Tavlas' Summary of MMT
Kitchen Sink Critiques
- "Kelton’s rendition, for example, has been criticized for (1) its neglect of the 1970s, a period during which expansionary policies led to increases in both inflation and unemployment (Cochrane 2020);" I ignored the Cochrane review since it was a bad faith critique, which falls under Section 5.2. I also ignored the 1970s, because not everyone is stuck re-living that decade. The longer answer is that MMTers disagree vehemently with the mainstream narrative about that period, but that is now a question of economic archaelogy.
- "the likelihood that it would induce unexpected inflation, reducing the purchasing power of those caught holding “old money” as “new money” is printed (Andolfatto 2020, Dowd 2020);" I have not read these critiques, but Tavlas makes it sound vaguely Monetarist. For reasons to be discussed later, I am not interested in that angle.
- "its strong proclivity to increase the size of the government in the economy, thereby diverting resources from productive firms to the quixotic public sector (Coats 2019, Tenreiro 2020);" This is a political economy complaint, buried under pseudo-science (Section 5.2). As I discuss in Section 1.3, although MMT supporters are generally progressive, the theory itself is largely neutral with respect to the size of the state (although libertarian fantasies about the state disappearing are not supported).
- "its neglect of the fact that, in the absence of monetary accommodation, fiscal expansion can be a weak policy instrument (Greenwood and Hanke 2019);" MMTers are quiet vocal in their beliefs that monetary policy is weak (or even works backwards from conventional thinking) -- Section 2.5.
- "its neglect of the literatures on central‐bank independence, the term structure of interest rates, and the effects of portfolio‐balance decisions by investors on the way that policies interact with key economic variables (Edwards 2019)." Once again, covered in Section 2.5.
- "Krugman (2019) likened MMT to Calvinball, a game under which its adherents keep changing their arguments in response to criticisms; Rogoff (2019) called MMT 'nonsense'; and Summers (2019) wrote that it is 'a recipe for disaster'" This is what scholars call appeals to authority. In all of these cases, the so-called "authorities" just made stuff up about MMT (Section 5.2). It seems clear that it was a connected group of people who decided that if they repeated the same lies often enough, people would believe them.
Tavlas Misrepresents What Kelton Wrote
Second, Kelton’s argument that interest rates on Greek government debt “skyrocketed” beginning in September 2008, which, if accurate, would support her contention that the origination of the Greek financial crisis lay with factors external to Greece, is similarly incorrect. As clearly shown in Figure 1, interest rates on Greek sovereigns began their ascent in October 2009, coinciding with the market’s recognition that Greece’s fiscal situation was unsustainable.
Yet Another Misrepresentation
The fiscal profligacy led to high inflation, something that, as we shall see, Kelton says will not happen to a country that has monetary sovereignty.
This is a bizarre assessment of what Kelton wrote, and it is not even internally consistent with the rest of Tavlas' description of MMT. (That said, he repeats the claim, as we shall see next.)
The Earlier Greek Crises
The key macroeconomic performance indicators during 1981 to 1994 tell the resulting story: the nominal interest rate on the 10‐year government bond was consistently near 20 percent, despite the activity of the Bank of Greece in the sovereign‐bond market; inflation—something that Kelton says will not happen to a currency issuer [emphasis mine]—averaged 18 percent; real growth averaged 0.8 percent; and the current account consistently registered deficits in the range of 3 percent to 5 percent of GDP. In those circumstances, the country faced a series of financial crises as the drachma came under attack. Several adjustment programs were undertaken, but they were subsequently abandoned in favor of a reversion to fiscal and monetary expansion.
Consequently, monetary policy’s role was to help finance the fiscal deficits—annual money growth averaged more than 20 percent during the period 1981 to 1994.
An important consideration in evaluating Kelton’s proposal is that the author has ventured into an area—the subject of money—which appears to be uncharted waters for her.