Opinion: Detroit accountant shows that opinions built on ignorance come crashing down

Richard Drumb disapproves of Modern Monetary Theory. He pretty much trots out every moronic anti-MMT trope. 

Drumb compares the federal government to the city of Detroit, but Detroit cannot create money, and the federal government does nothing but create the money it spends.

No one lends money to the federal government. Why would the government need to borrow money, which it creates? The government does not borrow; instead, it generously offers to pay people interest to take money out of circulation.

We have a lot of economic problems, and the federal government is doing a lot of harmful things. But a violating a non-existent budget constraint is not one of those problems.

The fundamental problem with MMT

Robert P. Murphy has a mostly negative review of Stephanie Kelton's The Deficit Myth. Murphy appears to be a member of the Mises Institute, so I assume he believes that the government cannot do anything good, other than to protect the property of the wealthy. Even before reading, I was pretty sure he would disapprove in principle of the whole MMT project of making it easier for the government provide for social welfare. Still, Murphy avoids the OMG! hyperinflation hysteria so common to vulgar critics of MMT, and ideological bias is no guarantee of error, so I want to look at his criticism in more detail.

Murphy presents a laundry list of mostly unconnected objections to MMT, so I'll just present a corresponding list of rebuttals over at least a couple of posts, perhaps more.

The Fundamental Problem of MMT

Murphy begins his objections by stating MMT's "fundamental problem":

regardless of what happens to the "price level," monetary inflation transfers real resources away from the private sector and into the hands of political officials. If a government project is deemed unaffordable according to conventional accounting, then it should also be denied funding via the printing press.

I'm still really struggling to understand this objection. Clearly, Murphy thinks that monetary inflation is something different from a general increase in the price level, the usual definition of inflation. But I don't know what that is. (Murphy kind of expands on the point below.) Presumably, because MMT is all about the government creating currency as needed, I think Murphy considers the creation of additional currency by itself to constitute monetary inflation.

Now it is definitely true that when the government creates money to purchase goods and services from the population, it is transferring real resources from the private sector to the government. That's pretty much the whole point of a government, and what governments have been doing for about 7,000 years. I get it, Libertarians are completely against governments except to protect their own privilege, but this objection seems misplaced and has nothing to do with MMT per se.

Murphy continues with another opaque objection: "If a government project is deemed unaffordable according to conventional accounting, then it should also be denied funding via the printing press." But what does Murphy mean by "unaffordable" and by "conventional accounting"? Affordability precedes accounting: spending is affordable if a firm or household can get the money; once it has the money, firms and households account for how they spend it. But where does the money that firms and households need to get ultimately come from? Well, in every large economy since 1971, the government creates the money*. All government spending is "funded" by created money. Although MMT scholars are exceptional in that they don't try to pretend that governments don't create money, this objection has nothing to do with MMT. Libertarians might pine for a return to the gold standard, but the world abandoned the gold standard because it just doesn't work. Go back 50 years and argue with Richard Nixon, not Stephanie Kelton.

*The Eurozone is a Hot Mess and has suffered several financial crises precisely because the European Central Bank is not part of any national government.

I will concede one point to Murphy: if the government wants to appropriate real resources away from private production, it should ensure that the citizens believe that benefit of the government spending exceeds the benefit of alternative private employment of those resources: to avoid price inflation, the government should collect enough taxes (after, of course, it spends the money) to reduce private demand by as much as it reduced private production. But every MMT scholar agrees with this concession. The whole point of MMT is about how to employ unused resources, i.e. available labor not employed by the private sector.

Murphy expands a bit, presumably on "monetary inflation". Government spending to employ real resources increases the price level. If the price level would have otherwised decreased, so that spending keeps the price level stable, then those with financial assets are poorer than they would have been had the government permitted deflation.

The easiest rebuttal is simply: yes, but so what? That's how the money system works. Instead of permitting deflation, investors increase their real wealth by collecting interest, which requires increasing the money supply. We might have chosen to keep the money supply constant and let price levels decline instead, but we didn't; which method is correct is beyond the scope of this post. Regardless, investors can't have it both ways: investors cannot be both entitled to interest, increasing their real wealth holding the price level constant, and entitled them a decrease in the price level, increasing their real wealth holding the money supply constant.

But it also matters why the price level decreases. There are two ways the price level can decrease. The price level will decrease if real production increases holding the money supply constant. That's the trade-off above: presently, the government increases the money supply, supplying all holders of financial assets with interest. However, the price level can decrease when real output decreases. In this case, an increase in real wealth for holders of financial assets is at best illusory. If financial asset holders were to increase their consumption, that spending would simply drive prices back up. Even worse, if the decrease in real production were to become permanent (as equipment rusts and workers forget their skills), then an attempt to convert financial assets to consumption will increase the price level above its original point, causing a decrease in asset holders' real wealth.

Murphy argues directly against employing unused resources at all. Murphy cites Mises' malinvestment argument: unused capacity is the result of earlier bad investments; employing that unused capacity will just perpetuate the bad investments. If, for example, we have a thousand factories and a million workers making Pet Rocks that nobody wants anymore, it's a pointless waste of real resources for the government to print the money to keep the Pet Rock factories operating and employing those workers. MMT theorist agree that the Pet Rock factories should not operate (and investors would lose financial claims to their revenue), but what about the workers?

Even taking the malinvestment theory at face value, what do we do with the million workers? We have four choices: pay them to continue to make Pet Rocks, let them starve and die, pay them while they're not working, or pay them to do something else useful. In theory, the private sector should be able to pay them to do something else useful, probably building more factories for products that people do want. Not that Libertarians care much about evidence, but the evidence shows that's not what happens in real life. Instead, if we abandon too many bad investments at once, those workers are not reaborbed into the workforce. Even worse, the workers that provided the newly unemployed workers with consumer goods also leave the private labor force. We end up losing useful productivity for years and sometimes decades.

Murphy continues with some more MMT-specific objections. I'll cover those in a later post.

What a criticism of MMT lacks

Perhaps surprisingly, Daniel Tenreiro's criticism of Modern Monetary Theory, "What The Deficit Myth Lacks," at least avoids the usual hysterical bad-faith anti-MMT propaganda: Tenreiro does not froth at the mouth screaming hyperinflation! and Venezuela. Indeed, Tenriero grants MMT's most important claim: the United States can presently use government spending to use idle productive resources. However, seems to understand neither the basics of MMT nor basic economic theory.

Tenreiro observes that MMT (following Keynes) prescribes government spending when the economy is below full employment and MMT predicts that government spending will cause inflationary only when the economy is at (or above) full employment. However, these theories do not simply restate the Phillips Curve; more over, modern theory has not thoroughly undermined the Phillips Curve.

We can use the Phillips Curve to say that if unemployment is above the "natural rate" (momentarily ignoring the political choices embedded in the natural rate of unemployment) and inflation is below the corresponding natural rate, then rather than shifting the Phillips Curve, government spending should just move both unemployment and inflation to their natural rates. Indeed, since the GFC, most capitalist economies have seen both too-high unemployment and too-low inflation, indicating that the government can indeed spend extra to use idle productive resources, i.e. labor and existing industrial capacity. Such spending is inflationary by design: a little inflation is a Good Thing.

It is only when unemployment is at or below the natural rate, indicating that the private economy (and ordinary government spending) is using all available labor, that government stimulus spending will crowd out private economic activity. This crowding out causes the Phillips curve to shift outwards, causing inflation with no corresponding increase in long-run unemployment, rather than causing movement along the curve to equilibrium.

Tenreiro mentions the Job Guarantee, an important and perhaps intrinsic MMT policy prescription. His sarcasm aside (the Job Guarantee does not "solve[] the economy"), he correctly states the MMT position: the Job Guarantee will "spur economic growth by employing workers who would otherwise be idle [emphasis added]." The qualification is critical, but Tenreiro perhaps does not grasp its implication.

Tenreiro does not appear to understand ECON 101 national accounting nor the usual rationale for government spending. Tenreiro's complaint here is that the Job Guarantee "would have a negligible effect on output, because by definition it would employ workers in the production of goods and services that private firms consciously avoid." Basic national accounting assumes that government spending counts directly to output: it's the $G$ in $Y=C+I+G+(X-M)$.* Tenreiro's deeper fallacy is that all government spending — roads, bridges, schools, police, the military — is by definition useless: if it were useful, private investors would find it profitable. There's nothing about MMT or the Job Guarantee that's any different from any other government spending.

*In English, output (Y) equals the sum of consumption (C), investment (I), government (G) and net exports (X—M)

Tenreiro shows his disdain for public goods with the usual conservative contempt for alternative "clean" energy. But of course alternative energy hasn't "flopped". It's doing quite well, and the Germans and Chinese are killing us in the sector. The U.S. is lagging behind because it's actually productive, and there's no way to use alternative energy to loot American consumers. More importantly, the job guarantee's primary role would be not in developing but converting the current electricity, heating, and transportation infrastructure to methods that won't kill us all from global warming. Again, ECON 101 (at least as I teach it) tells us that public goods cannot generate profit in a free market because of the free-rider problem. It is worth repeating that the social value of governments providing public goods is not a feature unique to MMT; it's standard economics.

