Simon Wren-Lewis’s recent post on why MMT is so popular makes a number of important points. The Twitter response to Simon’s post was fairly representative – to its credit, MMT has a committed community of online followers. I have written on MMT before, and have learnt a lot from online discussions with advocates, notably with Scott Fullwiler, who produced a legendary response to Paul Krugman on how banks work.
I am hugely sympathetic to much of what MMT has to offer, but inevitably I focus on weaknesses. I also think it is interesting in the context of the sociology of ideas. In particular, it intrigues me how a large number of highly motivated adherents flock to a fundamentally nerdy and technical school of economic thinking.
The defining ideas of MMT are the following:
(1) A theory of public finance, with advocacy that fiscal policy should dominate;
(2) A belief that money is a liability of the state.
Points (1) and (2) are importantly linked, and neither are particularly unique to MMT. The fundamental theory behind MMT is almost indistinguishable from that of the fiscal theory of the price level, advocated by textbook ‘classical’ economists, such as John Cochrane, and nobel laureate Chris Sims (with the caveat that they draw almost opposite policy conclusions).
In addition, MMT is a minor social movement in its own right. It has vocal followers. This is testimony to two things. Primarily, its explanation of public finance is brilliantly clear, and comes with catchphrases. It debunks important myths about the budget deficit in the US, which has obvious political appeal. And some of the leading lights in MMT also have the eccentric dogmatism necessary for leaders of movements.
What is the ‘MMT’ theory of public finance? It’s pretty much Milton Friedman’s and Abba Lerner’s, which is one reason Brad De Long and I are fans of MMT. The only budget constraint the government faces is inflation, because (in theory) governments can finance themselves by issuing bonds or by printing money. If bond markets were to go on strike, the central bank can finance the government.
This simple observation is extremely important and powerful. It immediately shows that simultaneously worrying about inflation being too low and engaging in ‘austerity’ is inconsistent, or less politely, dangerous and stupid.
I have addressed point (2) before, at length, and engaged in a detailed exchange with Randall Wray. The typical position of MMT is false: base money is not a liability of the state at book value. Were it true, it would undermine their thesis that the only budget constraint the government faces is inflation. If money is simply government debt, the constraint is default, not inflation. “Too many” liabilities results in default. “Too much” money creates inflation. In short, (1) is actually more convincing if (2) is false. When I read Randall Wray, who despite this is well worth reading, he also suffers from ‘money denial’, a widespread bias in the history of economic thinking which remains pervasive, based on refusing to recognise that money’s value resides in a network effect, and network effects are extraordinarily strong. To understand the value of money one must understand the economics of language, not taxation.
The problem with abandoning (2) is that it undermines an approach purely based on current accounting practice, and furthermore the assumption that accounting book values are ‘correct’. They’re not. Which is one reason why stock market values differ from accounting book values.
Simply analysing accounting entries makes the ‘economics’ of public finance very clear. And rhetorical simplification is a strength of MMT, pace Randall Wray who has a language of his own.
If you are an MMTer, you will know most of this. And one reaction to cognitive dissonance is varying degrees of irritation. That’s ok. The question you must ask is this: ‘Is MMT simply ANYTHING argued by four or five individual economists, or is it a distinct set of economic ideas?’ This confusion explains why when Simon Wren-Lewis and I state that MMT is institutionally contingent, MMT advocates often reply ‘no it’s not, because look at what so-and-so has said’. That serious MMT economists recognise that (1) is institutionally contingent is clear. But many adherents do not. And even the serious advocates rarely explain how the institutional contingencies affect the accounting.
In discussion, this distinction between MMT as a distinct theory of public finance, and MMT as a set of individual economists, repeatedly gets blurred. For example, when I point out that (1) does not hold in Greece, supporters of MMT say, ‘That’s wrong because Stephanie Kelton predicted the Eurocrisis’. Now, Stephanie Kelton is nothing less than a brilliant economist and communicator, in my opinion. Her diagnosis of the Eurocrisis is very insightful (similar in spirit to Charles Goodhart’s and my own), and I was unaware of this work prior to Nathan Tankus drawing my attention to it. But her diagnosis has little to do with MMT, unless it becomes very broadly defined as simply analysis of the institutional structure of monetary and fiscal policy. Being aware of the institutional contingency of (1) helps her diagnose the problem, as did her emphasis on market panic. But these are not the defining ideas of MMT, unless you believe that MMT is simply any economic view held by Stephanie. I would also add that the narrow analytical focus on deficit financing biases one from recognising that in the Eurozone there is backing of the sovereign by the central bank, but it is contingent on the outlook for inflation. That is why I argued that deflation in Europe would end the Eurocrisis. In other words, we need a framework that explains the crisis, and its end. In fact, the institutional separation of power is far more complex than the phrase “monetarily sovereign” suggests.
Finally, I am not a fan of the football team approach to economics. I prefer to derive utility from team adherence in sports. Why not in economics? To declare oneself a ‘keynesian’, ‘monetarist’ ‘Austrian’ ‘MMTer’ etc., is to declare oneself biased. This is John Cochrane’s obvious weakness. Anyone who has a prior adherence to a ‘school of thought’ in considering evidence, or advocating policy, is simply declaring a lack of objectivity.