MMT II: Response to Commentary

I would say Reply to Critics, but that sounds too pompous.  I don’t operate at a level where I have critics or those expecting a reply.

I could, I suppose, say Response to Criticism, but criticism has a bad connotation in America, and responding to it might reveal that I am seem insecure.

I could say Response to Critiques, but that would sound French and – separately! – pretty silly.

Anyhow, my post on The trouble with modern monetary theory received quite a bit of commentary, some fair and some otherwise. So I figured that I would address some of the commentary here, rather than (further) stinking up comments sections at the blog sites of “my critics.” I will just go down the list of points I noticed, very roughly descending from what I take to be best.

My post misunderestimates MMT by failing to account for the fact that that framework changes the analytics, even if not necessarily creating more “policy space.”  

First, I am going to respond favorably to any argument that includes the term misunderestimate.  Second and more fundamentally, the claim seems plainly right to me. I would invert the second part to say that MMT does not open up any obvious policy space, even though it does change the analytics.  But I think that is a very good point.

It actually synthesizes a point Brian made in a post to his blog and an aside he made offline.   One of the comments under Brian’s post seemed also right on target.  MMT has merit but applying it would not likely to relax the constraint that government spending must ultimately be financed with taxation, and that there will be  a close correspondence between the two over time.  I would add that what forces that correspondence relates to Brian’s points about the analytics.  But the correspondence seems inescapable and I think MMT guys can be misleading when they imply otherwise. Were I to rewrite that post, I would lead with that. You see, it helps to interact with guys.

Other bits of the comments section over at  Brian’s site were less impressive. I am not sure if MMT guys are utterly humorless, in part because I concede (below) that I am not familiar with their canon.  But another possibility is that my  references to Woody Allen movies from the 1970s are no longer hitting and serve mostly to date me.

My post was not well informed by a thorough study of all the MMT literature and many of its points have been dealt with elsewhere.

The first part of that is definitely valid criticism. And because it is, I am not sure if the second part is or is not!

The point of my post was mostly to assess MMT’s claim that there is no public sector budget constraint extending beyond that implied by the need to avoid excessive inflation, and that there is no point in worrying about the trajectory of the debt per se. I have argued that –practically speaking — that claim is false.  If my points have been thoroughly and convincingly refuted elsewhere, then it would presumably be easy to offer the refutation. If I were an MMT advocate, I would do so – not just claim that others have.

My post took some MMT claims out of context.

This criticism is like MMT itself: perhaps true strictly speaking, but also very misleading.  Any citation of any person on any subject can be found to be “out of context” in some regard. If I said something wrong or mischaracterized somebody, just say how.

I quoted Warren Mosler making some very bold claims, which, taken literally seem to be false.  You could argue that what he really meant was something else.  For example, when Mosler claims that government deficits add to savings, what he really means is that in a closed economy, deficits add to net savings or financial asset accumulation in the private sector.  But the problem with that defense is that Mosler had gone after Larry Summers for (supposedly stupidly) implying that fiscal deficits reduce national savings, which they do in some contexts.  Mosler should be more consistent when speaking of “savings.”  So long as he is inconsistent, he will necessarily be wrong about something. And if that something has policy relevance, then it will attract attention, for example from me.

Here is another example, which is closer to the main point of my post.  Mosler strongly implies that there is no reason to concern ourselves with the public debt per se.  The idea that government spending needs ultimately to be financed with taxation is a “fraud” believed by mere “innocents”.  Mosler’s claim is wrong, practically speaking.  But you could say that what Mosler is really saying is that inflation will signal the solvency problem when it arises.  If that is what Mosler is really saying, then I agree and wonder only why he thinks the insight is interesting or has any policy relevance.  But it is surely not what he strongly implies when offering policy advice, and it is not what he is understood to say.

My post covered only Warren Mosler’s popular work and left out his formal work as well as the thoughts of others in the MMT school.

Again, there seems to me to be an element of truth in this criticism. I used Mosler as an example and I went to his popular work because I was familiar with it. Maybe I will take up his more formal stuff at another time. But to broaden the list of characters, belatedly, consider this from Bill Mitchell’s blog. He is trying to open an “MMT University”, so I am assuming here he is of the cloth.  For context, he is going after Krugman for believing that US fiscal capacity is limited and that we should economize our use of it:

Just the title – Deficits Matter Again – is enough to tell you that he doesn’t know much outside of his textbook narratives.

Deficits always matter as they are intrinsic to ensuring full employment. There isn’t a point (threshold) where the deficit suddenly becomes an issue and otherwise is not a concern.

In Modern Monetary Theory (MMT), if the deficit is too small then there is mass unemployment. If the deficit is too large then there is inflation.