Finally, Tenreiro absurdly objects that MMT isn't what he wants it to be. Tenriero wants a supply-side theory of long-run economic growth; MMT is a demand-side theory of short-run utilization of idle resources. True, MMT fails to address supply-side economics, nor does it promise to do away with war, disease, famine, death, mopery on the high seas, nor the heartbreak of psoriasis. So what? Criticize the theory for what it is, not what it does not even pretend to address.

MMT Misconceptions part 3b

Continuing with Doug Henwood's essay, Modern Monetary Theory Isn’t Helping, and his treatment of taxes and government revenue.

Misconception: Taxation transfers resources

[O]ur public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones.

Well, no. It's not anything like that; it can't possibly be anything like that. Henwood is not getting MMT wrong here; he's getting basic logic wrong. Henwood is at best speaking imprecisely; we could just attribute this imprecision to a desire for concision, but speaking carefully would completely undermine his point.

Generally, the word resource refers to something real: labor, raw materials, capital equipment, intermediate goods, etc. But of course it's nonsensical to suppose — and I don't think Henwood believes any such thing — that rich people have vast warehouses full of machines, equipment, parts, and raw materials, and dormitories full of people they are withholding from the labor force.

Taxes take money away from people who have it. Money is not a resource; it is the social permission to access society's resources. This isn't the 11th century; the government does not impose a tax by taking the food I grow. When I pay my taxes, I am not giving any resources to the government; the government is taking away some of my social permission to access society's resources.

Absent theft and robbery, ordinary people, households and firms, must get money by persuading someone else who already has money to give it to them, eventually in return for real resources. That's just how money works, n'est ce pas? But governments are just not at all like that.

Money is a social system, and someone, some collection of institutions (spoiler alert: the government), has to create and manage money. The government has to create the money, ensure that people want to use it as a medium of exchange and store of value. The government must ensure there's enough money overall to grant the social permission to access all of society's resources, but not so much that people think they have the social permission to access resources that we cannot produce.

No other institution except the government* can manage the money system. We can't just leave money to "the market". Even if you grant that markets have some value, they suck at delivering the kind of rigidly broad uniformity we want from money; governments are terrific at being rigidly uniform. Government does not have to get social permission to access society's resources. Government has this social permission just by virtue of being the government.

*I suppose e could go back to the gold standard, but almost a century ago, Keynes realized the gold standard was a Bad Terrible Idea, and we abandoned its last vestige in 1971.

This is what I meant previously by looking at the control system; it's important to understand how the control system works so we can effectively use it.

This is how money actually works: The government creates money and puts in the hands of the private sector by buying things like airports and bridges, loaning it to banks to manage the payment system, or buying real or financial assets with it. So that people will actually accept and use the government's money, the government imposes taxes that must be paid in the money it just issued, that could not have been be paid unless the government had first issued the money. Because the government wants some of this money to stay in circulation for private transactions, they collect in taxes less money than they issued.

The government takes these taxes and "burns" them. The government does not need your tax dollars; the government imposes taxes in part so that we need them.

Once the money economy gets rolling, the government continually creates money and puts it into the private economy; it collects taxes to destroy excess money.

The government does not borrow money; they offer people interest to take money out of circulation and "store" it in a government "bond". The government does not offer people real resources in return for the "bond", and the government has no need to give anyone real resources to get the money they promise to repay. They not just can but they have not choice but to print the money when the "bond" matures.

I don't care at all how you or anyone else, left, right or center; capitalist, socialist, or anarchist, feels about the above. That's how money actually works. Again, this is not MMT; this is fundamental monetary economics.

Capitalists fucking hate that money works this way. They would much prefer the gold standard, which gives the rich total control of the money system. The only reason they tolerate the fiat money system — and they have no choice but to tolerate it — is that the last time the bourgeoisie tried the gold standard, the peasants started gathering torches and pitchforks.

The bourgeoisie and their loyal ally? unwitting stooge? useful idiot? Doug Henwood absolutely do not want the unwashed masses to understand how the money system actually works. They want you to believe that the rich have the resources we need to run our society, and that the citizenry must either humbly beg them for these necessary resources or fight a long and vicious battle to take those resources away from them.

Neither is true. The rich have nothing but money, social permission, created by the government. We absolutely should take away most (all?) of that social permission, not because we need it, but because fuck you, that's why; we do not want them to have it. If they want to hide their money, let them. Hidden money is out of circulation and useless. If they want to defend their money — and the government really should be careful and legal about how they take anyone's money — that's fine; the government can just freeze the money while the litigation drags on; again, frozen money is no money at all.

The rich may have something we do not want them to have, but they have nothing we need.

MMT Misconceptions part 3a (taxes)

Finally, Doug Henwood's essay, Modern Monetary Theory Isn’t Helping, gets to the crux of the biscuit, taxes and government revenue.

Misconception: Taxation transfers resources

MT’s lack of interest in the relationship between money and the real economy causes adherents to overlook the connection between taxing, spending, and the allocation of resources. We have [all sorts of bad things] because the public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones, with at least the potential for them to be spent on more humane pursuits.

Long sigh. This is a complicated and persistent misconception. It's complicated because economics is complicated; it's persistent because the illusion that taxes transfer resources serves the interests of the capitalist class.

Please bear with me as I draw an extended analogy.

Consider an ordinary automobile. One way (certainly not the only way) to think about a car is to divide it conceptually into the physical system, the user interface, and the control system. The physical system consists of the engine, which physically makes the car go, the tires, which physically turn the car, and the brake pads, which make the car slow down and stop. The user interface is what you, the driver, use to control the car: the gas pedal makes the car go, the steering wheel makes the car turn, and the brake pedal makes the car stop. Finally, the control system connects the user interface to the physical system. Pushing the gas pedal down (U) causes a cable to open the throttle in the carburetor, which sucks more gasoline and air into the cylinders, (CS) and the car goes faster.

This is more or less what MMT does (or at least how I read MMT): divide the economy the same way as above. The physical part, the real economy, comprises factories, workers, capital, natural resources, etc. The user interface is money our ordinary experience of money, receiving a paycheck, spending money to buy stuff, paying taxes, etc. The control system is the banking system, including the central bank and the Treasury, which connects our ordinary experience of money to the real economy.

There are a lot of other useful ways to divide the economy, and a lot of other economic topics worth studying; MMT scholars choose to focus mostly on the control system, i.e. the banking system. Moreover, they claim to have discovered (or advanced our understanding of) how the control system works; moreover, they claim the control system does not work the way capitalist economists tell us it works.

(These claims are either true or false. If they are true, they are true even if we don't like that they're true; if they're false, they are false even if we want them to be true. It is instructive that Henwood never analyzes whether or not MMT scholars' claims are true or false, only that they are undesirable, and MMT scholars are ugly and their mothers dress them funny. Of course, I think Henwood is fractally wrong.)

Back to the car analogy. Max Max has a turbocharger on his V8 Interceptor. He has a pull switch installed on the gear shift lever that engages the turbocharger. He pulls the switch and the car goes faster. We would justly consider someone misguided who objected, "Max can't just push a button and make the car magically go faster. Pushing on the gas pedal makes the car go faster." We would consider them willfully ignorant if, when we tried to explain, they retorted, "Don't confuse me with all that 'physics' and 'engineering' bullshit. I know how a car works, and you make it go faster by pushing the gas pedal. If we could just push a button and make the car go faster, then why can't we just put in a button that makes the car go 1,000 miles per hour? Checkmate atheists engineers!"

Henwood makes the same mistake by confusing taxes (user interface) for resource transfers (control system) and exhibits the same willful ignorance by dismissing MMT scholars nerdy wonks talking about boring and mathy topics like accounting and finance. Henwood already knows how the economy works. I mean, he's at least skimmed "Wage Labor and Capital"; what more do we need to know?

In the next installment, I'll dig more deeply into what economists teach undergraduate economics students about macroeconomics (I am an expert in this topic, or at least a professional, because I am paid to do just that) and how Henwood badly mangles even conventional macroeconomics; I will follow with the changes that MMT scholars (as I understand them) propose to conventional macro.

MMT Misconceptions part 2

Let's push on looking at the misconceptions Doug Henwood's essay, Modern Monetary Theory Isn’t Helping.

Note: For clarity, I've added the label "Misconception:" to the boldfaced titles.

Misconception: MMT is about American Exceptionalism

Another serious problem with MMT is its embeddedness in a rich-country perspective, and in particular American exceptionalism. . . . MMT’s unacknowledged dependence on the exorbitant privilege of the United States —Mitchell is about the only high-profile MMTer from abroad — is almost completely unaddressed by its proponents.

