What is Modern Monetary Theory?

[Hrothbern]

What I'd like to see MMT explain is how much a government can get away with printing money and why. How much is too much?

There must be a reason USA is different from aforementioned Roman/Spanish governments, else anticipating a different/better outcome isn't justified.

What the Spanish Kings did was borrowing a huge amount of money on top (for AFAIK above normal market interests).
But as such their debasing and silverfleets from South America was the equivalent of MMT.

 

[Cutlass]

But that is a crucial point that can't be handwaved. When I "borrow money" it is because I am dependent on the lender for money. I cannot issue my own money. Or rather, I can, but no one will take it (whole 'nother discussion).



Not since the domestic convertibility of the dollar to gold was suspended.



It's not about the specific dollars. Your point would make more sense if the cash was burned but the money was still retained on a balance sheet somewhere. But it is not. It is wiped off the balance sheet, it is destroyed, poofed out of existence.



If this is a purely semantic issue to you, then frankly I don't care what you call it. You can call it borrowing, that's fine, just please stop trying to get me to call it borrowing because I'm mostly not going to. I don't think borrowing is a good term because of the connotation I mentioned at the top of my post here: it implies the government is dependent on revenue from the "lenders" which is false, as you freely acknowledge. The main point is that the "borrowing" operation is discretionary and done by the government for purposes that have nothing to do with obtaining dollars.



Intellectual honesty ought to be its own motivation. But if we get down to it: you've never treated MMT seriously and you know it. For example you know have never read a single academic paper written by an MMT economist. In fact I am not sure you have ever read a single word written by an MMT economist, period. Your "serious" arguments against it, where original and not just Paul Krugman blog posts, incorporate statements which you would never have made if you actually knew anything about it, for example your assertion earlier in this thread that "no one in the economics profession takes it seriously."

Disagreement with you is not attacking you. Attacking the outmoded and empirically false economic theories to which you subscribe is also not attacking you.

The sad thing is I think you could benefit quite a bit from serious engagement with these ideas - even if you ultimately decide you don't agree with them - but you refuse because you seem to think you know everything worth knowing about economics already.

It's up to you what you want to do about that.

If 99% of the people who have studied smoking cigarettes tell you that they are bad for you, and 1% tells you they are good for you, and the 1% which does so do not include anyone widely respected in the field, do I really have to master what that 1% said to know if it's worth my time?

I do in fact understand what MMT is saying. But I also know the basics of economics, probably better than anyone currently posting on OT. And what MMT is saying is wrong, and is contrary to what economics teaches. This is not an issue of me not understanding the arguments MMT are making. This is an issue of the arguments MMT are making not standing up to examination.



Poll a couple dozen of the most prominent economists in the country, what do they have to say on the issue?

http://www.igmchicago.org/surveys/modern-monetary-theory

This is a very strong consensus against. It is, in fact, greater than a 99% consensus against.

 

[Lexicus]

I do in fact understand what MMT is saying.

No you don't! Look at this from the link you posted:

Question A: Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.

Wrong, "MMT" doesn't say this. No MMT economist would agree with it.

We won't even get into how this is a bald appeal to authority fallacy, or draw analogies with the many theories rejected by the mainstream of their field when they were first proposed but which later came to be accepted as overwhelming evidence piled up. In fact I believe the association between lung cancer and cigarettes was one such idea. It certainly did not have majority support from doctors in, say, 1925.

This is not an issue of me not understanding the arguments MMT are making.

So again since you ignored the question: have you ever written any words written by an MMT economist?

If you "understand what MMT" claims why not quote MMT economists in their own words and then explain in your own words why they are wrong instead of showing economists saying they disagree with strawmen?

 

[TheMeInTeam]

I like this quote:

"If this were true, each such country could finance the purchase of all of the world's output, which is obviously impossible."

 

[Lexicus]

I like this quote:

"If this were true, each such country could finance the purchase of all of the world's output, which is obviously impossible."

Each currency-issuing government is technically capable of purchasing all the world's output that is for sale in that government's currency, which is a different claim. Of course, no MMT economist would say that such a thing would be a good idea.

 

[Hrothbern]

Each currency-issuing government is technically capable of purchasing all the world's output that is for sale in that government's currency, which is a different claim. Of course, no MMT economist would say that such a thing would be a good idea.

MMT is much more easy to understand if there is only one country with one currency and one central bank.

 

[Lexicus]

MMT is much more easy to understand if there is only one country with one currency and one central bank.

Well yeah the world and the economy would be easier to understand if that were the case!

 

[Birdjaguar]

What real world economic activity or events does MMT explain better than more traditional theory? Is it predictive? Are there any real world examples of its predictive value?

 

[Zardnaar]

It's a theory, personally I don't think it will work. It's the left wing equivalent of voodoonomics IMHO.

