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Saturday, July 11, 2020

Comments On Chris Dillow's Review

Chris Dillow wrote a review of Stephanie Kelton's The Deficit Myth. It was a fairly positive review, but I wanted to discuss some of his commentary on MMT. In my view, the aspects of the book that Dillow questioned are probably the reasons why the look is a best seller.

One of the concerns was originality of ideas. From my perspective, this is just a question of academic turf wars. Unless you can get some really spicy details, normal people are not interested in arguments over priority of ideas. Rather, they sensibly want to know how the economy works.

Bond Yields

Dillow writes:
For this economist, though, it poses a problem. I remember writing a research note for Nomura back in the early 90s arguing that increased government borrowing would not increase gilt yields because the same increased private saving that was the counterpart of government borrowing would easily finance that borrowing. Nominal gilt yields, I said, were determined much more by inflation than by government borrowing. But nobody accused me of originality.
As someone who started writing fixed income research in the 1990s, I rapidly gravitated to the view that the rate expectations was the key determinant of bond yields. That was not original, pretty well all of mathematical finance is predicated upon that description.

That rate expectations (or the central bank reaction function) is the key driver of bond yields is also the MMT story. Is this "original"? No. What makes MMT different is that it seems to be the only school of thought to take that story seriously.

On paper, rate expectations is also the core belief of neoclassical economics. However, despite that theoretical purity, the record is filled with well-known neoclassicals worrying about bond vigilantes, tipping points, etc. This highlights that the issue is not originality, rather it was being internally consistent.

If we turn to the question of default risk, it was very easy to find analysts who poo-poo'd the notion of Japan defaulting in the late 1990s to early 2000s (I was one of them). The problem was that nobody had a good theory backing this up; at most, hand-waving about "money printing." MMTers were the first group I ran into that provided a clean explanation of the matter.

Political Strategy

Chris Dillow also questioned the political strategy behind Kelton's writing. He invokes Kalecki's "Political Aspects of Full Employment", and then states:
Which is a big gap in Kelton's analysis. In treating public finances as merely a technocratic matter, she is ignoring the fact that capitalist power sometimes precludes good policy. She is making the error Kalecki warned us against: [quoting Kalecki] "The assumption that a government will maintain full employment in a capitalist economy if it only knows how to do it is fallacious."
I grew up in Winnipeg, site of the General Strike of 1919. Urban ridings were dominated by the NDP, a social democrat party. By North American standards, about as fertile a ground for left-wing politics as could be imagined.

Even so, the two Marxist-Leninist parties (they hated each other) only managed to get a couple dozen votes each in a typical riding, being well back of The Rhinoceros Party (sample policy: "Providing higher education by building taller schools"). I am a political realist, and I follow the examples of groups that actually win elections.

All welfare state policies were opposed by free marketeers; you had to make the argument that not only did they meet a moral imperative, they made the mixed economy we actually live function more efficiently. Arguing that we need to abolish Capitalism in order to have a Job Guarantee is not how I would market a programme that makes industrial capitalism more fair, and more robust.

European politics are different; Marxist parties actually get votes. But one should not expect an American tied to the Democratic Party to market to those voters.

Currency Sovereignty

In a final footnote, Dillow asks:
She neglects another historical question: if monetary sovereignty is as good as she claims, why were European nations (with the support of both public and economists) so keen to abandon it in the 1990s? One answer, I suspect, is that countries lacking the US's "exorbitant privilege" had less effective sovereignty. Whereas demand for Treasuries and dollars is so great as to give the US room to borrow, demand for drachmas, escudos and lira was not so great - and the dumping of such currencies meant their governments faced a tighter inflation constraint than the US.
The reality is that thinking is very different on this side of the Atlantic. Canada has had a free-floating currency during almost all of the post-1950 period. We are a small, resource-dependent economy, with massive cross-border trade. The only people who want to peg the Canadian dollar are a few crackpot business owners or business press writers who pop up every five years to call Canada to adopt the U.S. dollar.

Given the travails of the euro periphery, it is a hard sell to say that the European elites made the right call.

(c) Brian Romanchuk 2020


  1. Brian

    Let me first acknowledge that you are an exception among MMT followers. You are measured and rational. I thank you for that.

    Having said that, and with all due respect, I will say that you missed the point of Dillow's remarks on the politics of MMT, particularly regarding full employment.

    He isn't advising the US Democratic Party to adopt a socialist platform, as much as the Bernie Sanders crew (which is not without its electoral weight) would like. He isn't telling the UK Labour Party to beg for Jeremy Corbyn's forgiveness.

