Home > Uncategorized > Wren-Lewis and the dangerous MMT

Wren-Lewis and the dangerous MMT

from  Lars Syll

Professor Simon Wren-Lewis recently wrote: “The dangers of pluralism in economics: the case of MMT” …

mmtWren-Lewis argues that MMT concepts can be explained using mainstream terminology. Since I tend to use fairly standard terminology, I cannot disagree with that argument. However, I would phrase it differently. Mainstream discussion of fiscal policy is almost invariably clouded with theoretical junk (“fiscal sustainability”, “budget constraints”, “intergenerational transfer”, “bond vigilantes”) that it takes considerable effort to strip the junk out to get the correct description, which almost always ends up being the MMT description. The MMT jihad against various phrasings and framing terms reflects the need to think clearly about fiscal policy …

Modern Monetary Theory is evolving outside the journals that are locked down by the mainstream, and is focussed on real economic issues. Meanwhile, the mainstream is using dubious mathematics to painfully re-derive results that have been part of the post-Keynesian tradition for decades. You do not need a degree in the history of the philosophy of science to guess what the outcome is going to be. What we are seeing is the inevitable blowback of the attempt to stifle debate; since criticism cannot work through academic channels, it is instead funneled through non-academic ones.

Brian Romanchuk

  1. Paul Davidson
    March 4, 2018 at 2:39 pm

    MMT correctly rccognizes Money is the creation of the State. Unfortunately MMT associates the use of what the State says is money with what the state says you must pay your taxes.

    Keynes, in TREATISE ON MONEY, noted that government determines what is money. So here MMT an\d Keynes agrees.

    The difference however, is, as I have pointed out, it is the State’s civil law of contracts that determines what is money — as that thing that settles contractual obligations between participants in the private sector.

    I have pointed out there are real world examples where the State has declared one thing as the thing that one pays taxes with but at the same time there was a different thing that the private sector used to settle contractual obligations, Thus people carried the thing that the private sector used to settle contractual obligations as money–

    • Mark Johnson
      March 4, 2018 at 4:03 pm

      “there are real world examples where the State has declared one thing as the thing that one pays taxes with but at the same time there was a different thing that the private sector used to settle contractual obligations” Would you give oone or more examples or give a citation. Thank you

  2. March 4, 2018 at 2:49 pm

    MMT is a refreshing way to look at economics which is, at the present time, mostly interpreted by neoliberals who tout “free markets,” which really means that finance and corporations are free to make huge profits while others may only experience austerity. Free market economics believes in cutting social services and welfare. Deregulation and privatization accords with these ideas and helps eliminate the concept of the community and the public good.

    MMT also describes the role that money plays in the economy without the “Seven Deadly… Frauds of Economics” as described by Mosler ( https://moslereconomics.com/wp-content/powerpoints/7DIF.pdf )

    • March 5, 2018 at 4:01 am

      I mostly agree that MMT is a refreshing way to look at economics. The fundamental insight it touts—that governments can increase their spending without raising taxes or borrowing—is an important one that all who are interested in economics should be aware of.

      But in spite of the fact that I fully identify with the ‘values’ of the MMT movement, I cannot embrace the overall project as a preferred alternative to the traditional perceptions that legislators have of their restrictions when taking on the challenges of fiscal policy.

      The reason for this is I can’t see any meaningful role for MMT once an economy has achieved 100% Full Employment and has a government that intends to keep it that way.

      Sure, when 1) an economy is in recession and 2) it is politically impossible for a government to increase its spending levels by either increasing taxes on savers or increasing borrowing, that is a time when the MMT alternative should be given serious consideration. If I am the part of the leadership team running the government at such a time and I am facing a recalcitrant legislative body, then I am going to start ‘printing’ money to save the people from harm, just as MMT recommends.

      But once Full Employment has been achieved, it no longer makes any sense to give thoughts about MMT any further consideration.

      In a full employment economy, if that achievement was due in part to the government’s willingness last year to increase its spending by ‘printing money’, then it cannot give any reasonable consideration to sustaining that higher level of spending this year and the next by simply creating once again the money needed to sustain the higher overall spending level.

