MMT: Political Polemic posing as Economic Theory
Its key ideas forget that we live in the real world
Disclaimer: I welcome all the MMTers out there to answer the questions posed below. I’d love for you guys to prove me wrong.
Now, let’s get to the letter.
The basic case for MMT:
Modern Monetary Theory (MMT) can be described most simply as an argument for creating money to inject into the economy, in an attempt to make use of idle resources.
The idea goes that if people have their hands on more money, there comes a point where most of that money starts to circulate in the economy. Sure, you may start saving more of your income during a recession, but if the government hands you more dollars, maybe you’ll spend a higher percentage of those dollars when compared to your income. More money in circulation can give a boost to the economic engine.
But with it comes this famous concern of inflation. But in response, Stephanie Kelton, one of MMT’s leading proponents clearly says:
“In his important book, How to Pay for the War, John Maynard Keynes explained what Kennedy later understood: Coming up with the money is the easy part. The real challenge lies in managing your available resources—labor, equipment, technology, natural resources, and so on—so that inflation does not accelerate.”
The Deficit Myth
This seems to suggest that MMTers have their gazes fixed on inflation, too. “MMT is no free lunch!” they cry. Assuming that the economy is producing more goods and services, having more money doesn’t hurt the purchasing power of each dollar much. We used to have $10 on hand to buy 2 burgers. Now, we have $15 on hand at a time when the economy is producing 3 burgers. Each burger still costs the same $5.
And perhaps even more importantly, a lot of that money is going to stimulate more production. You spend money in the right areas and your economy will produce more, too. Production increases along with the money supply. No inflation, no problem.
In fact, this is the base logic behind how many of our existing systems work. Banks can create money out of thin air when they lend because they are lending to borrowers who can eventually pay them back — i.e. that new money will probably create new value in the future.
And in a world where we have plenty of idle resources — unemployed people who can do jobs, cement using with we can improve our country’s infrastructure, and so on — MMT argues for the creation of new money to put these resources to good use.
MMT can’t agree with itself on how humans behave
For decades, America has placed trust and power in a global network of financial and political elites who have profoundly failed to address the economic concerns of most people on the planet.
The Deficit Myth
She blames the failure of economics on these elites; they were the ones who incorrectly perceived the limitations of credit creation. She may very well be right that the elites misunderstand economics.
But these elites could also just be unable to understand the infinite signals of the market. They’re humans, too. They could also just be incompetent. Knowingly or unknowingly, they may also have skewed incentives (Presidents are elected every 4 years, right?). The real world is more complex.
For example, government spending itself can channel (knowingly or unknowingly) to the wrong areas. Or at least, after the channeling has been done, it’s hard to verify if that was the right place to throw money at. Remember: after the financial crisis, banks declined to explain how they’d distributed their bailout money.
“We’ve lent some of it. We’ve not lent some of it. We’ve not given any accounting of, ‘Here’s how we’re doing it,”. “We have not disclosed that to the public. We’re declining to.”
JPMorgan received $25B in bailout money.
Lobbying, vested interests, and incompetence are very real. And even if you completely trust the government, there should be some way to verify what’s really happening. Remember: information asymmetry is a classic cause of market failure in neoclassical economics.
MMT’s biggest problem lies in its hypocrisy about how humans behave. On one hand, it acknowledges and blames the incompetence of the elites of the past to understand economics. On the other hand, it expects the elites of the future to understand economics and behave optimally.
This is a big problem because MMT puts forth proposals that require a whole lot of government intervention.
And here we wonder — do MMTers themselves understand economics?
MMT oversimplifies how markets work
MMT makes two central claims on how to manage an economy. Let’s run through some of the big boys:
Claim #1: Inflation is evidence of overspending, and if we do go and overspend, we can raise taxes to absorb back that “excess money” for the time being.
In England, we have come to rely upon a comfortable time-lag of fifty years or a century intervening between the perception that something ought to be done and a serious attempt to do it.
- H.G. Wells
Wells was no Economist, but (though exaggerated) that’s an astute observation. Every policy has a lag.
You could rebut that statement with the example that news of Quantitative Tightening by the Fed was immediately reflected in the markets. “The lag is negligible!”, you may say.
But remember: there are many steps to a policy being implemented. It takes time for the government to figure out that something’s going wrong. It takes time for them to react and implement a policy, and it takes time for the economic impacts of these policies to show up. And every lag can compound an existing problem — especially if that problem is inflation. Inflation can feed on itself: where inflation leads to demands for higher wages, which leads to more inflation. Loop and comes the infamous Wage-Price spiral. And then we end up at hyperinflation: every Economist’s nightmare.