American economists study the American economy. Quelle surprise. Granted, the US is indeed an exceptional economy. So what? How much does MMT rely on American exceptionalism, which really is singular, rather than its monetary sovereignty, which is not universal but more broadly shared? As Henwood later mentions, other countries such as "Canada, Japan, and Britain, though to a lesser degree" have monetary sovereignty. Henwood does not, however, compare how MMT applies to those countries which do have monetary sovereignty but not the United States' singular privilege. Instead, he jumps right to Allende and Chavez:

But less privileged countries have to worry about foreign investors dumping their bonds and driving down the value of their currency, which would jack up interest rates and inflation. Salvador Allende’s government greatly increased spending and raised the incomes of the poorest in Chile in the early 1970s; that worked nicely for a while, but then inflation took off. Allende wasn’t operating from the MMT playbook, merely resorting to policies pursued by many progressive governments facing political opposition and resource constraints. But such experiments rarely end well, and similar problems would face a poor country trying to stimulate its way to prosperity today, as we see in Venezuela now.

Wait, what!? Am I reading Jacobin or The Economist? Such experiments rarely end well not because they are economically inept but because the United States sends the CIA or the Marines to put a stop to it.

Misconception: MMT should address International Trade and International Political Economy

Those countries need, for example, to import things priced in dollars, like oil, and the value of their currency has a direct effect on living standards that Americans are insulated from because we can print the currency in which that oil is priced. Brazil, in turn, has even less freedom; it needs harder currencies like dollars and euros to import commodities and advanced manufactured goods; and poorer countries like Bolivia or Ghana have even less. To buy essential imports, these countries often have to borrow in those hard currencies. To pay off the loans, they need to earn foreign currency through exports.

MMT has little helpful to say about that situation.

I will note that not only do MMT scholars say little about IPE, they say nothing whatsoever about the heartbreak of psoriasis. So what? MMT is a theory about domestic monetary and fiscal macroeconomics.

Misconception: Advocates present MMT as a socialist panacea

MMTers show a strange lack of interest in the specificity of capitalism — how production and distribution are organized, how demand for credit arises in the course of commerce, how people earn their living and under what conditions . . . Through the fantasy of effortless keystroke money, all those relations of necessity and power supposedly get wiped away.

Supposedly? Supposed by whom? I've never seen any MMT scholar say that MMT will wipe away capitalist economic relations.

I will grant Henwood that a socialist will not find a complete plan for socialism in MMT. Anyone who thinks MMT is a socialist theory is both dumb and not a legitimate MMT scholar. But Henwood hardly needs however many thousands of words to get there. Just call L. Randall Wray and ask him, Is MMT a socialist theory? To which I imagine Wray would reply, What, are you high or just stupid? MMT is about how to run a capitalist economy. Boom! I could have saved Jacobin however much money they paid Thomas Friedman Doug Henwood. (Sorry, I keep getting those two confused.)

That's enough singing for today, lads. More on the weekend.

MMT Misconceptions part 1

I will skip the pure bad faith propaganda in Doug Henwood's essay, Modern Monetary Theory Isn’t Helping: As the saying goes, "Never wrestle with a pig. You both get dirty and the pig likes it." However, Henwood reproduces many misconceptions about MMT (and basic economics). Whether he reproduces them out of ignorance or bad faith is irrelevant; my task here is to link correct the misconceptions.

Note: For clarity, I've added the label "Misconception:" to the boldfaced titles.

Misconception: "Cool[ing] things down" means "creat[ing] a recession".

Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes.

Strictly speaking, this statement is a misconception not about MMT but about basic economics.

I don't know what Henwood actually means by "cool things down"; it's not a precise economic term; Henwood is paraphrasing without a citation, so I can't look at what Wray actually said. It is certainly the case that raising taxes is neither synonymous with creating a recession nor do tax increases necessarily or even usually cause recessions. Tax increases are contractionary, but contractionary fiscal policy is recessionary only if long-run economic growth is near zero. In standard undergraduate macroeconomic theory, when actual output exceeds potential output, some people are working harder than they want to, and they demand more for their loss of leisure than they are producing. The economy will (and should) contract (the short-run rate of growth will at least slow) no matter what the government does; all raising taxes does is to change how the contraction takes place. Without taxes, the contraction will take place through an increase in the general price level; with taxes, the government just takes the excess money out of the economy.

(Of course, if someone doesn't use a word, and Henwood explicitly says that Wray "shies away" from using recession (because contraction is different from recession), basic honesty generally requires some evidence for the imputed usage. The evidence is definitely not to be found in basic macro.)

Misconception: Reserve accounting is irrelevant

Much of the MMT literature is an elaboration of the arithmetic of bank reserves . . . Reserve accounting is important if you’re a financial economist or a central banker, but it’s of limited relevance to anyone concerned with big-picture economic questions.

Wait, what? Central bankers are most definitely concerned with big-picture economic questions. Any intro macro textbook will tell you that reserve accounting is the foundation of orthodox monetary policy. In my principles class, I spend an entire 110 minute lecture on reserve accounting. And it's not that hard; mostly just arithmetic and a little simple algebra, but it does scare some people with deficient education.

More importantly, MMT scholars want to prove that money does not work in the way we think it works, so they have to talk at length about how it actually works. Perhaps they're not correct, but a blithe math-is-scary dismissal is not a critique.

Misconception: MMT should be a theory of everything

Absent from Kelton’s paper, Wray’s book, and much of the subsequent MMT literature, is any sense of what money means in the private economy, where workers labor and capitalists profit from their toil and compete with each other to maximize that profit, a complex network of social relations mediated by money.

Nor does MMT literature address the heartbreak of psoriasis. So what? MMT is not intended to be a theory of everything, to rethink how a capitalist economy works at a fundamental level. Why should it be? Marx already did most of that work.

Misconception: Fiscal policy is impossible

[Abba Lerner's] proposed doctrine of functional finance held that “government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.” In other words, if unemployment is rising, loosen policy (boost spending, cut taxes, lower interest rates), and if inflation is rising, tighten policy (the reverse). On first glance, this sounds completely reasonable. But on second, it’s a lot more complicated.

For one thing, it often takes time to understand what’s going on in the economy, and it takes even more time to change policy — and sometimes, like in the 1970s, unemployment and inflation are both rising, and it’s not obvious what policy should do in response. Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision.

MMTers extend this hubris about the precision and power of policymaking

A lot to unpack and explain here. Please bear with me. Note that I'm going to hold off talking about macro stabilization techniques, both mainstream and MMT, until later.

First, Henwood commits a subtle non sequitur fallacy. They're not completely unrelated, but there's a big gap between how we should measure or evaluate policy goals, and the specific techniques we use to achieve those goals. Saying that we should evaluate policy by its results rather than its soundness does not by itself entail that any specific policy measures, i.e., "if unemployment is rising, loosen policy, . . . if inflation is rising, tighten policy." Henwood's use of "[i]n other words," is absolutely dishonest, as if he were rephrasing Lerner instead of drawing a conclusion.

I'm not saying socialists should never talk about fiscal policy lags, but this trope is such a pro-austerity conservative laissez-faire bourgeois talking point that an honest socialist must handle it with full hazmat gear. Indeed, Henwood's use of hubris, plus the connection of functional finance to policy lags to hubris, is a direct invocation of bourgeois arguments against socialism: it is hubris to believe that the government could have any role in managing anything as complicated and subtle as a market economy. I'm a socialist, so that's not an argument that I want to get anywhere near my own lips.

Fiscal policy is indeed difficult, which is why principles of macro by itself (where I teach my students about fiscal policy lags) is not a sufficient qualification for holding the Fed chair. But thinking that a lot of smart well-educated people can do something merely difficult is hardly hubris.

Although taxes do work reasonably well as an "fine tuning" automatic stabilizer, literally no economist anywhere — including MMT scholars — thinks that using conventional fiscal policy (building bridges, airports, etc.) is an effective tool for fine tuning an economy for exactly the reason that Henwood lifts out of a dimly remembered or badly garbled sophomore economics class. So what? That's not the argument that anyone is having, and that has nothing to do with functional vs. sound finance.

I can tell a lot about a firm (or a household) just by looking at their books and not their real business. Specifically, I'm looking at things such as cash flow, net profit, and debt to income ratio. I know what those numbers should look like, and if they don't look the way they should, the firm is in real trouble.

Sound finance says that to some degree or another, we can tell how a government is doing just by looking at its books, or at least that we should pretend that ordinary accounting criteria that are important to households and firms are just as important for a government.

Functional finance says that we can tell very little, if anything at all, just by looking at the government's books; instead, we must look at the real economy, i.e. at GDP, inflation, employment, investment, etc. to determine how well the government is doing. If a firm is running up a lot of debt, that's troubling by itself. For a government, we don't know: is the debt causing inflation? If not, well, the government is all right for now. If a firm has positive cash flow, that's great. For a government, we don't know: is the positive cash flow causing unemployment? If so, the government is in trouble. Functional vs. sound finance is about what we should look at to determine what to do; neither offers a specific prescription on what to do about what we see.