      If it does so—and all other variables are unchanged—the new infusions of freshly created money will have a net inflationary effect on the economy. In order to minimize inflationary pressures in a full employment economy, current government spending levels should be fully financed by tax revenues.

      If this is understood, then I can’t see how it makes any sense to encourage politicians to get used to funding government projects with ‘created’ money when it will be necessary to get them to stop doing so once the economy starts to hum along at full employment levels.

      This is why I view MMT as an option that only has value to society when an economy is depressed and unemployment is high. Once Full Employment is achieved, it is no longer useful.

      I can’t endorse an ‘attitude’ that would become counter-productive once the goal of zero unemployment has been achieved.

      I’d rather politicians retain their reluctance to authorize government spending that is not financed by tax levies so that when zero unemployment is achieved they will be disinclined—by habit—to authorize spending that would be inflationary.

      I think it’s a far better idea to advocate tax increases on the economy’s biggest savers as the preferred way to stimulate the economy and reduce unemployment levels during periods of economic recession, especially when it can be shown that doing so would not impose any real sacrifice—in terms of lost purchasing power—on the rich people who would be asked to pay more in taxes.

      • March 5, 2018 at 10:21 am

        Re: “In a full employment economy, if that achievement was due in part to the government’s willingness last year to increase its spending by ‘printing money’, then it cannot give any reasonable consideration to sustaining that higher level of spending this year and the next by simply creating once again the money needed to sustain the higher overall spending level.”

        If there is an external deficit and the domestic private sector is net saving or paying down debt, then the government might have to compensate indefinitely.

        William Mitchell is Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), University of Newcastle, NSW, Australia
        http://bilbo.economicoutlook.net/blog/?p=31908

        “If there are external deficits and the government continues to balance its fiscal position (only spends what it raises in taxes) then the private domestic sector will run continuous deficits equal to the external deficit and thus incur ever increasing levels of debt.

        That is an unsustainable state….. Continuous government deficits are likely to be required if the non-government sector desires to save overall and maintain sustainable levels of private debt.”

      • March 5, 2018 at 5:42 pm

        Speaking of taxes as “revenue” violates a basic tenet of MMT, that taxes only destroy money. Additionally, speaking of “full employment” when the policy of the federal government is partial employment (ie the Fed’s “dual mandate”) is irrelevant. MMT has proposed a method to achieve real full employment. Dr. Stephanie Kelton explaines it very well on YouTube.

      • Craig
        March 5, 2018 at 6:10 pm

        There isn’t anything inherently wrong with employment of course and there will undoubtedly be more of it if we stop idiotically enforcing monetary austerity on individuals and the system, but the paradigm of employment ONLY as a means of dealing with our economic problems is soooo old paradigm that it is laughable.

      • March 6, 2018 at 3:57 am

        …speaking of “full employment” when the policy of the federal government is partial employment (ie the Fed’s “dual mandate”) is irrelevant.

        The problem with Congress’ Dual Mandate instruction to the Fed—that it should pursue both “price stability” and full employment—is that the Fed has always conveniently interpreted it as:

        Manage the money supply so as to minimize unemployment in the economy, but only up to the point when doing so begins to threaten “price stability.”

        Which is how banking interests would like to see the money supply managed.

        What a country’s Central Bank (should be the Treasury in the U.S.) ought to be required to do is:

        Manage the money supply so as to minimize Inflation, but only so long as Full Employment is not threatened

        Therein lies the essential problem we are having with the performance of our nation’s Monetary Authority.

      • March 6, 2018 at 4:26 am

        Mitchell:

        If there are external deficits and the government continues to balance its fiscal position (only spends what it raises in taxes) then the private domestic sector will run continuous deficits equal to the external deficit and thus incur ever increasing levels of debt.

        I should point out here that ‘external’ deficits are not actually external in any real sense. When foreign banks lend to American borrowers, they aren’t really sending anything from their country to our country.

        They are merely ‘activating’ reserves they happen to own in America. They decide what they are going to do with the dollars they gain possession of—maybe buy financial assets or even real property—but the dollars in a very real sense stay in America and are very much a part of that country’s ‘loanable reserves.’

