MMT and fiscal rules (part I) – a prologue

When I explained the essential tenets of Modern Monetary Theory (MMT) to Ben Bernanke, over dinner in Washington, he replied somewhat quizzically, “Isn’t that just economics?” In fact, on the accounting treatment of money as a liability – a subject I have disputed with some prominent members of MMT – Bernanke started in agreement with convention.

It is far too easy to dismiss what one agrees with in MMT as ‘just economics’. So I want to make a more strident defence of MMT as method and substantive contribution. By way of reference, I have personally learnt a lot from exchanges with Steve Keen – on modelling leverage, and many other matters – and I highly recommend his books. I think Scott Fulwiler has written one of the best explanations of how banks work, and a brilliant polemic. Stephanie Kelton is deeply insightful on public sector debt, on the Eurocrisis, on the philosophy of money, and much more. And although I have disagreed profoundly in an exchange with Randy Wray, on the subject of accounting as religion – and he pulls no punches – debates with him and Warren Mosler, have greatly helped me to clarify my own position on the nature of money. I am least familiar with the work of Bill Mitchell. It is a shame his style of ‘debate’ can be so unpleasant – particularly as it is harder to think of a more decent and respectful interlocutor on Twitter or anywhere else, than Simon Wren-Lewis. Perhaps this is the inevitable price of a motivating intellectual tribalism. There are still insights under the veneer – not least, that there are genuine problems with fiscal rules, and considerable difficulties in distinguishing some current expenditure items from capital expenditure.

Of course, there is no real reason to group, or label, this set of individuals. Steve’s work, in particular, is far broader than the standard limits set on ‘MMT’, and covers everything in economics, and more.

I’m also not a fan of the ‘football team’ approach to thought. I start with the philosophical disposition that all economics, funnily enough, is economics. That’s a basic tenet of logic. I am psychologically anti ‘schools’ of thought. Adherence to a group embeds a bias, and implies a lack of objectivity. It also makes it harder to change your mind – you have allegiance and will let others down. This is as true of John Cochrane adhering to ‘free markets’, or anyone who calls themselves a Keynesian of any variety, an Austrian, or a Market Monetarist. But I can’t resist self-contradiction – I am a Samuelsonian eclectic. Our instinct for group identification is irrepressible.

In MMT’s defence, it is a school of thought in a much more scientific way than say ‘new Keynesianism’ is. Most schools of thought in economics assume an empirical conclusion, which is why they are inherently biased. This is not true of MMT. It focuses resolutely on a subset of macroeconomics – public sector finances, the institutional assumptions of macro-economic policy, and an holistic analysis of the public sector, private sector and financial sector balance sheets. Most of the fundamental insights can already be found in the work of Tobin, Friedman, Lerner, Minsky, and others. Hence Bernanke’s quip. Many adherents to MMT, including Stephanie, would also consider themselves chartalists – which is really a school within the history of institutional money.

Focusing on these areas is entirely defendable and valuable. Many economists involved in policy-making have ignored this work to their peril. Dismissing MMT by saying, ‘this is all in Friedman and Tobin’ is irrelevant – the insights of Friedman and Tobin in many areas have been forgotten and neglected. And MMTers have updated, improved and expanded on many of these insights.

MMT has also achieved far more than a reorientation of focus. I think one of its greatest achievements is pedagogic. Stephanie Kelton is a prime example. Much of macroeconomics makes fundamentally simple concepts – such as the relationship of real interest rates to consumption spending – impenetrably complicated. As a result, a great deal of macroeconomic modelling produces a loss of insight, and introduces a fresh bias: over-confidence due to complex formalisation. MMT achieves the opposite – it makes complex matters, banking, fiscal policy, money creation, far easier to understand than any other approach I am aware of. And in most cases, the explanations are rigorous and accurate. It should not be surprising that MMT has a band of activists – economists like Stephanie Kelton have made macroeconomic problems which are of critical political importance highly accessible, while simultaneously revealing the snake oil peddled by much of the political class. There is a lesson here for everyone.

This blog was triggered by a number of considerations. I have been thinking about fiscal sustainability in fiat money regimes for the last 15 years, and still find most of the economics unsatisfactory. I’m not convinced anyone really know what to do with fiscal policy in Japan, for example. The issue is of critical significance of course, not least because the UK’s Labour Party, which could well form the next government, has adopted a rule devised by two economists for whom I have huge respect – Simon Wren-Lewis, and Jonathan Portes. More recently, the entire approach of having a fiscal rule has come under attack from some prominent members of MMT, who seem to propose the view that as long as there is no inflation, there is fiscal space. That is true – and I suspect that stated in this generic form, Simon Wren-Lewis would probably agree. But is it enough? I doubt it. The real difficulty is in creating a framework that is both true to the economic reality, and explainable to the electorate.

I also find assuming that current instutional structures should be taken as given – which MMT is prone to – is unacceptable, and Mitchell’s view of democratic legitimacy is superficial. As we are learning on every continent, the very survival of democracy requires checks and balances. Dismissing independent institutions run by public servants and established by Parliamentary legislation as ‘unelected technocrats’, is trite.

This blog was intended to be a synthesis on fiscal policy ‘rules’, but it is already long enough. So it is Part I. Part II will follow shortly.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

11 Responses

  1. Carolina Alves

    This is very good Eric. Thank you for trying to make sense of the mayhem that broke out on twitter last week (and many other weeks!). The more I read about MMT and the more I listen to Stephanie’s talk, the more I have to force myself to ‘find out’ the issues that make so many people so ‘angry’ at MMT. As some who clearly has not spent much time on learning MMT, I guess, albeit this isn’t the point of your blog, my problem sometimes is to understand, to be clear about, how MMT deals with the question of distribution – state distribution.