There's a deeper economic philosophy in play. Sound finance is the position that the government should be (or should pretend to be) part of the market economy, subject to the same market discipline that capitalists apply (or pretend to apply) to themselves. Functional finance says that the government is not part of the market economy, it manages the market economy. Naturally, the capitalist class prefers sound finance.

(Yes, as a socialist, I'm against markets in general. The socialist point here is that I argue that positioning the government as not a part of but the manager of a market economy is a useful step towards socialism. And there is an argument that a capitalist government cannot effectively manage a capitalist economy not because that task is too difficult but because it is a capitalist government. Henwood does not make this argument.)

Misconception: Monetary policy is just like fiscal policy

To extend (in bold) the ellipses at the end of the last quotation:

MMTers extend this hubris about the precision and power of policymaking to the realm of interest rates . . .

Wait! Stop! Monetary policy, i.e. interest rates, is completely different from fiscal policy, and is subject to fewer and very different lags. Conventional macro already holds that the central bank can fine tune the economy.

Misconception: MMT holds that monetary policy can fine tune the economy

To finally complete (in bold) the ellipses above:

MMTers extend this hubris about the precision and power of policymaking to the realm of interest rates, which they think the central bank is completely in control of and should be kept as close to zero as possible.

Sigh. One of the points I learned to look for when I debated religion (and especially creationism) on the internet was when a writer contradicted him- or herself in the same paragraph. Henwood manages to contradict himself in a single sentence. If MMT economists want to keep interest rates near zero without qualification, then they do not want to use interest rates for fine tuning.

And indeed MMT scholars argue not that we should not but that we cannot fine tune the economy with interest rates. MMT scholars argue that businesses' expectations of profit determine most investment; interest rates by themselves do very little. Moreover, because people hold bonds for income, interest rates have the opposite effect on consumption than they do on investment.

Misconception: MMT economists do not understand interest rates

Although MMTers tend to talk casually of “the” interest rate, in fact there are many. Long-term government bonds, for example, are almost always going to carry higher rates than short-term ones, because so many more unpredictable things can happen before the bond reaches maturity. And either is going to yield less than a bank loan of similar maturity to an oil wildcatter or the corner bodega, because of the higher risk of default.

Thank you, Mr. Henwood, for explaining to a bunch of people with PhDs in economics what I teach my sophomores about interest rates. I'm sure they are most grateful for lesson. </snark>

Talking about the imaginary singular interest rate is endemic among economists in general, for a lot of boring technical reasons, sometimes just laziness. For one, risk- and maturity-adjusted interest rates should all be about the same, because that's how markets usually work. But because people are exceptionally bad at judging risk (not to mention uncertainty), markets don't always work the way they're supposed to.

When MMT economists talk about the interest rate, they usually talk explicitly about the Federal Funds rate, the rate at which banks loan each other reserves overnight, which is indeed singular and which the Federal Reserve can indeed completely control, and which does indeed influence other interest rates at least a bit. If any MMT economist has said that all interest rates should be near zero regardless of risk or maturity, I would like to see a citation, because that economist should be stripped of their PhD and forced to repeat their sophomore principles classes.

Misconception: MMT scholars don't understand inflation

MMTers are coy about [inflation] — they never say how much is too much, and they profess great confidence in their ability to control it.

Ok... How fast is too fast? It depends. On what? A lot of things; I can't put it in a soundbite for you. But let's proceed.

In a paper criticizing MMT, the left-Keynesian economist Thomas Palley says he’s heard a “leading” MMTer say inflation less than 40 percent is “costless.”

Objection! Hearsay! Sustained. Move on counselor.

<snip long discussion about hyperinflation> Weimar Germany may be an extreme case, but since it’s often brought up by critics of MMT — “won’t all that keystroking lead to inflation, like Argentina or Weimar?” — it’s one for which they need to have a good answer. Wray’s reluctance to face head-on the risks of printing money makes you wonder how confident he really is of his own theory.

Printing "too much" money is only the proximate cause of hyperinflation, in just the same sense that turning on the heat is only the proximate cause carbon monoxide poisoning. It's a bugaboo, moreover a bugaboo hysterically promoted by capitalist economists against Allende Chavez socialism. Hyperinflation is just not a risk in a country with an otherwise well-functioning government that can effectively collect taxes; if its government is dysfunctional, the country has worse problems than just hyperinflation.

MMT scholars talk how to control inflation all the time. It's really not that difficult. You suck money out of the banking system and the economy by selling bonds, or you (gasp! horror!) raise taxes.

But raising taxes is hard! No shit, Sherlock: economics is hard. Running a government is hard. People go to school for years just to start to learn how to do it.

(Maybe they should just go to journalism school and write dishonest hatchet jobs. Hell, it works for David Brooks and Thomas Friedman, maybe it'll work for Henwood; perhaps he'll go all James Burnham on us and join the AEI.)

But people hate taxes! Really? You don't say! Do they love recessions? Because that's how to control inflation without raising taxes.

Actually, people don't hate taxes, capitalists hate taxes, and they tell the people what to think. Henwood approves of taxes, and good on him, I do too, and so do MMT scholars.

Damn! This is getting long, and we're only about a third of the way through Henwood's mess. Let's take a break here and pick up where we left off in a day or so.

MMT and socialism

It's always depressing to read "socialist" polemics against Modern Monetary Theory, and Doug Henwood's essay, Modern Monetary Theory Isn’t Helping in "socialist" Jacobin magazine follows the trope: nothing but bad faith and a Gish gallup of ridiculous capitalist propaanda.

It's clear Henwood is arguing in bad faith. With suitable elisions, Hemwood more or less accurately presents a core concept of MMT:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” . . . Since there is a risk that too much government spending would spark inflation, the government might need to cool things down . . . by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

This seems like a straightforward presentation of an idea that is admitted as true by most economists, even if they don't really want the general public to know about. Let me add back the elisions in bold:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” You might be wondering where income earned on the job fits into all of this, but the world of production doesn’t play a large role in the theory.

But having tempted us into thinking that taxes were dispensable, Wray pulls a bait and switch. Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

I don't know what is more depressing, Henwood's shameless hatchet job, or how transparently he tries to manipulate his readers. Henwood seems to think that Jacobin readers are as gullible as Fox News viewers. I hope he's wrong.

It's not really useful to go into Henwood's article point by point; instead, I want to highlight a specific capitalist talking point Henwood reproduces, which implies that a popular government — i.e. a socialist government — cannot responsibly manage a fiat currency. The idea starts with the half-truth that MMT theorists think government creating money will magically cure all our problems. According to Henwood, MMT theorists claim, "A few computer keystrokes and everyone gets health insurance, student debt disappears, and we can save the climate too, without all that messy class conflict." The most obvious problem, of course, is inflation. MMT's answer is that taxation (fiscal policy), rather than central bank manipulation of the Federal Funds rate* (monetary policy), is the correct way to curb inflation. The question is, will taxes rather than interest rate manipulation work to control taxes?

*The rate banks charge each other to borrow reserves overnight.

On the one hand, Henwood appears to like taxes: "Taxation may not be full expropriation but it’s the next best thing in this fallen world. It is a form, however mild, of socialization — transforming private investment and consumption into public expenditures. [link original]" I concur, as do many notable MMT scholars. However, Henwood casually insults the "naïve belief in the curative powers of fiscal policy" (i.e. taxes). And Henwood claims the government is far too cumbersome to manage an economy with fiscal policy, "Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision." Henwood doesn't answer the question about who should fine-tune the economy. The central bank? The capitalist class? A socialist drum circle? I dunno.

The dead giveaway, however, is the considerable ink Henwood spends on the dreaded bugaboo of hyperinflation, invoking "[t]he extreme inflation of Weimar Germany in the 1920s." He also condemns the fiscal policies of many peripheral states, including Venezuela (!), Chile under Allende (!!), Venezuela, Turkey, and Greece. (Henwood has at least enough sophistication to talk about Greece before the euro.) Hyperinflation is one of the favorite monsters-under-the-bed unsophisticated capitalist propagandist love to invoke. Only the capitalist class can prevent the government from handing free stuff out to everyone. If the capitalist class does not impose the illusion of government fiscal discipline, a socialist government will eventually spend its way into hyperinflation and economic collapse.

Now very economist knows this illusion, this superstition, for what it is: the government does not have a real fiscal constraint. Paul Samuelson himself admits on camera (long before MMT) that the idea that taxes fund government is a superstition. A useful superstition, to be sure, but a superstition nonetheless.

An ordinary person such as myself has a fiscal constraint: I must obtain money through revenue (my paycheck) or borrowing (a bank loan) before I can spend it. Thus, I must persuade someone who already has the social permission to spend — my employer, my bank, or my friends — to give that permission to me before I can actually draw on the social product. The same is true for firms: they must persuade someone to buy their product (generating revenue), lend, or invest before they can spend money.