        So it is really quite a fanciful perception to look at the current account and say that debt owed to foreign interests is some kind of ‘drain’ from our economy, when nothing at all ever leaves our economy.

        That is why I do not seen the significance of Mitchell’s suggestion here that debt owed to ‘external’ parties must be reacted to in a way that is different from debt owed by domestic borrowers to domestic lenders. Don’t understand why he is making this distinction.

      • March 6, 2018 at 5:00 am

        I don’t believe that he is not making that distinction. As I understand it, he is saying the foreign money is net saved not spent. We are spending more abroad than the foreigners are spending here. In that sense, there is a “drain” of spending from the domestic economy. And it is that gap of spending as long as there is a trade deficit for which the government must compensate through it own deficits.

      • March 6, 2018 at 5:09 am

        Larry:

        If there is an external deficit and the domestic private sector is net saving or paying down debt, then the government might have to compensate indefinitely.

        Once Full Employment is achieved, and if the presiding government has the will + power to maintain it, there are any number of developments which could occur that would justify an increase in government spending over what was anticipated in the original budget.

        The Monetary Authority, for example, might need to respond to by making it possible for the government to spend more money than it collects in tax revenue (by allowing borrowing to occur, or by simply ‘printing’ the money needed to finance spending requirements).

        That is why I included the qualifier: and all other variables are unchanged in my statement. The reason I did so is to isolate the predictable impact of additional infusions of newly created money on prices when all other economic variables are unchanged.

        No, funding half the government’s spending next year with newly created money will not necessarily be inflationary IF some other variables are changing in a way that compensates. But the point I’m emphasizing here is that the quantity theory of money does apply at some point.

        In a Full Employment economy, I would not want to make any fiscal or monetary decisions that could contribute to inflationary pressures. That just seems to be the prudent thing to do, at a time when aggregate spending is already creating a jobs environment where there are more jobs available than there are people to fill them.

        By the way, if ‘developments’ occurred in a Full Employment economy that necessitated an increase in government spending that was not covered by tax revenues, I would most definitely advocate the ‘print more money’ option over the alternative of borrowing.

        But as a general guideline, I say that every effort should be made—in a Full Employment economy—to pay for all budgeted government spending with tax revenues, as a basic plan to minimize inflationary pressures.

      • March 7, 2018 at 6:06 pm

        Perhaps taxes should be set in accordance with changes in the CPI and dispense, once and for all, the bookkeeping fairy tale that taxes are used to finance the government.

      • March 6, 2018 at 7:17 am

        As I understand it, he is saying the foreign money is net saved not spent. We are spending more abroad than the foreigners are spending here. In that sense, there is a “drain” of spending from the domestic economy.

        What is important to me in this discussion, Larry, is that an effort be made to distinguish between the relative unimportance of “capital flows” and the supremely important matter of jobs created/destroyed by international trade.

        The dollar has remained relatively ‘strong’ vs. other currencies in recent decades spite of endless trade deficits only because there is so much international demand for dollars by banks and other international speculators who want to own US assets for their profit potential (or because other countries want to keep their currency’s XR low, vis-a-vis the US).

        But if we focus more narrowly on the impact of international trade on employment levels, then we can talk about how a trade deficit can represent a “drain” on domestic spending levels.

        Yes, if there is a net outsourcing of American jobs to other countries, then it has the same effect as ‘saving’ does on the economy: a decrease in money spent on domestically produced G & S.

        If the economy is dealing with a net loss of jobs due to international trade—or for any other reason—then the government definitely should increase its spending on real economic investments to make up the difference, and yes, that extra spending could be financed by a tax increase—if the extra spending is anticipated—or by “printing money” if not.

      • March 6, 2018 at 9:12 am

        If the problem is a lack of aggregate demand, do you agree that increased taxation would countervail the increased spending?

      • March 6, 2018 at 10:16 am

        If the problem is a lack of aggregate demand, do you agree that increased taxation would countervail the increased spending?

        No, not in the least. Not if the incomes that are taxed are those of the economy’s biggest savers.

        Recall that the situation is a lack of aggregate demand. When there is a lack of aggregate demand (unemployment), there is an excess level of savings occurring in the private domestic economy.

