Friday, July 10, 2020

Quiggen on MMT

John Quiggen is awesome. His book, Economics in One Two Lessons should, I think, be required reading for everyone (and I assign it for extra credit in my Principles of Macroeconomics classes). But his recent post, The General Theory and the Special Theories, shows that he doesn't quite get Modern Monetary Theory. Or, at least, he doesn't get it in the same way I do.

I am not any kind of "official" spokesbeing for MMT. I don't have a PhD and I don't publish. I'm not affiliated with the Levy Institute or UMKC. I've never met or corresponded with Kelton, Mitchell, Mosler, Tcherneva, Wray, etc.

I have, however, read a lot of the MMT literature, both peer-reviewed and popular. And I have a Master's degree in economics, and I teach undergraduate economics, so I'm not entirely illiterate in economics. The best I can do is put my interpretation of MMT alongside Quiggen's.

Quiggen claims that "Modern Monetary Theory (MMT) is, in essence, based on the assumption that the economy is always in what Keynes called a 'liquidity trap'"; in other words, it applies only under special circumstances, when the "natural" rate of interest is below the zero lower bound.

I disagree. Modern Monetary Theory is, in essence, based on the observation that a sovereign-currency issuing government creates currency, the foundation of the social permission to allocate real resources. Therefore, the government is not required to obtain currency (or money) from those who already have it to get the social permission to allocate resources. The government's social permission both to allocate resources and to manage the money system comes from its political legitimacy.

More technically, MMT scholars conclude (not assume) that monetary policy is never an effective method to employ unused resources. Mainstream Keynesian economists generally believe that monetary policy is ineffective only in a "liquidity trap" (where the real interest rate "wants" to be negative), so this confusion is perhaps understandable. But Quiggen's assertion and the actual MMT position are different.

Quiggen complains that "The problem with this special theory is that a successful application implies destroying the conditions under which it works. Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure." Well, yes, and MMT advocates always add this proviso literally in the same (or next) breath as the assertion that well-targeted fiscal policy can reach full employment.

Quiggen nitpicks that "MMT advocates, like Stephanie Kelton kind-of admit" that progressive taxation is necessary to reduce private expenditure, "but continuously seek to dodge the point." Maybe Quiggen kind-of has a point, and maybe MMT advocates should emphasize that really big infrastructure projects such as the Green New Deal will require increased taxes to distribute the necessary reduction in real private consumption. I honestly don't know what specific policy positions MMT advocates should emphasize; I'm not at all a specialist in public policy debate. However, the right mix of tools to manage private consumption versus inflation seems to me more like implementation details than deep theoretical issues.

Quiggen states that:
MMT advocates Nersiyan and Wray* suggest that the Green New Deal can be financed without “taxing the rich” . . . relying instead on “well-targeted taxes, wage and price controls, rationing, and voluntary saving”
But this interpretation misses a key theoretical point about MMT. MMT advocates argue that large public works programs such as Green New Deal will necessarily be financed the way all government spending is financed: by creating the currency. Financing, i.e. getting the money, isn't ever a problem for the government; the problem is fairly distributing the opportunity cost of using money creation to divert real resources, with inflation (perhaps) the most problematic way of distributing opportunity cost.

Quiggen does not include a link; presumably he's referring to How to Pay for the Green New Deal.

And I honestly don't know whether households in top decile or percentile even use as many resources as a huge public spending program such as the Green New Deal would require, even if we reduce their consumption to the 20th percentile. I'm pretty sure we cannot provide universal health care just by reducing the real consumption of the ultra rich; we cannot return all the purchasing power middle-income households already forego by paying private insurance companies.

Other than quibbles about the gory details about optimal tax policy, I really don't understand why Quiggen seems to dislike MMT at a theoretical level.

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