We like to pretend that the government is the same: it must obtain money by taxes (revenue) or by issuing bonds (borrowing) to obtain the money before it spends that money on public goods and services, and if the government cannot get the money, they cannot spend it. But this constraint is nothing more than pretense. The government can, if it chooses, spend money before it obtains it from others. For me, spending money I don't yet have is impossible; for a government, it might or might not be wise, but but it is possible.

Fiscal constraints differ from real constraints. If there are no cars available (real constraint), I can't get a car, no matter how much money I have. However, if I can't get money (fiscal constraint), I can't get a car, even if there are a thousand sitting on the lot. The trick is to get all these individual fiscal constraints to match up with the overall real constraints.

One point that MMT scholars make is that the present capitalist-managerialist system has already abandoned fiscal constraints in reality, but the system tries its best to bury this fact and make sure that deviations benefit the only capitalist class. One reason MMT scholars dig deep into the accounting is to try to uncover this buried truth. Again the capitalist story is clear: the government can deviate from its fiscal constraint for the benefit of the capitalist class without causing (too much) economic chaos, but do it for the people and bam! we're in Venezuela.

Abandoning even the pretense of a government fiscal constraint does make life more difficult. If we pretend that government has a fiscal constraint, it's easy to put an upper bound on how much the government should spend: only as much as it can convince the citizens to cough up in taxes or are willing to lend. If we drop the pretense, then the upper bound is much more difficult to determine. If we abandon the imaginary fiscal constraint, we have look at what the spending does rather than just ensuring expenditure does not exceed revenue. We want to spend — and spend appropriately — until we have full employment and are at potential output. One way of determining whether we're at full employment is by looking at inflation. If the price level starts rising, either stop spending or increase taxes. Henwood has a point: the above task is much easier said than done. Then again, so is the task of transforming a capitalist-managerialist country such as the United States to socialism.

Socialists face two main dangers. The first danger is that it might not be possible to run a socialist economy with anywhere near the level of comfort and convenience afforded by a capitalist economy. This danger is mitigated by the fact that capitalism-managerialism is lowering standards of living for all but the rich at an accelerating pace. The second danger is that capitalists, who will certainly fight back, will defeat socialism. We cannot avoid these dangers except to abandon the struggle. Socialism is not a Sure Thing: if we fight, we have to accept the possibility that we will fail. We can either admit defeat before we start, or bit the bullet and proceed despite the dangers. Fundamentally if someone believes a government not controlled by the capitalist class cannot effectively manage the economy, then they have no business calling themselves a socialist.

It would be nice to have an economy that doesn't use money, where we had so much that no reasonable person would want more than social product could afford them, where everyone contributed to the social product not to have more of the social product but out of a spirit of self-actualization, altruism, and civic duty. I don't think such an economy is utopian, or at least not impossibly utopian. But we're also not there today, and we won't get there tomorrow. We have a money-mediated market economy today, so we have to start pushing that economy towards our utopian ideal. And MMT is a good place to start pushing.

The objections against MMT are important, but not dispositive. MMT economists (Kelton, Wray, et al.) are not socialists, and MMT is thoroughly left-managerialist, not socialist. Just putting Kelton in charge of the Fed and Wray in charge of the Treasury will not usher in a socialist utopia. So what? Either MMT ideas are true or false; socialists should use the true ideas, regardless of the political orientation of their proponents. MMT scholars make errors, some grievous, and disagree on important points. So what? No one should propose making prophets of Kelton, Wray, etc. following to the letter the dictates of a nonexistent MMT scripture. We should not treat anyone (not even Marx!) as a transcendent authority; we should subject all ideas to ruthless critical scrutiny, not calumny. Like everything else, some of MMT is bullshit, but much of MMT really is true, admitted even by mainstream economists.

MMT is better-developed than Henwood would have us believe: MMT even has its own textbook. If MMT scholars are sometimes vague, well, the details really are complicated. How high should taxes be? How much inflation is acceptable? Where should we spend our money? The answer is the same as any economist would give: it depends. How fast should you go? It depends: are you in a car? a plane? A rocket ship to the Moon? Are you driving a Mercedes on the autobahn or a dynamite truck on an icy mountain road? The details are very different, but the framework, physics, is the same. MMT scholars are first and foremost proposing a framework for answering these questions.

The United States has no reason to worry much about hyperinflation. Wiemar Germany, Chile, Venezuela, Turkey, even Zimbabwe, are very different from use, and facile comparisons have no value. We do have the real capacity to make everything we want in the United States. We can and should worry about countries on the periphery, countries without our economic, social, and military privilege, but that's a different issue, and one we cannot even begin to address without first further advancing the cause of socialism.

The above notwithstanding, MMT gives us important weapons in the fight against capitalism. The first is that we do not need the money of the rich. We should definitely take their money, because they're the enemy, and money is their weapon, but we don't need it. As long as we hold on to the superstition that we need their money to fund socialism, we give the rich leverage: we must appease them, at least to some degree, to get their money. Why give that power away? Don't give the rich the power to hoard their money and crash the economy; instead, create our money to spend on what we need while we're clawing their money away. It's a subtle distinction, but one that is crucial to advancement of socialism.

The other big advantage of MMT is the job guarantee. Sure, a job guarantee (JG) could be implemented poorly, or the capitalist class could force it to be implemented poorly, but it can also be implemented well. The JG is straightforward, has theoretical and empirical support, and can act as a powerful automatic macroeconomic stabilizer. As Henwood admits, it begins to erode the most important tool to maintain capitalist power, the threat of the sack. The JG is not perfect, it does not solve every or even most of the problems facing the working class. But in this case, the perfect is the enemy of the good. The JG is not the end of the journey, but a step in the right direction.

A trillion cows

It's one thing when stupid people repeat stupid talking points because they are paid to be stupid. That's how the world works. They're not being paid to persuade anyone; they're paid to reassure their masters and scare the rest of the slaves.

But I find people especially irritating who try to pretend to be economists, who seem to think they're actually explaining something, and just botch the job. So we'll have a look at Larry Burden's monstrosity, Thoughts on money theory.

Burden wants to explain inflation.

[M]aybe an example will help illustrate how inflation steals our wealth. If a family woke up one day and found out they had the only cow on earth, the value of that cow either to sell or exchange for other needed goods would be immense. The family, being prudent, decides to save their valuable cow until next year when it will be worth even more. Meanwhile, the USDA gets word of this priceless cow and decides to clone it.

Unknowingly, the next year the family discovers that because of the government’s interference in the market, there are now 1 trillion more cows for sale. Sure, they can still sell or exchange their cow for things the family needs; but for much, much less than they could have the year before.

Oh, sigh. I cannot think of a stupider way to explain inflation. Cows are a real productive resource. If we could clone cows, we would increase our real wealth, making everyone better off. Indeed, our fictional family has lost none of their real wealth (they still have their cow).

Money, in contrast, is not real wealth. You cannot eat a dollar bill, nor can you use it to produce more food.

Burden goes on:

Similarly, the dollar in your bank account has had its purchasing power diluted. Between 2008 and 2012, the Treasury [sic] printed somewhere between \$3 trillion and \$7 trillion out of thin air.

(Just so you know, the Federal Reserve, not the Treasury, creates money, which they can use to lend to banks, purchase Treasury bonds, or sometimes buy assets. The Treasury does print Federal Reserve notes, i.e. paper currency, but I have no idea how many they printed, nor how many were destroyed because they had worn out. Maybe if Burden would bother to cite his sources, we might be able to check his numbers.)

A growing economy needs a growing quantity of money. We try to create just enough new money to cover economic growth, but it is better to create a little bit too much than not quite enough. We want to keep the money moving: we measure our national economy by the flow of dollars, not by the stock. If there are not quite enough dollars, people tend to hoard them, the flow goes down, and we produce less than we could. It is difficult to produce more than we can, impossible in the long run. It is easy to produce less than we can, and if we produce less than we can in one year, it is easier to produce even less the next year. No more staunch a conservative than Milton Friedman argues that spiraling deflation probably turned what would have been an ordinary recession into the Great Depression.

We print money to cover our national budget deficit every year. This year’s deficit is projected to be \$1.4 trillion. Our national debt will likely top \$22 trillion. This is the largest debt ever incurred by a nation in human history.

Oooooh! Scary big numbers! Googol! Googolplex! Ackermann functions! Are you shaking in your boots?

So what? We also have the largest productive national economy in human history. Indeed, the "national debt", denominated in real goods and services at today's prices (not a terribly useful measure), comes in at well under two years of our national income. In other words, the United States' debt to income ratio is less than that of most families who buy a house.

And we are going to pass this bankruptcy [sic] down to our children and grandchildren.

We will pass the debt (not bankruptcy) — or should I say "debt", because governments are not like households, and government debt is not like household debt — to our children, as well as the productive economy it has built.

All debt is present pleasure for a future obligation.