        If the tax rates that rich people must pay in this situation are increased, it will generate an immediate and powerful stimulus to the economy, for it would gather a significant amount of money that would otherwise have been removed from the economy (saved) and then the G would spend it into the mainstream economy instead.

        Contrary to what you will find in nearly any introductory economic textbook, income tax INCREASES always provide a direct stimulus to the economy, if they are imposed on savers. The the decrease in C will always be < the increase in G.

        (Even the decrease in C—luxury and asset purchases—-would not harm rich people in the least, for they would retain their positions at the top of the disposable income hierarchy, which means they would still be the ones who buy all of the economy's scarcest luxuries, only at lower prices, cuz they’d still have the highest disposable incomes in the land. In real terms, they’d lose nothing whatsoever.)

      • March 6, 2018 at 10:37 am

        If you specify raising taxes on the rich, that is a very good direction because gross inequality harms democracy. But in terms of immediate inflation and creating employment now, how will the cash registers differentiate between money newly created and funds you believe were formerly just not spent? Would you have the government spend right away and put people to work immediately, or justify delay until you have collected sufficient taxes?

      • March 6, 2018 at 11:06 am

        …in terms of immediate inflation and creating employment now, how will the cash registers differentiate between money newly created and funds you believe were formerly just not spent? Would you have the government spend right away and put people to work immediately, or justify delay until you have collected sufficient taxes?

        The cash registers, of course, will not care where the money comes from. By the way, money saved is, by definition, money not spent.

        Practically speaking, if the government plans to spend a lot of money that it does not yet ‘have’, it could—one possibility—borrow from the Social Security trust fund with the intent of replenishing the withdrawals once the tax revenue comes in later.

        Or, it could simply print up a certain amount of money it requires this week/month as a way to work around the lag period, with the intention of annihilating that created money once the tax revenue finally makes its way into the Treasury.

        I really don’t have a problem with the Treasury exploiting the MMT money creation option in small ways like this. Especially when there are unacceptable levels of unemployment in the economy.

        I just don’t think it’s a good idea—looking ahead to a full employment economy—to give legislators an attitude that would be unhelpful when Congress finally decides to create and indefinitely maintain a labor shortage in the economy.

      • March 6, 2018 at 11:56 am

        No one is advocating increased spending once full employment is reached, but the unhelpful attitude is the one legislators have now – the belief that all spending should be matched by taxation.

      • March 7, 2018 at 6:18 pm

        In more general terms you are expressing an often neglected fact, resources, not taxes, not borrowing, must limit G spending and labor is the primary resource of a nation.

      • Craig
        March 6, 2018 at 5:17 pm

        As I said, all of this discussion is a bunch of hide bound neo-classical, equilibrium, figure-figure…or the slightest tweaking of same. It goes no where and resolves nothing. It’s a bunch of erudite non-confront, a perturbation, an epicycle “solution”.

        Sorry.

      • Craig
        March 6, 2018 at 11:09 pm

        And the same goes for every other reformer, “new” theorist or de-bunking economist.

        Public Banking? Insightful of the incredible amount of money and profits that Finance skims off the top of the economy, but isn’t consciously aware of the present monetary paradigm of Debt Only that enforces systemic austerity. Looks at the keystone problematic business model, but It’s just another reform that splashes around on the surface of the real problem.

        Michael Hudson? I love his fire in the belly attitude and his focus on Finance as the parasitical illegitimate and problematic part of the economy, but he lacks the knowledge of the fact that both the money system and the pricing system are digital and that retail sale is the terminal summing and ending point of the entire legitimate economic process and so is THE POINT AND TIME to implement monetary policies that will literally implement the new paradigm…immediately, and with a few new paradigm aligned regulations and policies do more for the individual, enterprise and the system than any other reformer and both political parties have done in a hundred years.