    You say that in Canada socialism has no chance. For all I know, you may well be right.

    But Dillow isn't talking about "political strategy". His point is not how to get votes or win elections.

    He is talking about political feasibility.

    Moreover, it's not to Dillow that credit should be given for saying: "To implement her ideas (and those of Kalecki, Keynes, Lerner, Beveridge and Minskly!) however requires more than an intellectual (counter-)revolution. It requires a dismantling of capitalist power. And that's a tougher job."

    That credit should go to Michal Kalecki:

    "'Full employment capitalism' will, of course, have to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped."

    That's how Kalecki himself concluded his 1943 essay, as published in Political Quarterly. He was sceptical 'full employment capitalism' was at all possible (for the reasons he argued in that essay). One would need to develop a series of unspecified "new social and political institutions which will reflect the increased power of the working class" to make 'full employment capitalism' possible.

    Dillow's point, which is Kalecki's point, is that full employment is unlikely under capitalism, MMT or no MMT.


    You should ask Prof. Bill Mitchell about this. This is not the first time that MMT have encountered Kalecki's article as an argument against full employment.

    Personally, I appreciate Prof. Mitchell's opinion, but ultimately I find Kalecki's argument still stands (I myself had planned to write something similar).

  2. You should read Kalecki's essay. You can find the original version here:

    I have a deep respect for Prof. Mitchell. He is an honest intellectual (something exceedingly unusual, particularly among economists and their online fans). I first heard of a Kaleckian critique to MMT through him and he has a response:

    You should also read it. It's up to you to judge how well his counter argument fares against Kalecki.

    1. I read Kalecki’s essay. From my perspective, Kalecki’s opposition is just him talking his book. Marxists have an innate reason to hate the Job Guarantee because it shows that we don’t need Socialism.

      Saying that a policy is impossible to implement has to be literally the worst strategy for campaigning for it. MMTers have read Kalecki, we can understand why some free marketers won’t like it, but that doesn’t matter if you win elections.

    2. Although I could respond to that (there are also innate reasons why MMT followers would like to save capitalism, come what may), I will not.

      Instead, I will limit myself to admit that I was, indeed, mistaken.

      You are no exception among MMT followers, evidently.

    3. As I noted below - I meant to put the comment here as a reply to you - I suggest that Mitchell & you & Brian are seeing things in Kalecki's essay which are not there. There is no reason for MMT followers to want to "save capitalism" any more than Marx or Kalecki did - or for Marxists to hate the Job Guarantee. Rather, the thing to do is to fight for it and all other socialist measures.

      And not see disagreements or problems where there aren't any. Socialism achieved amazing unity in the century before the First World War - and amazing disunity over Big-Endian vs Little-Endian issues in the century after.

  3. Kalecki didn't believe that full employment was or would be impossible in the postwar era. How could he? He lived through it! If one wants to say that full employment capitalism is impossible, then fine. That means that the period until the oil shocks was NOT CAPITALISM. IHMO, Marx himself would have said something like that! It wasn't really the ideal capitalism he was talking about.

    Kalecki explained why business leaders would (and did) oppose full employment. As neither he nor most socialists were business leaders, this opposition did not include them. :-)

    Mitchell is a Kaleckian, not an opponent. But he too grossly misreads Kalecki the same way with his:

    "[Kalecki] laid out the blueprint for socialist opposition to Keynesian-style employment policy. The criticisms would be equally applicable to a Job Guarantee policy."

    Again, real socialists, reasonable socialists like Kalecki or Marx do not and did not oppose Keynesian-style full employment / Job Guarantee policies. They recognize the obstacles in their way, but they fight for them, not oppose them! Unfortunately, crazy anti-socialist opposition to full employment "socialism" from socialists is rather older than Kalecki - it became the mainstream of European socialist thought and parties, especially and even in government, between the wars. Urk. With suicidal enemies like these, rabid capitalists don't need friends!

    1. “Accelerationism” has been a thing for as long as I remember in the Canadian context (and probably similar to the US). Social welfare policies were allegedly bad, since they forestalled revolution. However, the only people that thought that way were the few dozen people that populated the two Marxist-Leninist parties.

      In Western Canada, if you were a sensible leftist, you aligned yourself with the NDP, and dodged whatever red-baiting that happened in the Cold War. In Quebec, language politics tended to dominate, until recently (and I don’t pay much attention to local politics any more).


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