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.