        Steve Keen? His de-bunking of DSGE is worthy of a Nobel itself and he keeps saying we need a new economic philosophy, a Copernican paradigm change but he doesn’t recognize that he’s re-discovered C. H. Douglas’s A + B Theorem in saying that as soon as the rate of change of credit creation dips the economy must enter a recession…unless of course you INDIRECTLY and inefficiently run fiscal deficits. Problem is that’s just another palliation of the most basic systemic problem which is that the rate of total costs and so total prices exceeds the rate of total INDIVIDUAL incomes. To actually resolve that problem you have to break up the monopolistic financial paradigm of Debt Only with DIRECT monetary gifting means of increasing individual incomes in ways that simultaneously not only prevent inflation, but integrate price deflation painlessly and beneficially into profit making systems. Like for instance a universal dividend and a high percentage discount/rebate at the point of retail sale. This would affirm Keen’s debunking of equilibrium theory, create “a higher disequilibrium” and also align with the signatures of paradigm changes which is the transformation-inversion of a ratio and/or a problematic duality and/or a change in primacy of the old and new paradigm.

        If you perceive the old paradigm and you also see the new discovery that always accompanies a new paradigm, like the telescope and the ellipse, and in this case is the economic and monetary significance of policy implemented at the point and time of retail sale….then recognizing the new paradigm, which is always in certain ways conceptually oppositional in nature to the old, becomes relatively easy….if you aren’t egocentrically involved with and/or blinded by fallacious orthodoxies and/or palliative reforms….and aligning policies and regulations with the new paradigm is a straightforward rational process.

      • March 8, 2018 at 1:09 am

        Perhaps taxes should be set in accordance with changes in the CPI and dispense, once and for all, the bookkeeping fairy tale that taxes are used to finance the government.

        The CPI? Not a good idea. The CPI is an attempt at at “average” inflation rate, which completely ignores the fact that inflation rates vary across income groups.

        A major part of the challenge of managing inflation is the way it has been traditionally measured.

        Most economists—even MMT economists—are oblivious to the crucially important fact that it is quite possible for one income group (e.g., rich people) to experience a double-digit rate of inflation at the same time that another income group (e.g., wage-earners) is experiencing dis-inflation, or even deflation.

        Whenever a decision is made by monetary authorities to ‘fight’ inflation, they should first be required to identify which income group’s inflation they are worried about, and then justify it.

      • March 8, 2018 at 5:38 pm

        I assume you equate income/wealth increase with inflation. The word “inflation” is rather general, it can be ‘wage inflation”, price inflation” or “money supply inflation” I was speaking of price inflation which, I believe, is the most common factor recognized by consumers as “inflation” or “inflated prices.” Why prices become inflated is another issue.

  3. Paul Davidson
    March 4, 2018 at 5:32 pm

    an example where taxes and contracts were settled by different things– was South Korea immediately after the end of the Korean war. Korean citizens paid their taxes with the Korean yuan but used U.S. military script to settle private sector contracts.

    This military script was used by the US military to pay soldiers in Korea. It was supposedly only good for buying goods from the US post exchange store in US army camps. The purpose was to prevent US soldiers from engaging in transactions with South Korean civilians.

    But soldiers often wanted to buy “wine, women and song” which could only be supplied by the Korean civilian population. So soldiers bougt these things from the private sector by spot transactions paying in military script. The Korean civilian population had more confidence in the US government than in their own Korean government and so they then used military script to meet private sector contracts [denominated in US military script] between the civilian population.

  4. Craig
    March 4, 2018 at 6:44 pm

    MMT has the mechanics of money correct and is also anti-austerity which is enlightened. Unfortunately, like nearly all other economic and monetary theorists, they’re thinking is still bound to the current paradigm of Debt Only by their failure to understand the significance of tying monetary policy directly to both the individual and to the point and time of retail sale.

  5. March 4, 2018 at 10:48 pm

    See three-part series by Bill Mitchell, starting here:

    The New Keynesian fiscal rules that mislead British Labour – Part 1
    http://bilbo.economicoutlook.net/blog/?p=38776

    “Portes and SWL fail to mention the concept of full employment in the NIESR article. Their discussion is pitched entirely in terms of ‘financial ratios’.

    It is hard to see that the general public will be enamoured with a government that delivers a target fiscal deficit (for example) but at the expense of elevated levels of unemployment and poverty. Fiscal policy has to relate to things that matter.”

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