    On a different note, not so relevant for the blog either, I like yours “I start with the philosophical disposition that all economics, funnily enough, is economics. That’s a basic tenet of logic”, but somehow, epistemologically speaking, I don’t think it is possible to be “anti ‘schools’ of thought”… maybe we just need to find a way to deal with our biases, more than try and water down the differences and particularities that each school, each framework, can contribute. These differences are important… they are in my view what can make economics such a rich discipline. I think your first premise is exactly about accepting all these differences, but we can do this without dropping the labels. Sometimes labels are bad, but sometimes they are essential and necessary. To be continued …

    Looking forward for Part II!

    Reply
    • John

      So often, in fact almost always, economics gets intertwined with political views/ politics.
      MMT, in its pure form, is for me a description of the way our whole macroeconomic system actually works; not the way it should would, or how many think it works (but it doesn’t). Thus, MMT has been described as a lens through which macroeconomic issues can be examined. It provides a way of understanding the system free of political bias. The decisions that are then made by politicians are the choices about resource allocation, who wins and who looses; what is going to be be given priority when resources are limited. Then, using MMT as a lens, predictions can be made about the effects of those political decisions.

      So MMT, imho, has no political bias per se. That is left to those who make the choices.

      Most economists put forward neoliberal ideas. Many text books follow neoliberal ideas on how economics works, and in my view MMT shows that those ideas can be wrong, very wrong, economy distortingly wrong. So when the state (ie the politicians in power) make decisions and follow economics based on neoliberalism, they are using a reference system that, in my view, has a built in bias to the benefit of those who already have money and power.

      MMT can be used to show a different outcome from that predicted by neoliberal based decisions. I suggest that everyone needs to develop a memory for the promises made by politicians when discussing economic issues and then comparing those promises with the actual outcome.

      The politics, for me, is that ALL the electorate should benefit during their lives on earth, not just the top small percentage. So, I guess that means I have a socialist bias and many would condemn me for that simple wish to see some fairness in resource allocation to all in society.

      Reply
    • Eric Lonergan

      Thanks Carolina. I like this ‘synthesis’ of yours about schools of thought … I personally like to choose which parts of each school are relevant in particular circumstances. But you are right – it helps to have a typology of approaches and method. Thanks!

      Reply
    • Alan Brisling

      From what I can see, people are not angry at MMT, but MMT proponents, and that is because of their conduct. I have no skin in this game. I approached MMT with scepticism but not hostility, but the tone of some academics in favour of it (verbally abusing, and threatening with lawsuits those who don’t agree with them) is enough to make it seem cult-ish. So I also very much look forward to the next part of this blog, which seems very level-headed and fair.

      And maybe I have just been lucky in not encountering anger directed towards MMT.

      Reply
      • Eric Lonergan

        I totally sympathise Alan. I have been very supportive of MMT on this blog, and tried to engage with reason and respect. Unfortunately, a large number of them behave dreadfully. And the ‘leadership’ seem to condone this. But don’t be put off. Reasoned, respectful, engagement will continue!

  2. Danny

    A nice constructive post.
    In my opinion the proposed Labour fiscal rule can be viewed as pure politics. It is hard to justify self-imposed restrictions on fiscal flexibility in economic terms when the future is not predictable. However when there are votes that need to be won, and the current public perception (erroneous or not) is that “credibility” requires self-imposed restraints, the utility of such a rule can be understood. This is nothing new, but I think there is a risk that it becomes yet another case of political rules and promises being broken in the face of economic realities and a further diminishing public of trust in the political class without any gains in general economic understanding.

    Reply
  3. Anarchus

    Regarding:

    “Dismissing MMT by saying, ‘this is all in Friedman and Tobin’ is irrelevant – the insights of Friedman and Tobin in many areas have been forgotten and neglected.”

    Much of MMT is in Friedman and Tobin – but then conventional economics has gone on to construct intellectual temples which are not consistent with how the banking industry actually works in reality. Leading Bernanke to make such bizarre statements as “the subprime crisis is well-contained” and “QE works better in practice than in theory”; neither of those statements is remotely close to true.

    Reply
  4. Jerry Brown

    These are your words- “Much of macroeconomics makes fundamentally simple concepts – such as the relationship of real interest rates to consumption spending – impenetrably complicated. As a result, a great deal of macroeconomic modelling produces a loss of insight, and introduces a fresh bias: over-confidence due to complex formalisation. MMT achieves the opposite – it makes complex matters, banking, fiscal policy, money creation, far easier to understand than any other approach I am aware of. And in most cases, the explanations are rigorous and accurate.”
    Which I agree with.

    And then later you say-“The real difficulty is in creating a framework that is both true to the economic reality, and explainable to the electorate.”
    Which I also agree with. I think that MMT, by making those complex matters easier to understand while remaining accurate, is a pretty good step towards solving that difficulty. It worked for me at least. You might be turning into an MMTer yourself, especially when you realize that it explains the “fiscal policy in Japan” a lot better than other economics does.

    Reply
    • Eric Lonergan

      Hi Jerry – I agree! Which is why it is a shame ‘MMTers’ (whatever that means) have been so unpleasant on Twitter. Stephanie’s pedagogy is admirable, the collective behaviour of her acolytes on social media is turning people off, I’m afraid.

      Reply

Leave a Reply

Your email address will not be published.

* Checkbox GDPR is required

*

I agree

Privacy Preference Center

Necessary

Advertising

Analytics

Other