You are just as benighted as those other wrong guys

Update on April 23


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Original post

Strident MMT pioneer and enthusiast, Bill Mitchell, has an interesting (to me) post on how to interpret MMT.   Hat tip Brian Romanchuk.

Mitchell complains that too many analysts view MMT purely as an exhortation to regime change. They fail to recognize the insights it brings to understanding  the world as it actually works today.

Thinking that MMT constitutes a regime change is incorrect and steers one away from the core issues. In this blog, I reflect on that syndrome and some other aspects of the development of ideas, which I hope will provide readers with a clearer picture of what the core (early) MMT developers (Mosler, Bell/Kelton, Wray, Mitchell, Tcherneva, Fullwiler) had in mind when we set out in the early 1990s to construct a better way of doing macroeconomics. The point is that while MMT constitutes a regime change in economic thinking within the academy it does not constitute a regime change in the way the monetary system operates. We need to separate the operational principles exposed by MMT academics from their ideological values to really come to terms with the fact that MMT is what is, not what might be.

I like the distinction he draws between normative and positive considerations and his concession (elsewhere) that even a strident right-winger might embrace MMT.  I think Mitchell should take his own advice, apply its converse, and retract his claim that Paul Krugman “hasn’t a progressive macroeconomic bone in his body.” What is good for the goose is good for the Krugthulu.

Link here and screen shot of relevant passage at bottom of this post.

That aside, Mitchell emphasizes in particular that MMT offers a superior understanding of how the payments system works, which has served MMT well in forecasting.  I am not in the MMT camp, obviously, but I find it hard to disagree with that point.

Conventional macroeconomists often fail to look into the plumbing, which can make them too afraid of – for example – auctions failing.  I would say this same issue also explains why people got so far offside on H money, which is implausible in the US, but I don’t want to put words in Mitchell’s mouth on that issue.

Related, I do think it is to the credit of the MMT school that they seem to have been loudly right about the stupidity of fiscal austerity during the early teens and in countries with floating currencies. Some conventional Keynesians got to the same view, and in part by recognizing the importance of fiat money.  (And, some of the conventional Keynesians have become more comfortable with fiscal drag, as liquidity trap has tentatively dissipated.)

As one of those guys, I would say the correct argument was that the risk of the self-fulfilling prophecy was lower than the austerians feared, which is slightly different from the MMT view.  But to MMT’s great credit, they were louder, more confident and more unified on this issue than Keynesians were.  Well done.

Where Mitchell goes seriously astray in this post is in relating the refusal of mainstream macro to embrace MMT to vignettes in the history of science.   He talks about dissenting voices in neurology, pharmacology and archaeology being suppressed by the mainstream, even though they ended up being right.

To me, that seems self-serving, arrogant and all too typical of the MMT crowd’s approach to engaging with those who disagree, at some risk of generalizing unfairly

It is at least possible that conventional macroeconomists – deeply imperfect as they are – might disagree with MMT, even though they do not fail to understand the payments system and are not actually benighted.

There was once a guy who was dead wrong. And in this context, you are that guy.  Not really convincing.

MMT embraces a lot of issues and I concede I have not read all the sacred texts. But it seems to me that a central claim of MMT is that government spending (or “purchasing” for the semantically pure) can be divorced from government taxation, so long as inflation is well behaved, and in the ideal regime.

In all my efforts to get MMT guys to accept or reject this claim, it seems they have invariably demurred, including today.  But the offer is still open. Guys, correct me if I am wrong. And then own it.

The problem with that claim is that it fails to recognize a pretty simple application of transitivity.  Running spending far ahead of taxation, with the gap financed by reserves creation, would at some point cause a large inflation, the cure for which would involve getting spending back in line with taxation.  The underlying problem there would ultimately have been the attempt to evade the public sector budget constraint.  To call this (just?) an inflation issue is deeply misleading semantics.

Consider the picture below. Sorry that the two scales are not the same: I just clipped these images off the internet.

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But between the 19th century and the late 20th century, government spending went up by about 17 percentage points of GDP and revenue went up by about 15.

The resulting chronic deficit has not been an issue for financial stability or solvency or whatever because the US has had more fiscal capacity than the austerians implied.  Still, the rough correspondence between spending and revenue is not a coincidence.  It reflects that there actually is a public sector budget constraint, although estimating precisely where it binds is tough. And to repeat, MMT guys have been right to insist, not near here!

I can imagine that the MMT response to this might be, well the history before 1971 is irrelevant because MMT is meant to apply under fiat money.  Fair point, which does weaken the importance of the data I show above.

But by the same token, the reality of today is that deficits are financed with debt, not money. And when thinking about the government budget constraint – or its irrelevance, per MMT – you have to take that on board as a fact. (Let’s leave aside the debate about whether excess reserves are debt or money. At the end of the day, QE will not have been an enduring form of deficit finance.)

Let me conclude with some amateur psychobabble of my own, reading others’ motives just as Bill Mitchell finds himself at such liberty to do.  I think there are two related reasons that MMT’s crazy approach to government finance is assigned any credibility at all.

First, the austerians who relied on conventional notions of government finance radically overstated their case, fear mongered, and discredited themselves.  What are you gonna do? Some others who oppose MMT say dumb things. As Sean Spicer might say, even Hitler used arithmetic.

Second, and related, because the US fiscal capacity is higher than consensus originally assumed, we do not now experience the tensions that would arise inevitably if the US government actually attempted to divorce taxation from spending.

If the debt were actually high enough to cause fear of default, on bonds or base money (as has happened), then the idea that this is all just about “inflation” would be recognized as the evasion it is.

But the US seems still to be well within the safe zone.   So there is no pressing need to think through the MMT craziness.  In other words, the reason MMT is viewed in some quarters as plausible is that it has not been tried, at least around here, recently. *

* The US has some experience with wartime finance, including during the Revolution.  I am not sure how MMT guys would treat that, if they would lean on it. As I mentioned, I have not read all the texts.  I focus on what I take to be a central claim of MMT, that revenue need not be lined up with spending, except as inflation developments might dictate.

Mitchell’s attack on Krugman

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