An Omnibus Reply to MMT Critics
Randall Wray and Éric Tymoigne just released a new working paper that rounds up and responds to various critiques of Modern Money Theory (MMT); critiques they organize into five categories:
One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment.
As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.
You occasionally see MMT loosely described as being “pro-deficit,” but Tymoigne and Wray explain that their theory is neither “for a fiscal deficit, nor is it for a fiscal surplus or a balanced budget”:
MMT is agnostic regarding the fiscal position of a monetarily sovereign government per se. As Abba Lerner’s “functional finance” approach insists, the fiscal position of the government is not a relevant policy objective for a monetarily-sovereign government. Price stability, financial stability, moderate growth of living standards, and full employment are the relevant macroeconomic objectives, and the fiscal position of the government has to be judged relative to these goals instead of for itself. If there is inflation that is demand-led, the fiscal position is too loose (surplus is too small or deficit is too large); if there is non-frictional unemployment, the fiscal position is too stringent. Also, if financial fragility grows due to negative net saving by the domestic private sector, the government’s stance is probably too tight.
Download the paper here.
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From the latest ‘Defense’ of MMT
Footnote 1
“”Throughout this article we will restrict our use of the term “sovereign government” to indicate a government that issues its own currency. ……””
HOWEVER..
“”The word currency is used broadly to mean monetary instruments……denominated in a unit of account and issued by government (treasury or central bank) and private banks.””
This ‘defense’ of MMT ignores the fundamental, non-‘theortical’, foundations of the monetary system that are ever in play. It decently defends against Palley’s traditionalist Keynesian approach, but avoids all of the relevant ‘money-science’ MMT criticisms of both the ‘nature’ of money, and also this important matter of ‘sovereignty’ over the national money system, which is here, again, shoehorned into an illogical construct.
The footnote (1) starts out by explaining that ‘sovereign government’ indicates a ‘government’ that issues its own currency.
And then later takes the extreme liberty in defining ‘currency’ as that which is issued by both government and private banks. Nice sleight of hand.
A monetarily sovereign government is one that issues its own currency, but, DOESN’T issue its own currency.
The essential public policy question that gets ‘defined’ out of existence is whether a government that allows private bankers to issue all of its currency is monetarily sovereign or not: In reality, not in theory.
Perhaps MMTers never heard of the American Revolutionary War for Independence, and what that was all about.
The deceit, intentional or not, that is lying on the table is the inference that it is the “exchange-rate regime’ that differentiates the degree of “policy space” in our national ‘sovereignty’ over money, rather than the obvious question of who issues the money, how and why.
It is obvious that none of MMT’s ‘theoretical’ scholarship is based upon a read of Alexander Del Mar’s ‘The History of Monetary Systems’.
MMT is extremely defensible, indeed to be congratulated, as a proposal for using the national money system towards a more egalitarian society, even identifying the ‘distributive’ nature of the money power as an example of how things should work.
For those of us who have read both Soddy and Del Mar, this is more whistling past the graveyard. But the spirit of revolution is indeed in the air, awaiting MMT’s corrections to its policy tenets and not another round of defense against critics. Here’s one that’s not referenced:
https://sovereignmoney.eu/modern-money-and-sovereign-currency/
Thanks, Levy Institute.
The effect of the policy recommendations in Section 5 of the paper are to 1) make the entire economy an operating subsidiary of the government, and 2) make the private sector a residual of the government. For example, the idea that the Job Guarantee program would be limited to the minimum wage is absurd. It would inexorably become a program to create a “better” employment situation at a “better” wage until it displaced as much of the private sector as was politically possible and redistributed as much of the economy’s real resources as was politically possible. This is the same dynamic as in the Affordable Care Act, for example, where “better” insurance policies are displacing as much of the private sector policies as the government can because “better” is a political definition not a market-based definition. It’s also the same dynamic as in the municipal government retiree programs that are bankrupting many cities because “better” benefits would naturally flow from “better” rate of return assumptions, none of which have any relationship to market-based economics.
On Page 44, you say “The government should be directly involved continuously over the cycle, by putting in place structural macroeconomic programs that directly manage the labor force, pricing mechanisms, and investment projects, and constantly monitoring financial developments. Because those programs would be permanent and structural, rather than discretionary and specific to one Administration, they would be isolated from the political cycle and political deliberations. All this eliminates problems of lags, credibility, and time inconsistency that Friedman and others have complained about.”
To the extent MMT is able to implement this complete structural control of the economy, what will happen is an intensification of what is already happening as a result of partial implementation: the private sector will withdraw from the repressed real economy (e.g., capital investment, market-based employment at market-based compensation) in favor of the stimulated financial economy (e.g., asset price inflation) and the result will be exactly what we’re already seeing – real economy stagnation. More MMT will make the stagnation more structural and more institutional.
That is the problem with MMT, not arcane relationships between the central bank and the fiscal authorities. Those of us in the private sector who would have been employers, investors, net creditors, and the like will stop playing the game. The government will never be insolvent but the real resources it’s counting on will also never be created.