The ‘too small’ and the ‘too large’ are relative not absolute terms and have to be assessed in the context of what the other two macroeconomic sectors – the private domestic (firms and households) and external (foreign trade and net income flows) – are doing.

The idea of a danger threshold is typical of New Keynesians who think fiscal rules have to be specified in terms of a particular fiscal limit (defined self-referentially, say 3 per cent of GDP) or as a ‘balanced budget over the cycle’ rule independent of what these other sectors are doing.

I think the disinterested reader would take the passage above to mean that worrying about the trajectory of the debt per se is pointless. Practically, speaking there is no limit to US fiscal capacity and the deficit should be managed only with a view to containing inflation.[1]  That view is widely promoted in MMT circles, so far as I can tell.  It is not just something Warren Mosler has said. And I think it is wrong.  The purpose of my post was to explain why. But, yes, I did limit myself to Mosler, in the interest of (my) time, and assuming he represents the school. That may have been unfair.

My post wasted time considering the case of the Fed paying interest on reserves because the MMT set-up assumes that reserves carry no interest and that managing aggregate demand is assigned to fiscal policy.

This criticism seems quite unfair and to highlight – again – that the MMT crowd sometimes has trouble keeping their story straight.

I mentioned in my post that I consider the case of the Fed paying interest on reserves because that it is the easiest one to assess, being consistent with the current framework.  Moreover, I mentioned that the “purer”, though tougher, case was that in which the Fed does not pay interest on reserves.

Perhaps discussion of the first case was redundant.  It would be so if MMT advocates were never to offer US fiscal policy advice, except in the context of being crystal clear that they assume that the institutional set-up at the Fed is entirely different from what it actually is.  If I could get MMT on record agreeing to that, then yeah I could cut my post by 300 words. It was a bit long.

One implication would be that we would hear a lot less from MMT.  For example, that post from Bill Mitchell mentioned above could not have been written.  And Paul Krugman would be entirely safe from the charge that he is a neo-liberal ideologue with not a progressive bone in his body, a mere fraud pretending to have some understanding of macroeconomics.

My post argues that we need to keep the truth of MMT from the masses because they could not be expected to act responsibly if they had access to that truth.  In fact, the honest analyst should just do the analysis and not worry about how people use it.

Ok, it may be my fault for being unclear, but that is just wrong.  I tried to show that the central claim, as I see it, advanced by MMT is somewhere between flat false and misleadingly semantical.  A practical implication of MMT being flawed is that applying it would lead to bad decision making by stakeholders to the public sector, even though I specifically identified them as not uninformed.  I may be wrong, but I am surely not saying that MMT has some super powerful truth that we need to keep from the plebs.

Analogies prove nothing, but citing one here might get your head in the right space. The problem with telling people that crack cocaine is good for you is not that it might encourage people to use “too much” crack cocaine. The problem is that crack cocaine is not good for you.

My post was the “definition of unscholarly” for failing to provide references or consider that my complaints had already been handled by MMT school members in their more formal work.

This one really pisses me off, mostly because unscholarly seems such weak tea compared to poseur, naif and fraud, you know on a scholarly level.

Separately, anybody who has read my blog knows that I am not into essences, much less semantics and definitions.  Get it right.  My post is an example of unscholarly work.  There is no conceivable discussion of MMT that could we worse than the example I set. Try to stay away from definitions.

Also, if you are going to place such heavy emphasis on the scholarly approach, probably best not to confuse Growth in a Time of Debt with This Time is Different. The former but not the latter has been “debunked.”

Speaking of rookie mistakes, I love that story about how Growth in a Time of Debt got overturned by UMass PhD candidate. Thomas Herndon. Reportedly, Herndon chose to review that paper in part because doing so would be so easy. How hard could it be to add up some spreadsheet cells?  Apparently, pretty hard.  Snigger. (Snigger.  Rogoff and Reinhart are therefore wrong about everything.) Were it not for Herndon’s laziness and utter lack of ambition, we would still be living with austerity!

Ok, this is it for on the back and forth. I will be offering no further reply to critics.

Of course, if somebody were to invite me onto their blog for a formal debate on this subject, rather than this extremely indirect approach, then I would certainly take that under consideration. Post a challenge. Skip the sacred texts and have a chat? I suggest the format be an extending blog pot, not a free for all in comments section.

[1] There is an inconsistency here, although noting it is separate from my main point.  Mitchell claims both that there is no point at which deficits matter AND that they must be reduced when they cause inflation.  I must say that it can be hard to keep these guys in proper “context”, given that they use technical economics terms in a non-standard way and regularly contradict themselves.