This statement is nonsense even regarding ordinary household or business debt. When a household borrows \$500,000 to buy a house, they are not consuming \$500,000 the day they buy it, to be repaid well into the next generation.

Every nation from the Greeks to Venezuela have inevitably collapsed because they debased their currency.

Tsk! Grammar, Mr. Burden. Does your paper have copy editors? (Sigh. Of course, there will be at least one grammatical error in this post even worse than Burden's. In my defense, I don't have a copy editor.)

And not every nation has collapsed, and those that have collapsed did not all collapse because of currency "debasement"; indeed hyperinflation appears to be a symptom of other causes, not a primary cause.

Our descendants should look back on us with derision and disappointment.

Not nearly as much derision and disappointment as people who know what they're talking about look on those like Burden, whose condescension is matched only by his ignorance.

Modern Monetary Stupidity

Greg Curtis gives us burning stupidity in not just one but two parts! Modern Monetary Madness and A Closer Look at the “Panacea”. From the first article:

When I think about MMT — Modern Monetary Theory — I visualize an odious miscreation squatting in its squalid swamp for decades, waiting only for an opportunity to erupt from the scum and devour the world’s economies.

Okay, maybe I should be taking my meds…

Or perhaps your employer should be taking a look at your (lack of) basic journalistic integrity.

From the second:

And MMT’s main tenets most certainly qualify as magical thinking. We can reach that conclusion by coming at it in two ways.

First, let’s set aside the True Believers in MMT, most of whom are advising the Progressive Democratic candidates. After all, they obviously believe their own hype. Instead, let’s look to serious economists who reside on the political left and who would be inclined to favor the Democratic policies if there were any way to pay for them.

If MMT made any sense at all, these economists would certainly be embracing it. But, to a man and woman, they aren’t. In fact, they mostly ridicule MMT.

Does Curtis understand the difference between reaching a conclusion and justifying a preconceived opinion? Apparently not. Neither does Curtis understand a basic tenet of intellectual honesty and journalistic integrity, that one must read and analyze the proponents of a claim, and not "set aside" the proponents and examining only the opponents.

A dead giveaway that Curtis has abandoned any pretense of journalistic integrity is his inclusion of completely bogus "evidence". From the first article:

Alas, into this sensible economic theorizing strode an obscure fellow named Abba Lerner, who said to himself, “Wait a minute! If high government spending during recessions is a good idea, then even higher government spending all the time must be a great idea!”

Never mind that MMT does not rely on Lerner, and we all understand that Curtis is not literally quoting Lerner, but if one actually reads Functional Finance and the Federal Debt — or even just the Wikipedia entry on functional finance (unlike Curtis, I actually, you know, cite my sources) — they would quickly discover that Lerner does not say, imply, or endorse any such thing. Curtis's assertion is not just an uncharitable interpretation; it's a flat-out lie.

Curtis also invokes the preposterous Chicago Booth survey. (There I go again, citing my sources. It's really not that hard.)

Fortunately for us, the University of Chicago surveyed hundreds of mainstream economists, asking whether they agreed with MMT’s main ideas (i.e., “spending doesn’t matter.”) Not a single economist agreed, not one. There is probably not another statement you could present to that group and not find at least one person to agree with it.

The problem, naturally, is that literally no MMT scholar ever has endorsed the idea that "spending doesn't matter"; more precisely, no MMT scholar would agree with the questions from the actual survey: "Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt," and, "Countries that borrow in their own currency can finance as much real government spending as they want by creating money." Both questions are appallingly stupid; attributing the underlying attitudes to MMT scholars is again not just an uncharitable interpretation but completely dishonest.

If I had the resources of the University of Chicago, and if I had completely abandoned any academic or ethical standards (but I repeat myself), I could just as well poll a hundred academic economists, asking if they agree that "Governments should never interfere in a market economy, because markets are always correctly self-regulating." Almost all (even the conservative economists, well, at least the three left who cling to a shred of intellectual honesty) would disagree. Wow! I proved that economists think capitalism is ridiculous!

Curtis is doubly lying here. Krugman, Summers, etc. agree with MMT proponents on the very point Curtis wants to rebut, that the government can and should spend more than it receives in taxes when the private economy is not at full employment. I know: I actually teach Principles of Macro from Krugman's textbook. "Left wing" (ha!) economists disagree with MMT theorists primarily on the effectiveness of monetary policy (central bank management of the banking system) on the real economy: MMT proponents consider monetary policy rather ineffective in aligning output and capacity (except at intentionally causing recessions); mainstream economists consider it more effective. We should, of course, settle this dispute by appealing to the data, not to the opinions of "experts".

Don't get me wrong: I'm not mad at Greg Curtis's shenanigans. I find it encouraging that the only critiques of MMT I can find anywhere — in both the popular and academic literature — have to rely on the most transparent of lies and bullshit.

A Marxist "critique" of MMT

I'm both a Marxist and a professional economist, and I very much like MMT. I think there are good Marxist arguments to be made against it, but in Marxism vs Modern Monetary Theory (MMT), Adam Booth does not offer one. Instead, Booth just repeats every American Enterprise Institute canard against MMT. It's no surprise that neoliberals and reactionaries just offer lies and bullshit to "critique" Modern Monetary Theory, but I expect a lot more — more perspicacious analysis and especially more basic intellectual honesty — from people who call themselves Marxists. Sadly, this expectation is honored yet again in the breach than the observance.

Headline MMT scholars (Kelton, Tcherneva, Wray, Mosler, Mitchell, etc.) are capitalists, not Marxists; of course they're not going to take a completely Marxist line. But Marxism, at least to me, is not about the "correct" ideological line; it's about a ruthless critique of everything existing. And MMT scholars are at least ruthlessly critiquing a central element of 21st century capitalist ideology, the private ownership of the financial system; they argue that we should socialize not just the losses but the gains from this central element. Does the MMT critique go far enough? Of course not. Does it go in the direction a good Marxist would think it should go? I say it does.

Booth uncritically reproduces the neoliberal critique of MMT, which relies almost entirely on outright lies about what MMT scholars actually say. The theme of this critique is that if we do not subject the production of money to market discipline, which requires private ownership of the production of money, then the economy will crash and burn. To reproduce and approve of the neoliberal critique first relies on outright falsehood. All truth is in favor of communism, or so I've been told; even if a lie seems convenient to the Marxist agenda, we should not use it. But the neoliberal critique is not even convenient to the Marxist agenda: if socializing the production of money is a Bad Idea, then why whould more socialization be a Better Idea?

Marx wrote on economics in the middle of the 19th century, when the gold standard was close to absolute canon in capitalist economics. It took repeated financial crises and the near-complete collapse of the Western international economy, but capitalists were finally forced by circumstances to abandon the gold standard partially with Bretton Woods and completely when Nixon ended convertibility in 1971. The core features of capitalism — exploitation, alienation, the falling rate of profit — are still there, but important technical details of how these features work today is almost, but not completely, unlike how they worked in the 1860s, when Marx was writing Capital. Marx understands the gold standard, but it is too much to expect even a person of his genius to anticipate how money would work a century after his death.

One of the persistent tropes of modern Marxist scholars is that because the gold standard was central to capitalism in Marx's era, it therefore must be an ineluctable essence of capitalism. Because we still do have a capitalist international economy, therefore there must be a gold standard lurking under there somewhere. I completely disagree with this trope. Money has a radically different character in 2019 than it did in 1867.

MMT theorists, I think, understand how money actually works today. And if we want to understand capitalism, we have to understand how money actually works, which means, I think, that honest, sincere, and curious Marxists should study MMT, and incorporate it, somehow, into the theoretical basis of action today. Make an honest critique of its truth and applicability. Argue that no matter how we slice and dice it, using money, be it commodity money, or fiat money, whether or not we pretend is a creature entirely of the market, to motivate economic behavior is not and never will be enough to deliver justice and prosperity.

But please, don't use lies intended to undermine the principle of socialism.

Heterodox economics is heterodox

Is the British Labour Party's Fiscal Credibility Rule [pdf] (FCR) neoliberal? I dunno: what's a "neoliberal"?

The FCR might or might not be politically advantageous, but I'm not a politician or political advisor — nor am I a member of the British Labour party — so I have nothing to say about the politics. I do, however, have something to say as an economist: the FCR isn't all bad — it's better than a poke in the eye with a sharp stick austerity — but it doesn't seem very good.

Simon Wren-Lewis put up an unconvincing defense of the FCR against MMT critics of the rule.

Wren-Lewis first undermines his credibility by not linking to the criticism he's rebutting. Presumably, he's referring to Bill Mitchell's extensive criticism of the FCR. Briefly, Mitchell asserts that the FCR "reinforces the narrative that deficits and public debt are in some way ‘bad’", and this narrative "will not turn out well."

The first part is undoubtedly true. The FCR states, "Labour will close the deficit on day-to-day spending over five years. Labour make sure government debt is falling at the end of five years. Labour will borrow only to invest. [emphasis added]" The substantive question, then is how this narrative will turn out.

