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Monday, April 19, 2021

Richmond Fed MMT Critique

Michael U. Krause, Thomas A. Lubik and Karl Rhodes published "MMT and Government Finance: You Can't Always Get What You Want" in a commentary at the Richmond Fed, which as the name suggests, is a critique of Modern Monetary Theory (MMT). To say that this article is underwhelming is an understatement. I am noting this article solely because it had an aside on some recent work from neoclassicals that I previously ignored.

My latest book Modern Monetary Theory and the Recovery discusses MMT critiques in its final chapter. Part of the Krause et al. critique was not deeply covered, although it was mentioned. They refer to the intertemporal governmental budget constraint. I discussed this in my earlier Understanding Government Finance, and I also referred to a Fullwiler article, but I preferred not to bog down MMT and the Recovery with  a heavily mathematical argument.


The article starts off stating the following (1):
Promoters of modern monetary theory (MMT) — including a growing number of pundits and policymakers — are toying with the idea that "deficits don't matter." They are tempted to believe that a government can merge fiscal and monetary policy and simply print currency to pay for its expenditures indefinitely without economic costs or constraints [emphasis mine]. This core tenet of MMT, which has permeated the public debate, worries economists of all stripes — not just "mainstream" economists, but also traditional Keynesians and heterodox economists.
Later in the article, they state (2):
Arguably, proponents of MMT are aware of this history. What they derive from these insights is that the roles of fiscal and monetary authorities (Treasury/Congress and the Fed) could be effectively reversed. Under MMT, the Fed finances the deficit by printing money, while the Treasury and Congress use their tools (taxation, expenditures and fees) to stabilize the economy and fight inflation. For example, Congress could raise taxes to dampen aggregate demand when the economy heats up. In fact, many MMT theorists are quite concerned about the dangers of inflation — perhaps to a greater extent than adherents to post-Keynesian or even New Keynesian views [emphasis mine] — because it erodes the purchasing power of wages. While in the latter frameworks, inflation greases the wheels of the economy, this is not necessary under MMT since the government's printing presses provide lubrication.
I am only a mere blogger and not a professor with a doctoral economics degree from an elite university, but even a thicko like myself can see that the emphasised text in (1) and (2) are not internally consistent statements.

(Spoiler of my book: (1) is incorrect, and (2) is closer to the truth.)

Guess the Number of Citations of MMT Proponents

In order to make this article more entertaining, I will borrow a tool from recent video game designs, and turn it into a mini-game. I ask the reader to guess the number of citations of MMT proponents in the 7 footnotes (some of which contain more than one citation) before looking at the article.

(As an added hint: Marc Lavoie is a post-Keynesian that I cite often, but he in fact was on the opposite side of debates from MMT proponents in the past.)

Budget Constraint

Once we get past the gaslighting about the MMT stance with regards to the constraints on fiscal policy, we get to the meat of the article.

This is the part that caught my eye:
While the older debt-sustainability literature came up with problematic debt-to-GDP ratios of between 100 percent and 120 percent, the fiscal-limits literature finds ratios of 180 percent to 200 percent sustainable.
It is good to see them throw the old sustainability literature under the bus, given its worthlessness. However, saying that the ratio is 180-200 percent of GDP is a result that is pretty much useless. Outside of wartime finance -- which in the case of World War II, largely ended up with the combatants all running variants of command economies -- it is extremely hard to get ratios at that level. Japan's net debt is hanging in at about 170% of GDP (based on IMF WEO data), and that debt level was only possibly because they managed to arrange to get near-zero nominal GDP growth in the presence of large fiscal deficits. It is extremely hard to see any other country hitting 180% of GDP under anything resembling normal circumstances.

(For example, Japan's general government gross debt-to-GDP is over 200%. Basically, if one arm of the government ends up lending to another arm of the government, you can rack up whatever debt ratio you want.)

Sticking the "fiscal sustainability" threshold beyond any plausibly observed level is a great way to make a theory non-falsifiable. Given the penchant for non-falsifiable theories by neoclassical economists (r*, NAIRU/u*, potential GDP), this is a non-surprising outcome.

As covered in my book, their argument relies on a assumption -- that the neoclassical budget constraint is not a bogus -- that is explicitly rejected in the MMT literature. (Of course, it would be crazy to expect professors of economics to read journal articles in economics.) Even a struggling first-year philosophy student could tell you that if you assume a point is true that your opponent claims is false, you would appear to "win" the argument.

I will not comment any further, since I have not yet read the literature that their assertions are based on. Given that the theory is a non-starter to anyone who is slightly numerate and familiar with observed developed country debt dynamics, I do not expect to read it any time soon.

As a final note, there was an article published awhile ago by C.D. Howe Institute (a Canadian neoliberal think tank) on MMT. It seemed to be of better quality than other critiques, but I have not had time to wade through it.

(c) Brian Romanchuk 2021


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