This coming from someone who thinks some form of Keynesian economics is needed over the neo liberal version.

There are limits in what you can borrow and print. Put up taxes works up to a point.

 

[Ajidica]

I have no strong opinions about MMT. On one hand, it seems like it makes a lot of sense. On the other, some of its internet advocates seem to have drunk the kool-aid, and that it is super-simple and easy to adopt and once adopted it will usher in a new age of happiness and prosperity.

Plus, all of the big things MMT advocates say we could do as a result of implementing MMT are things that have already been done in developed economies before. Back under Breton Woods, governments were able to maintain full employment, robust welfare spending, and significant industrial and economic development/planning. Sure, it required things merchant banks didn't like - stuff like capital controls and stringent risk controls - but screw them. Further, even if the public and policymakers do come around to MMT, it won't make a jot of difference unless the American public stop having visions of bread lines and dreary Soviet apartment blocks whenever they hear some variant of the phrase "industrial and economic planning".

 

[El_Machinae]

If this is a purely semantic issue to you, then frankly I don't care what you call it. You can call it borrowing, that's fine, just please stop trying to get me to call it borrowing because I'm mostly not going to. I don't think borrowing is a good term because of the connotation I mentioned at the top of my post here: it implies the government is dependent on revenue from the "lenders" which is false, as you freely acknowledge. The main point is that the "borrowing" operation is discretionary and done by the government for purposes that have nothing to do with obtaining dollars.

Sure, but it's why I said "you've gone too far". The entire operation is easily described as 'borrowing'. In the original thread I quoted you from, you did a fly-by claiming that the government hadn't borrowed. It's needless muddying. This isn't German, where "actuallythegovernmentremovesdollarsfromcirculationbybribingpeoplewithdollars" is just a word we can make. And especially just use it in a flyby, without actually talking about what the person is talking about.

The government borrows. It's what happens. There are all these sovereign countries out there that borrow money, even though they technically don't 'need' to. And, you'll note, none have actually tested the idea that they don't 'need' to. It doesn't matter that the dollars are poofed out of existence and then new ones created to pay off the bond, because it functionally doesn't matter if they're poofed out of existence or just temporarily placed in a vault until repayment or even directly spent at the next opportunity. MMT thinks that governments sell bonds to remove rich people's dollars from current spending. Sure, maybe that's why. But the answer to "the government borrows too much and spends too much repaying" isn't "the government doesn't borrow".

You can say that 'the government isn't dependent', but it's not really true. The current system very much has governments borrowing. If they stopped borrowing, everything would change. Sure, they don't need to, I get that. But they do. There's no better word for the process.

 

[El_Machinae]

What I'd like to see MMT explain is how much a government can get away with printing money and why.

Well, it depends on what a government wants to buy, and why. As long as people owe money, there's a demand for printed dollars. If the government then buys output that people are willing to borrow to buy, then the output from printed dollars can keep rising, because the person who borrowed in order to consume a service now has a demand for dollars.

 

[Lexicus]

Plus, all of the big things MMT advocates say we could do as a result of implementing MMT are things that have already been done in developed economies before.

You've got this wrong. MMT is a descriptive theory and the fact that the things it says are possible have been before is evidence of its accuracy.

What real world economic activity or events does MMT explain better than more traditional theory?

The business cycle, the behavior of banks and central banks, the causes of inflation. Neoclassical macro is wrong about almost everything, so "explain better than more traditional theory" is not a high bar to clear.

Is it predictive? Are there any real world examples of its predictive value?

MMT as such isn't exactly predictive. It's more like applying discipline to economic analysis using analysis of real-world financial operations and accounting rigor. This is kind of like asking whether a physics concept like conservation of energy is predictive. It "predicts" that the sectoral accounting identity will hold, but it doesn't really make any definitive claims about what causes the numbers in the equation to change. That is a complex question and MMT'ers have different positions on it. But you need to have things balance out so that, for the economy as a whole, spending=income, assets=liabilities and so forth. Just as when doing physics, you can discipline your analysis and your predictions with conservation of energy, you can do the same with MMT principles in macroeconomic analysis and prediction.

I will say that the post-Keynesian framework (of which MMT is an outgrowth) is predictively far superior to the mainstream in that it at least understood a crisis like the 2008 one was possible, whereas mainstream neoclassical macro had literally denied the possibility. Some individual economists in the MMT tradition did predict the crisis but it wouldn't be accurate to say that adherence to MMT led people to foresee it.

