Functional Finance Roots Of MMT

I have been writing online for over six years. and my experience is that almost all of the discussion around Modern Monetary Theory (MMT) involve basic principles of Functional Finance. Functional finance was a school of thinking within early post-World War II Keynesian economics. For a number of reasons (mainly political), Functional Finance disappeared from discussion -- until proponents of MMT revived the ideas. The online debates (including opinion pieces from mainstream academics) bounce around Functional Finance ideas. This is somewhat unusual, as the theoretical dissent around the basic Functional Finance concepts used is not very strong.

The Debt-To-GDP Ratio Does Not Matter: The Fiscal Constraint Debate

Most debates around Modern Monetary Theory (MMT) revolve around the role of operations and the meaning of the “fiscal constraint”: what are the limits on fiscal policy? (The focus on this one topic is either the result of this being the most interesting topic, and/or critics not being bothered to read anything else in the MMT literature.) These debates are typically uninteresting, because they end up being purely semantic debates, and the two sides actually agreeing on the underlying principles. To avoid wasting time on such debates, we need to re-cast the debate into a debate over something concrete. In the absence of a discussion of a specific policy, I believe that the best way to phrase the debate is as follows: does the government’s debt-to-GDP ratio matter?

Functional Finance Versus New Keynesian Economics, Krugman Edition

Paul Krugman has piled onto the "MMT explained by non-MMTers" bandwagon, with a critique of Functional Finance. Functional Finance is largely associated with the Old Keynesian Abba Lerner, and is one of the key intellectual roots of Modern Monetary Theory (MMT). In my view, the most interesting part of the article is that it contradicts the commonly made assertion that there is very little new in MMT (which Krugman hints at in the article as well). In presenting his summary of Functional Finance, Krugman obviously has theoretical blinders on, and the objective of MMTers is to point out the existence of those blinders.

There is a legitimate substantive debate about issues underneath the disagreement, I am not going to assert which side is correct. However,I would note that only the MMT side actually sounds like it made the effort to understand the ideas on both sides of the debate. As a result, there is no doubt that MMT represents an advancement of knowledge relative to the neoclassical consensus.

Australian Fiscal Surpluses And Functional Finance

The chart above shows the (annual) fiscal balance for the general government sector of Australia (the general government sector includes sub-sovereign governments as well as the central government), taken from the IMF World Economic Outlook. As can be seen, there was a lengthy period of surpluses from the late 1990s - 2000s. This is somewhat unusual, and raises some questions about some interpretations of functional finance and Modern Monetary Theory (MMT). If we look at the situation more carefully, the fact that there were surpluses then was not too surprising, and is entirely consistent with functional finance principles.

Let's Talk About Debt, Baby

Gerard MacDonell wrote "The debt debate is relevant now" a couple of weeks ago. In it, he argues that debt sustainability in the United States is a relevant issue now, not an academic issue a couple of decades out. He realises that economists in the Modern Monetary Theory (MMT) school will disagree, and he explains why he disagrees with the MMT view. I am in the MMT camp, and I suspect that I do not violently disagree with Gerard's view on the current state of the cycle. I would side-step his concerns about "fiscal sustainability," and instead argue a slightly-modified version of his argument: fiscal policy is relevant now (and it always is). However, political economy matters. That is, I do not think we can discuss fiscal policy in the dry technocratic terms our elites prefer to use; we need to accept that fiscal policy is inherently political. "Debt sustainability" is best labelled "political sustainability of debt." Given the drift in the Debt Ceiling debate, "(political) sustainability" is an issue that may hit in a matter of months.

SFC Models And Introductory MMT-Style Fiscal Analysis

The usefulness of Stock-Flow Consistent (SFC) models is that they allow us to illustrate concepts in economics without relying solely on verbal descriptions. In this article, I will discuss my interpretation of some of the ideas floating around in Modern Monetary Theory (MMT). I will note that these are my interpretations of statements made by others, illustrated by an extremely simple model. The key is that even simple models can be used to clarify our thinking.

Book Review - Taxation: A Very Short Introduction

The book Taxation: AVery Short Introduction by Stephen Smith provides an introduction to mainstream analysis of taxes. It offers an excellent overview of the history of taxation, the forms of taxation, and current issues. The weakness of the analysis is that it is firmly conventional, and ignores the insights of functional finance (described in this primer). The book focusses on minimising the distortions created by taxation, while in fact those distortions are the necessary objective of taxation.