I want to write more about this but before I am off to a set of meetings I will answer Dean Baker who asks
Modern Monetary Theory: What’s Modern About It?
The short answer is a floating fiat currency – not a gold standard, not fixed exchange rates.
The short, short of MMT is that it is Market Monetarism in reverse. Just as Scott Sumner insists that people recognize Fiscal is dependent on Monetary. MMT asks the people recognize that Monetary is dependent of Fiscal.
They are both right as far as their mechanisms go, though I find it easier to think in terms of the natural rate of interest.
Though the proponents – in my view – seem to make a bigger deal out of it than is in the theory itself.
An earlier version of this post contained some unfortunate commentary on my part. I apologize for that.
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Tuesday ~ February 21st, 2012 at 10:10 am
david
An endogenous money supply, the claimed inability of central banks to influence real interest rates, the claim of severe spare capacity even in the long-run, the claim of significant distributional implications in the interest-rate instrument used by central banks – these are not trivial differences between MMT and monetarist-Keynesian syntheses, of the Sumnerian or Mankiw/Romer/Delong/etc. school.
If you introduce the post-Keynesians more generally, there are even more differences between their economic models and the orthodoxy – non-profit-maximizing firms (satisficing-managerial instead), households with steeply asymmetric debt behavior, etc.
Tuesday ~ February 21st, 2012 at 10:13 am
Ritwik
MMT is indeed MM in reverse, but not just on fiscal affects monetary and vice versa.
To my mind the much more fundamental disagreements are :
1) Is the business cycle a monetary phenomenon or a credit phenomenon?
2) Does there exist a money supply meaningfully independent of the credit demand. Can the central bank control it?
3) Is investment demand constrained or supply constrained?
Tuesday ~ February 21st, 2012 at 10:55 am
Curt Doolittle
RE: “The problem of people not getting MM or MMTs points is simply the problem of them being mentally slow. No model is going to help that.”
(Laughter)
@Ritwik
Good points. Although I think that assumes lower friction than exists. Maybe:
(1) Is the business cycle a) a monetary, b) credit, or c) an information phenomenon?
(2) Can a) the central bank control it, AND b) what damage will politicians do without the private sector resistance provided in the old model?
(3) Is investment a) demand constrained, or b) supply constrained, or c) both depending upon the sector (for example: bottom supply top demand).
Tuesday ~ February 21st, 2012 at 11:29 am
RickR
or (3) d) sometimes one and sometimes the other.
If I have investment in capital equipment to produce, say 10,000 widgets and am currently only producing 7,500 because I can’t sell any more at a profitable price then it seems that I have little incentive for further investment.
But if i am producing and selling at a profitable price all 10,000, and customers are complaining to me that I can’t deliver all they want, then it seems that I do have a much greater incentive to invest in higher production.
Tuesday ~ February 21st, 2012 at 1:01 pm
Jon
MMTers may use some of the same foundations but their policy prescriptions are wrong for reasons outside of those foundations.
They claim that large deficits are okay, even when those deficits are financed by a few powerful buyers. In so doing they underestimate the impact of the shock that would follow if those buyers withdrew from the market. Why? They propose that this does not matter because unlimited money printing may be used to cover the deficits. They propose that the inflationary impact should be managed by significant tax increases.
So they are leading us into a twin shoals world. Either we get lots of inflation and inflation variability, which could sink the banking system. Or we accept the shock of losing those buyers of debt by replacing it with the shock of a massive tax increase.
In short, the policy prescription of the MMTers (“Unlimited debt is okay”) is wrong; it is destabilizing. It makes the financial system brittle like glass.
Tuesday ~ February 21st, 2012 at 4:38 pm
Curt Doolittle
@jon
Agreed. And they’re also not accounting for the loss of knowledge, and the depletion of the talent pool that currently calculates and recalculates the economy daily.
It’s not that a parallel consumer banking system under MMT wouldn’t work though. I haven’t thought through it enough, but it seems to be one way of adapting without the shocks, while addressing consumption.
Tuesday ~ February 21st, 2012 at 9:15 pm
FDO15
Dude, you have no idea. MMT wants to hire all of the unemployed at $16/hr with full benefits. They don’t just want to push more deficit spending on the public. MMT is full blown socialism. Their policies would destroy this country.
Tuesday ~ February 28th, 2012 at 2:22 pm
Dismayed
So you’re arguing that we’re much stronger as a country when 58% of the workforce is gainfully employed?
Tuesday ~ February 21st, 2012 at 9:17 pm
FDO15
Look up the MMT “job guarantee”. It’s their most important policy and it’s a core piece of the theory. It’s soviet style government.
Tuesday ~ February 21st, 2012 at 5:11 pm
Becky Hargrove
Jon and Curt,
Your comments here were especially helpful for me. When I started looking into MMT last year it seemed more than anything like a fight over who gets to spend the money. But as Curt said, the loss of knowledge and depletion of the talent pool is what really worries me. In short it sometimes seems as if MMT can work…and it keeps on working…until it does not.
Sunday ~ February 26th, 2012 at 3:29 pm
Vincent Cate
In MMT they think that monetizing government debt with newly made money does not cause inflation. However, historically it does. In fact, usually when the public does not want to buy government debt any more and the central bank is the only buyer you get hyperinflation.
http://pair.offshore.ai/38yearcycle/#chartalism
Tuesday ~ February 28th, 2012 at 2:31 pm
Dismayed
Why is it that so many people that comment on MMT fail to understand the research that supports it? I’ve never seen an MMT paper that claimed that governments can spend as much as they like. What they do acknowledge is that there are situations that can spur inflation. On the plus side, it’s matches empirical evidence much better than the nonsense economics that I learned in grad school at U Chicago.
Friday ~ March 2nd, 2012 at 11:26 pm
Vincent Cate
Monetizing debt is something that the central bank does. It is not “governments can spend as much as they like”. The MMT people claim that bonds and money are the same and that paying off bonds with new money has no impact. But this experiment has been performed many times and you can get real data. The data says that if you monetize a lot of debt you get inflation. So MMT does not fit reality. It is a bad theory as it stands.
Tuesday ~ March 6th, 2012 at 12:39 pm
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