Plus: lags don’t just occur because it’s hard to agree what’s the suitable course of action. They occur because of conflicting interests, too.
Economics is itself is really good at being indecisive. One guy will yell that credit expansion is the problem, while another will say that inflation’s entrenched in expectations. Nobody really knows for sure who’s right. And then there may also be a President with an (understandably) implicit bias: which politician wants to apologize for injecting too much money when (maybe) global supply chains are being hit by international conflict?
I then ask MMTers: is there a way to genuinely deal with inflation that doesn’t depend on people (governments are made of people) being perfect and immediate in their response?
Claim #2: More money chasing idle resources can increase total economic output
The keyword is can. Remember: economics is all about trade-offs. Nothing good comes without a cost.
There’s already money creation via commercial banks, exacerbated by QE and YCC. Now there’s MMT, which is a classic Keynesian argument on steroids. A more specific example of how this manifests is via 0% Central Bank interest rates i.e. the Federal Funds Rate.
Consider the Taylor Rule proposed by Stanford Economist John B. Taylor, which would usually recommend closer to 5-6% as the Federal Funds Rate.
“After huge numbers of model simulations and experiments, thinking about what’s realistic, I came up with this idea that, well, we can make it pretty simple if the interest rate rises by a certain amount when inflation rises and then declines by a certain amount when the economy is in a recession.”
- John B. Taylor
But MMT shows no sign of following nuanced reasoning in explaining why it’s optimal to always park the Federal Funds Rate at 0%.
As for the Taylor Rule specifically, the idea behind keeping this number positive is simple: we do not want long-term financial imbalances, or money being channeled recklessly to areas where people are likely to make a loss. If you go even further, Austrians would argue that the Fed shouldn’t interfere at all and that the interest rate should be determined by the free market.
The Taylor Rule is imperfect, but at least it takes into account context on how the economy is doing. Free Markets are also imperfect, but they take into account millions of decisions by decentralized economic agents. What exactly is the economic case for the 0%?
Flimsy ideology?
If the new money created is channelled irrationally — which it very well may be because with lower interest rates comes easier access to money — we may not be seeing much output improvement at all. For example:
What if an idle resource is better utilized for a new need tomorrow? Why hold interest rates artificially low to encourage premature investment today?
Furthermore, this argument assumes that economic output is primarily limited by resources being left idle. Surely the truth is more nuanced? Maybe the free market recognizes that the resource is better used tomorrow. Maybe the problem isn’t even with insufficient dollars going around, it’s with weak institutions.
For example, the United States spent about $14,000 per full-time student pursuing elementary and secondary education. That’s more than Finland and almost equal to Singapore.
Is the primary problem really a lack of money? Is the existing money even being used efficiently?
MMT sidelines the implications of growing private debt
“Myth 3: (On the National Debt) One way or another, we’re all on the hook.
Reality: The national debt poses no financial burden whatsoever.”
The Deficit Myth
MMTers talk extensively about public debt — i.e. the US government owing money to the Fed, or to other countries. Proponents argue that it doesn’t matter because the US government is the one issuing the currency and how much it owes is expressed in terms of that same currency.
But there’s very little talk about the implications of private debt (which refers to the debt of households and non-financial firms as opposed to the debt held by the government or commercial banks).
“Both the international and U.S. evidence reveals a strong pattern: Economic Disasters are almost always preceded by a large increase in household debt. In fact, the correlation is so robust that it is as close to an empirical law as it gets in macroeconomics.”
House of Debt
Princeton Economist Atif Mian and UChicago Economist Amir Sufi make compelling cases for private debt not only leading up to but being a cause of subsequent economic disasters. Their book House of Debt explains why excellently, but the short story is this: debt facilitates an increase in the value of assets by giving optimists more influence on market prices. In other words, people take irrational amounts of risk, which leads to increased prices, which leads to more people taking crazy amounts of risk, and loop.
This vicious loop starts at banks lending aggressively. Which again, the 0% value mentioned before (unjustifiably, without looking at both benefits and costs) encourages.
I’m inclined to agree with MMTers that MMT provides no free lunch — but it does provide an overly cheap lunch, and that’s not sustainable in the long-term.
But hey, if you’re reading this and disagree with me, please answer the questions I’ve posed throughout this letter directly. Tell me why I’m wrong. Because if MMT somehow is the solution to many of our economic concerns, it sure as hell is a convenient one.
This letter is still a brief look at MMT, and I’m sure we’ll be revisiting this theory in future letters.
Till then,
Ja ne!
I created this newsletter to share, get roasted, and learn along the way. So if there’s anything you feel that I got wrong, or you’ve feedback in general, do let me know in the comments or DM me on Twitter!
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