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Thursday, October 22, 2020

Comments On Palley's MMT Critique

Thomas Palley is one of the more persistent MMT critics. His article “What’s wrong with Modern Money Theory: macro and political economic restraints on deficit-financed fiscal policy” was published just as I was finishing up this manuscript. Although I am not greatly impressed with the quality of the criticism, it covers many of the topics discussed in this chapter. If one wanted a summary critique (and not rely on my summaries) of major points of dispute, this might be the briefest summary.

(Note: this is an unedited small section that has been added to my manuscript.)

Palley covers the “there’s nothing new” critique (Section 5.12):
[reference to a figure in the article]… the critique of MMT is that it ‘is a mix of old and new, the old is correct and well understood, while the new is substantially wrong’ (Palley 2015b, p. 45). MMT’s main macroeconomic claim to fame rests on its declaration regarding government's ability to finance spending without recourse to taxation owing to its ability to issue money. In fact, government’s ability to create money to finance spending has long been widely recognized by all economists, who have also long recognized that ability gives government considerable extra financial and policy space
My argument is that saying this is “the main claim to fame” is not even close to true. 

The following statement seems to summarise most of issues of concern within the article.
In the real world, economic policy and policy outcomes are subject to multiple economic concerns and constraints. Those include concerns about government bond rates, private credit market long-term interest rates, financial market stability, the balance of payments and the exchange rate, the inflation constraint imposed via the Phillips curve, and policy implementation and policy credibility constraints.
As will be seen, most of these topics overlap the other sections of this chapter. I will finish with some point form notes about this article.
  • He objects to MMT’s operations analysis as that it is static and does not take into account behavioural relationships. Given that other schools of thought had almost no useful analysis of operations, it is still about the best work in the area available.
  • He has concerns about the political biases about MMT, which is not my concern (Section 1.3).
  • Palley has an exaggerated fear of money-financed spending, which makes the article generally sound like something written by an internet Austrian in 2010. 
  • Palley’s analysis of interest rates is weak. He observes that even if the central bank pins government bond yields, private sector interest rates can still rise. Basic financial theory tells us that if the risk-free curve is pinned at 0%, private sector rates represent a credit spread. The fair value for a credit spread is the expected default loss (plus liquidity and term premia), and the credit spreads tighten during an expansion.
  • His discussion of the Job Guarantee shows no signs that he has adapted his Old Keynesian models to the characteristics of the programme.
In summary, I think Palley’s article provides a good survey of (reasonable) MMT critiques, but Palley’s argumentation is weak. There are better versions of the criticisms, but most are lengthier and only look at a subset of issues.

(c) Brian Romanchuk 2020

1 comment:

  1. Palley's critique is good for young MMT'ers to cut their teeth on. But it is painfully embarrassing. The exchange rate effects are the most interesting imo. That's because no one has a clue what causes the fluctuations, or rather they do know, but they do not know which factors dominate. I think MMT has it right that when you float you at least give the market a chance to work, and that's probably optimal given current international trade and currency speculation regimes. But this can never form an argument "against MMT" because MMT never says the foreign channel is not a real constraint. Import capacity is a real constraint, but it is not a financial constraint, that's the point.

    For example, if solar panels are for sale from Japan or China, the Myanmar government can purchase them with It's own currency with a FX swap, and that is never going to collapse their currency completely, it just never works like that. There will be trade-offs, but the trade-offs (possible depreciation if the purchase is huge) won't limit the capacity of Myanmar to purchase solar power plants with their own currency, and it will not limit Myanmar from being able to tax in It's own currency to control inflation. What is Myanmar stupidly doing instead? They are borrowing Yen or Yuan to get the solar power, borrowing a currency they do not issue. Madness, or at least risky. I hope they get away with it for their sake.


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