Instead, Wren-Lewis's chief complaint is that MMT scholars have a gasp! horror! political agenda: "MMT is also a political movement of the left." The political agendas of many economists are irrelevant: they ask questions about politically-independent reality. But macroeconomics, at least the kind of macroeconomics that seeks to inform public policy, must have a political agenda. Value judgements are bound up in the very fabric of macro. We talk about employment and unemployment, for example, precisely because we value employment. According to Wren-Lewis, MMT scholars "are therefore naturally indignant that a Corbyn led government has adopted a rule that is derived from mainstream economics rather than adopting MMT." Yes, and? MMT scholars believe that the rule itself — a rule that derives from mainstream economics — is bad, and that a policy derived from MMT would be better. That's the whole point of disagreeing with mainstream economics.

Wren-Lewis offers only the most tepid defense of the FCR:

Why the need for a fiscal rule at all? . . . The answer is provided by something called deficit bias. . . . In the 30 years before this crisis, the ratio of OECD government debt to GDP almost doubled for no justifiable reason.

Deficit bias happens because politicians like cutting taxes or raising spending through borrowing, because it puts off any obvious economic pain. . . . But if deficit bias does substantially raise the debt to GDP ratio, as it did before the GFC, then more debt requires paying more interest which in turn requires higher taxes or lower spending. Deficit bias does not avoid the downside of cutting taxes or increasing spending, it just puts it off until a later date.

But Wren-Lewis simply begs the question here. MMT scholars do not argue that a fiscal rule is not the correct way to limit deficit spending. They argue that deficit spending is the generally correct way to implement government policy. (They do not argue that deficit spending is good by definition: any tool can be used poorly. But the problem is not in the tool itself but the application.)

I do not see "neoliberal" as an insult: Brad DeLong classifies himself as a (left-)neoliberal, I would classify Keynes as a left-neoliberal, and I would classify Wren-Lewis as a left-neoliberal. Neoliberalism is just an philosophy in political economy that holds that private market solutions are almost always preferable to government policy, i.e. provisioning public goods as well as using non-market activity to achieve efficient social allocation of resources. And government policy is inferior precisely because the government is not budget constrained: if the government is not actually budget constrained, it must pretend it has a budget constraint.

In contrast to right-neoliberals, left-neoliberals usually agree that government must rescue markets when they face the danger of collapse. (Most left-neoliberals also advocate greater prudential economic regulation, in agreement with MMT, but that's not the issue here.)

In this sense, the FCR is clearly neoliberal. The message is clear: When not at the zero lower bound, government should sharply restrict its economic impact, especially use of deficits. The FCR treats deficits like dynamiting houses during an out-of-control fire, a desperate measure justified only when used to avert total catastrophe.

MMT scholars and I myself hold almost the opposite opinion: Deficits by themselves are just no big deal. In just the same sense, a tyrant can make any number of horribly oppressive laws, but the idea of law itself is not the problem. The government must act economically, and it must act beyond just the necessity to fix the inevitable periodic catastrophic failures of the market system. And when it is expedient to print money to do so, then print the damn money without worrying about the effect on the capitalist class.

Additionally, the FCR calls for closing the deficit and lowering public debt over five years. MMT is clear on the implications of this policy: lowering net private wealth.* Again, if net private wealth decreases, I would be shocked! shocked, I say! to find that the decline came not from rentiers' but workers' wealth.

*Alternatively, increasing net private wealth with reduced public debt would require a huge current account surplus (increased net exports), which is probably worse.

So is the FCR neoliberal? I dunno. I don't really care. Is it bad macro? By orthodox macro, it's fine; MMT macro, it's dumb. It would be nice if Wren-Lewis and other economists, all of whom are way smarter than me, would actually address the issues instead of slinging around insults and butthurt, but I'm not holding my breath.

A technocratic apolitical presentation (not!)

MMT: new wine in old bottles or ‘voodoo economics’? by Russell Jones and John Llewellyn

Much likeearly-1980s Laffer Curve ‘supply-siders’, MMT’s disciples are often near-messianic in tone, while somewhat vague in exposition. They are prone to presenting their ideas as a pathbreaking, revolutionary, approach to economic analysis and management, that can free policymakers from the shackles of fiscal and monetary orthodoxy.

First, cite your fucking sources. Second, this is a pure ad hominem argument. Third, this is how every critic describes every advocate: how creationists describe evolutionary biologists, religious people describe atheists, capitalists describe socialists, anti-vaxxers describe medical professionals, etc. ad nauseam.

[I]n this piece we seek to present, in a technocratic, apolitical way, a guide to the analytic content of MMT, and the conditions under which it could, or could not, be usefully applied in policymaking.

I would take this disclaimer a little more seriously if you hadn't just shat in the well two paragraphs previously. But whatever, let's push on.

The essential elements of MMT can be summarised as follows:

• A government that creates its own money generally need not, and will not, default on debt denominated in its own currency.
  
• A government deficit is necessarily mirrored by an equivalent private sector surplus.
  
• Monetary policy is relatively ineffective in a slump: fiscal policy is more powerful.
  
• A government can buy goods and services without the need to collect taxes or issue debt.
  
• Through money creation, interest costs can be constrained. Indeed, a substantial and persistent budget deficit can be financed at low, if not near-zero, cost.
  
• Government spending and money creation need be limited only to the extent that employment becomes ‘over-full’ and encourages inflation.
  
• Inflation, should it arise, can readily be controlled by higher taxation and bond issuance to remove excess liquidity.

I might tweak this a little, but it's not too bad a description. But again, cite your sources, please.

Thus, the core inference and contention of MMT is that the budget deficit and public sector indebtedness should be allowed to adjust to the level necessary to secure full employment. In turn it is suggested that this goal should be achieved through a government-sponsored blanket jobs guarantee, which would act as an utomatic stabiliser. When private sector jobs were plentiful, government spending on the guarantee would be lower, and vice versa. Alternatively, full employment could be achieved by large-scale spending on infrastructure, climate change, and the environment, such as via a ‘Green New Deal’–all financed, if necessary, by the central bank.

The jobs guarantee and large-scale government spending here are not alternatives. MMT advocates argue for both. Other than that, a fair summary.

The truth about MMT is more complicated and less trailblazing than its supporters suggest.

Not a criticism, just another lazy ad hominem. Let's push on to Jones and Llewellyn's actual criticism.

Indeed, it looks very much like the ‘Functional Finance(FF)’gospel preached by Abba Lernerin the late 1930s and 1940s.

What?! MMT Scholars, who have PhDs in economics, have, gasp! read Abba Lerner?! Say it ain't so!

For example (since I actually will cite sources), Here's L. Randall Wray in MMT Responds to Brad DeLong’s Challenge:

What [MMT scholars] really like was Lerner’s application of Functional Finance to the budgeting process. The budget should be functional, not sound. That is, to achieve a functional purpose rather than to balance taxes and spending.

Or just search for Lerner on NEP.

Furthermore, Lerner isn't the first. He has predecessors.

Back to Jones and Llewellyn.

[Keynes] considered that Lerner lacked practical judgement and intuition, and paid insufficient heed to what he described as the public’s ‘allergy to extremes’.

Yet another ad hominem. Is this how you do technocratic apolitical examination? I think I was doing it wrong all those years in college and grad school studying economics.

[T]he policy inferences of MMT need to be considered seriously. At the very least, they do not compare unfavourably with calls for fiscal and monetary rectitude that are grounded either in narrow accounting logic or myopic adherence to the quantity theory of money.

I concur! Given that "calls for fiscal and monetary rectitude" have dominated the conversation over government spending since I've been alive, MMT sound pretty trailblazing just on that point alone.

MMT, like FF (and in common wit hmuch US-led analysis) is based implicitly on a closed-economy model. It makes no allowance for the possibility of monetary expansion causing the exchange rate to fall rapidly.

No it isn't and yes it does. See MMP #34 Functional Finance and Exchange Rate Regimes: The Twin Deficits Debate. Y'all have heard of Google, right?

Also, for a large country such as the US, exchange rate problems are relatively trivial. MMT scholars have given a lot of thought to the applications of MMT for smaller, outside-debt constrained countries.

Jones and Llewellyn:

MMT overlooks the potential for monetary expansion and an extended period of low interest rates to create the conditions for domestic financial instability, excess, and perhaps disaster.

Surprisingly, MMT scholars have heard of Hyman Minsky. Google is your friend.

MMT’s disciples pay little attention to the structural component of unemployment, which is unlikely to prove responsive to stimulus of demand and, more likely, raise inflation.

What. The. Fuck. The whole point of the Jobs Guarantee is that ordinary stimulus will not cure structural unemployment. Seriously, guys, you have to at least read the textbook, or you'll fail the class.

For example, from the MMT Primer:

OK, explain to me how pumping up the demand for higher skilled and educated workers—setting off a bidding war for them—will cause jobs to trickle down to the less skilled and less educated workers WITHOUT causing wages and prices to rise.

