in my “to read” pile. It’s pretty thick right now, unfortunately.

  2. Thanks, Brian

    On Medicare, projections are for it to increase a handful of % of GDP. The question is if it's inflationary to pay for it or if some other offsets would be necessary (that potentially makes things more complicated, obviously). I think it's a flat out misreading of Stephanie's book to suggest she wasn't up front in the book about how she is framing it. It's not sleight of hand to say Medicare will always be financially affordable--it puts the debate on the appropriate issue of how much and which scarce resources to devote to Medicare and healthcare in general, and how to configure that. Hell, Medicare Part D is already reported by CBO and SS/Medicare Trustees as fully funded precisely because there's no law saying a particular tax has to cover it; the sleight of hand is to pretend a particular tax funds the rest of it. It's Klein's own sleight of hand to add/subtract to/from Stephanie's words in order to suggest she's ignoring other problems in the healthcare system, the degree to which Americans have healthy lifestyles or diets, and the current setup of Medicare. Her entire point is that those "other" things beyond financial affordability are what matter, not the ability to pay. His point is complementary to hers, not something she's tried to get people to somehow ignore--it's not as if she said "there's nothing wrong with Medicare or the American healthcare system as currently constructed--we can afford it, we just need to be able to devote the real resources." To the contrary, she wrote a collection of several essays 10-15 years ago on problems with the US healthcare system.

    Frankly, this begins to sound to me like whataboutism--her book is about changing the lens and the boundaries of debate, not about laying out everything important in every debate and certainly not about providing answers to them. And that is as it should be, for a number of reasons that should be self evident.

    Finally, as you note, the issue with the US healthcare system is its costs vs outcomes, both of which are poor by the standards of rich countries. It's the healthcare system we have, as well as our system of food production, and so on, that is creating these costs and outcomes; the rise in Medicare spending as currently configured is largely due to that, and somewhat also to an aging population (mitigated to a degree by moving to M4A and thus pooling more young with the old in the same program). It will be the private sector that will increasingly not be able to financially afford our healthcare system--medical bankruptcies, pvt insurance premium growth tacked on to labor costs, and so on--not the government sector that won't be able to financially afford Medicare. But it would be ridiculous and disingenuous to suggest Stephanie used sleight of hand to somehow divert attention from those issues by only focusing on the financial affordability of Medicare. If those are the issues I want to talk to people about, Stephanie just made that easier, not harder.

    1. I agree that this isn’t a great example. If we go back in time 8 years or so, it seems clear that some people misunderstood the MMT message. So obviously, wires got crossed somewhere. (This was John Quiggin’s complaint.) But I don’t care about someone’s feelings about blog comments from 8 years ago. This was the closest to a “modern” example I could get.

  3. Murphy says a couple interesting things that deserve to be addressed:
    1. that idle resources are the result of previous mal-investment.
    2. his examples with goldman sachs and google.

    Some answers to these concerns are:

    1. It is easier use politics to suppress resource use, a great example is the classic "no man's land", when you look at any historical territory dispute. The resource simply goes idle when too many people contest it without an authority or agreement to resolve dispute. This is why governments are so expedient for resolving the edge cases of resource gridlock: they represent mutual consensus. This makes them both procedurally inefficient(dictators always can act faster than democracy), but also more resilient(you can't dethrone democratic consensus).

    In some cases, self-directed resource use makes sense, even in public spaces. A perfect example is that roundabouts are more efficient than traffic lights, so having a system where users are largely self directed and not subject to direct interference by a control system is better and more adaptive. But if you get rid of all traffic control, would you really expect a city to do better? There is a great city planning youtuber "City Beatiful", who actually brilliantly explores this possibility in "Where do the rules of the road come from"

    Murphy fails to recognize his own ideology of methodological individualism, in suggesting that idle resources always deserve to be idle unless the "market" can find a use, and that the government has no useful role to play in resource use and allocation.

    2. His example of goldman sachs and google are very useful rhetorically, because private entities leverage their valuation in order to secure financing, but public entities don't have valuations in the conventional sense. Indeed, much of the private production of value depends on public infrastructure and dispute resolution. The difference between a free market and a "free-for-all" market, is critical. Public entities *allow* for individual expression of common values, instead of merely suppressing this.

    He references "conventional accounting" and "suits", and "If a government project is deemed unaffordable according to conventional accounting, then it should also be denied funding via the printing press."

    The final point, is that the MMT "confusion" between debt and money, is actually quite instructive, as debt is a political vehicle for resolving contested resource claims. As such, strictly nominal fiat debts, like treasury bonds, are claims against the value produced by the private sector supported by and subject to the political authority. As cullen roche said in his 2017 "state of the markets" address in 2017(about halfway throught), the U.S. dollar is strong in large part because we have the most productive private sector in the world.

    1. I didn’t read the whole Murphy piece; I mentioned it as a marker to myself. His drawing a line between “printing money” and bond issuance is incoherent, and if we don’t allow bond issuance, it means that we need to balance the budget perfectly In every budget period. That’s not a defensible stance.

  4. Well put, Brian. Relevantly, your interlocutor John "motte and bailey" Quiggin blocked me for this cheeky remark:

    My cheekiness aside, in that thread he's either missing Fadhel's point deliberately, ignorantly, or possesses some superordinate model of the economy which assimilates MMT but he hasn't explained how. This is a common theme, not unique to Quiggin.

    Earnestly, any idea which?

    1. Don’t really understand his logic. I agree that rationing would be unpopular - but guess what, any mechanism used to put into place a Green New Deal would be unpopular. Pretending that we could just tax a couple billionaires and life goes on before - while there is a total restructuring of the economy - is not reality-based either.

      In any event, his complaints are that particular MMT economists are proposing policies he does not like. Policy debates are fun and all, but we cannot cast such disagreements as an issue for MMT as a theory, particularly if the complaint is nebulous opinions about popularity.

      I liked your article on the Twitter wars.

    2. Indeed. The GND implies massive restructuring, but even with his logic we'll run out of rich people's money and yachts before we run out of things that need doing!

      And thanks :) Good faith criticism of MMT is healthy, but they can't keep running the "not new/not interesting" line when there are obvious implications to the contrary.

    3. I was reading the thread on Twitter, then read the Nersisyan/Wray paper. Yes, it mentioned rationing. But Quiggin’s characterisation is ridiculous. Rationing was given as a last case option.

      It seems to be that unless you just demand to tax rich people, Quiggin finds it unacceptable. That’s a ridiculous position. I don’t follow his thinking closely, but I see no evidence that he has a huge track record of political successes that allows him to dictate what acceptable policy options are.

    4. I was going to post something on Twitter, but decided I was too cranky.

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