Jones and Llewellyn:

They say little about the effects on wealth distribution of a reliance on monetary finance.

Why should they? They talk about the salutatory effects on wealth distribution of fiscal policy, i.e. taxing the shit out of the rich because, you know, fuck those guys.

They ignore the vexed issue of moral hazard. The disruption of the connection between government decisions on the size of its budget deficit and the willingness of the private sector to fund that deficit at interest rates that it deems reasonable destroys at a stroke one of the most important disciplines the market imposes on politicians.

This statement requires a little more depth of response. First of all, no economist ever just ignores moral hazard; however, we might have different opinions on where and how much there is. And we already know Jones and Llewellyn have not read the textbook, so we have little confidence that they have read comprehensively enough to find out what isn't there.

I can't nail down a specific quotation, but the whole point of MMT, at least as I read it, is that MMT scholars don't want the "private sector" (i.e. the billionaires) to discipline the government, they want the government to discipline the billionaires.

Where's the real moral hazard? In elected politicians who have to maintain legitimacy and popular support to gain reelection? Or in a bunch of rich people who will do anything to retain their power?

Finally,it is inescapable that debt accumulation cannot go on indefinitely

This is just flat-out not true. Or, more precisely, debt accumulation can go on as long as economic growth goes on or until we move away from a money-based economic system entirely, in which case debt becomes meaningless.

Palley on MMT part 1

I'm going to go through Thomas Palley's What’s Wrong With Modern Money Theory (MMT): A Critical Primer page by page and examine Palley's arguments. I won't bother commenting on his descriptions and background material, which seem unobjectionable. All references are to the above unless specifically noted.

Recently, MMT proponents have begun walking-back the idea that functional finance is central to MMT. The purpose of the walk-back appears to be to deny that taxes are needed at full employment to neutralize inflationary excess demand caused by excessive government spending. Three points follow. First, it is fundamentally dishonest to deny the long-standing central role of functional finance in MMT’s argument (see for instance, Kelton, 1999). Second, removing taxes means MMT has now shifted to the arguing that inflation control should be conducted via rationing, price controls, and other administrative measures (Wray, comments at Eastern Economic Association, March 2019). Third, it illustrates the difficulty of understanding and debating MMT as its proponents constantly change their positions. (footnote 2, p. 4)

This is unwarranted well-poisoning. If Pally wants to ascribe a purpose or motive to a body of writing, he should offer an argument in addition to citing the evidence. If he wants to accuse proponents of dishonesty, he should cite their dishonesty. Do MMT proponents really argue that "inflation control should be conducted via rationing, price controls, and other administrative measures"? If so, a written reference, not a reference to an oral presentation seems required.

MMT’s main macroeconomic claim to fame rests on its declaration regarding government’s ability to finance spending without recourse to taxation by issuing money. In fact, government’s ability to create money to finance spending has long been widely recognized by all economists, who have also long recognized that ability gives government considerable extra financial and policy space. (p. 5)

Damned if you do, damned if you don't. How is it a criticism that MMT scholars advocate a position that is "widely recognized by all economists"? And why should I believe Palley that this apparently obvious proposition is MMT's "main macroeconomic claim to fame"? Again, Palley offers no citation to show that MMT scholars believe they themselves have discovered governments' ability to create money.

As regards injecting state money to pay taxes, MMT is strictly wrong with its claim that the public cannot pay taxes until government has first spent. In fact, the central bank is the source of such money. (p. 6)

The Federal Reserve Bank is part of the government. I do not know of a central bank in any industrialized democracy that does not have authority granted by the legislature.

Palley offers as "evidence" a quotation from Wray:

In principle, then, the government first spends fiat money....Once the government has spent, then the fiat money is available to be transferred to the government to meet tax liabilities. As a matter of logic, the public cannot pay fiat money to the government to meet tax liabilities until the government has paid out fiat money to the public. (qtd. footnote 5, p. 6)

But Wray explicitly makes an in principle argument. It is merely a "terminological objection" (see below) to argue about which organ of the government, the legislature directly through spending or the central bank autonomously exercising spending power granted by the legislature, creates the money.

Palley also asserts that Jo Michell "claims MMT does not say government spending is needed to pay taxes" (footnote 6, p. 7). The cited post does not appear to support this assertion. Michell says, "[G]overnment spending comes before taxation . . . is sort of true but also not particularly interesting." What Michell argues is not part of MMT is that "without [government deficits] the means to make settlement would not exist in our economy."

MMT focuses on accounting and stock-flow relations. . . . [T]hose accounting and stock-flow relations have long been understood by Keynesian and neo-Keynesian economists. (p. 7)

Again, it should not be a criticism that MMT scholars agree with orthodox economists.

MMT objects to [the government budget constraint] being called a constraint as if government were a household. However, that is a terminological objection. (p. 7)

Not all terminological objections are created equal. Terminology should clarify, not obfuscate. Palley's terminological objection above obfuscates that the Fed is a part of the government; MMT's terminological objection clarifies: If government is not actually constrained by a budget, it's disingenuous at best to say the government has a budget constraint.

MMT sees the effects of increasing government financial obligations as entirely benign, and policymakers can use the financial space to costlessly boost demand and push the economy to full employment. There are no negative consequences from increasing government financial obligations; no conflicts with other policy objectives; and no policy implementation problems. (p. 7-8)

[citation needed]

As shown below, MMT’s macroeconomic policy assertions follow from its oversimplified and incomplete Keynesian analysis. The lack of a dynamic economic model with behavioral content is a glaring professional failure. (p. 8)

I don't know about this one. My general training in advanced macro is woefully inadequate. Still, the orthodox dynamic macroeconomic models (DSGE models) seems to attract their share of criticism.

Unfortunately, instead of addressing that failure, MMT proponents have responded by claiming critics either do not understand it or have misrepresented it. (p. 8)

Or it could be that critics don't actually understand MMT and are actually misrepresenting it.

The difficulty of confronting MMT about those failings is compounded by its practice of walking back its positions and adopting those of its critics without acknowledgment. (p. 8)

What? MMT scholars might clarify their positions, correct mistakes, or even, gasp! change their minds?!

[M]oney financed budget deficits drive the economy to full employment by increasing wealth and AD. That makes it critical there be institutional arrangements for closing the deficit once full employment is reached to avoid inflationary excess. However, MMT relies on a highly simplified and implausible political economy in its attempt to address that problem. Thus, it assumes taxes can be abruptly and precisely raised at full employment to contain excess demand, when the reality is taxes are politically contested and difficult to raise. Long ago, Friedman (1961) argued that fiscal policy was impractical for “fine-tuning” stabilization policy owing to inside (decision) and outside (implementation) lags. Those lags mean policy implementation is likely to be poorly timed, so much so that it could amplify the business cycle rather than dampen it. (p. 9)

These criticisms are kinda true, especially the latter concerning lags. However, they really amount to the unobjectionable claim that regardless of one's models, managing a large economy is a Hard Problem. Friedman et al. argued against any kind of fine-tuning, not just via fiscal policy but monetary policy as well.

But yes. MMT does need good models concerning how to raise taxes effectively to address inflation. Maybe they have them. I am not at all confident that Palley has made an exhaustive search of the literature to find them.

Absent budget discipline, spending and deficits would tend to ratchet upward owing to the political attraction of money financed deficit spending and the political aversion to higher taxes. (p. 10)

Maybe, maybe not. I'm not at all convinced that the above political attractions and aversions are anything more than artifacts of our dysfunctional political system exacerbated by inequality. And I'm not at all convinced that an artificial budget discipline, denying truths that have "long been widely recognized by all economists, who have also long recognized that ability gives government considerable extra financial and policy space" (p. 5) is the only alternative.

Regardless, part of economics is not just what is feasible in the immediate present but also what is theoretically possible. Taken in that spirit, yes, MMT needs to come up with institutional mechanisms that can use taxes effectively to control inflation, which does not sound like an impossible task.

Another political economy critique (Lavoie, 2014) is that central banks and fiscal authorities are institutionally separated in most economies, but MMT ignores this and treats them as a unified decision maker. The separation is usually justified on public choice grounds that politicians have an inclination to inflationary monetary populism, and separation of fiscal and monetary powers helps prevent that. (p. 10)

This critique is petty. Institutional separation seems inconsequential, and the Fed and Treasury usually coordinate their actions. Regardless, institutional separation is at best one way of avoiding "inflationary monetary populism", but it's hardly the only possible way.

Palley is making a fundamentally flawed argument, which is at least a step up from the beginning of the paper. Anything can be done poorly — White can lose at chess in two moves — so the argument that X might not work is unintersting. The argument needs to be that X cannot work, or be extraordinarily difficult to make work even under favorable conditions.

And heterodox economics is heterodox. That we currently solve certain problems one way is not an argument that that way is the only way, especially when the current way really seems to be failing badly.

Only a third of the way through, and I'm throughly unimpressed with Palley's critique.