One example of the predictive ability of MMT over neoclassical theory is the prediction of Wynne Godley, who came up with the "sectoral balances" approach that comprises such an important part of MMT, all the way back in 1992, that the Euro countries would run into trouble because the countries adopting it were effectively ceding such an important part of their sovereignty. Another example is when MMT economists (I believe Randall Wray was one of them [edit: indeed, Godley and Wray 2000]) disagreed with CBO predictions in the late '90s of "surpluses forever", using a balance sheet analysis they argued it would be impossible for the government to drain financial wealth from the private sector indefinitely and they were quickly proved right when the government's budget shot into deficit early in the Bush years, because of the recession. The CBO was wrong because it failed to consider the implication of the government's surplus on the other sectors of the economy. That kind of mistake is endemic in neoclassical macro.

In the original thread I quoted you from, you did a fly-by claiming that the government hadn't borrowed. It's needless muddying. This isn't German, where "actuallythegovernmentremovesdollarsfromcirculationbybribingpeoplewithdollars" is just a word we can make. And especially just use it in a flyby, without actually talking about what the person is talking about.

I don't agree at all. Getting people to understand it isn't really borrowing is important.

MMT thinks that governments sell bonds to remove rich people's dollars from current spending.

No. Professional economists and others who "believe in" MMT have a variety of opinions on what government bonds actually do. Some people see it as basic income for rich people, others see it as the necessary and desirable base of the pyramid of a healthy financial system.

But the answer to "the government borrows too much and spends too much repaying" isn't "the government doesn't borrow".

It kind of is though? And this is an enormous simplification and flattening of the debate. There might be perfectly legitimate reasons, within an MMT framework, to reduce spending and bond issuance. In fact MMT'ers are at pains to identify just such a reason: the economy is at full capacity and further spending increases will be inflationary without adding real production. The proper answer to people saying "government is borrowing too much" is "why do you think so?"

 

[El_Machinae]

I don't agree at all. Getting people to understand it isn't really borrowing is important.

But it really IS borrowing. As I said, it works the same whether the dollars are poofed out of existence, spent immediately, or just buried until repaid. Distinguishing that "they're just poofed out of existence" doesn't matter, as in "It.Doesn't.Matter." because there's no functional difference. There's no other word for it. Invent your german word, if you want. And then slowly introduce it to the parlance. Or introduce it each time.

"Entity sells bond with a promise to repay" is going to be described as a word. "Government issues bonds" isn't sufficient, because "government sells bonds" is more accurate. Taxes are destroying a legal entity. A bond is swapping one legal entity for another, and is done on a voluntary basis. The only real way it's significantly dissimilar (that I can see) from every other form of borrowing is that a government can default either by refusing to pay or by inflating away the debt.

The mechanisms by which governments or private entities don't default are multitudinous, since it merely involves gaining control of more dollars than were originally borrowed. We know we live in a world where government deficits assist in paying off outstanding debts.

 

[uppi]

To add to that: The government issuing bonds creates a liability to pay money at a later date. In that sense it is borrowing. That it can create the money at will to do that is true, but this liability will force the government to create money even when it doesn't want to or when it would hurt the economy to do so. Thus issuing bonds constrains a future government in its economic policy and should not be done without some restraint.

 

[Ironsided]

Discussing academic economics, any kind, is probably up there with the most worthless time occupation known to man. Not detrimental, just worthless in its Sisyphus-like endeavour. Making rational models for irrational politicians elected by irrational people bending rational economic theory to their own irrational agenda. I suppose there is a real benefit to choosing a framework for a collaborative economic effort, however, it really matters less which one you choose. The actual governance is all in the agenda anyway, economics be damned, and that's probably the most rational take.

 

[Hrothbern]

One example of the predictive ability of MMT over neoclassical theory is the prediction of Wynne Godley, who came up with the "sectoral balances" approach that comprises such an important part of MMT, all the way back in 1992, that the Euro countries would run into trouble because the countries adopting it were effectively ceding such an important part of their sovereignty. Another example is when MMT economists (I believe Randall Wray was one of them [edit: indeed, Godley and Wray 2000]) disagreed with CBO predictions in the late '90s of "surpluses forever", using a balance sheet analysis they argued it would be impossible for the government to drain financial wealth from the private sector indefinitely and they were quickly proved right when the government's budget shot into deficit early in the Bush years, because of the recession. The CBO was wrong because it failed to consider the implication of the government's surplus on the other sectors of the economy. That kind of mistake is endemic in neoclassical macro.

That all the way back in 1992, the Eurozone, the madness of countries joining that were totally unfit and a mismatch to the German culture and kind of economy...

You can redistribute money, prosperity among individuals, to generate more financial equality.

Although this individual redistribution does cover some inequality between economical strong and weak regions (central tax flowing to the region with social security, pensions, care security, regional civil servants, etc), reality is that this not cover enough to counter the regional inequality within a unitarian country (for example North Italy and South Italy, for example the typical rural-urban divide).
A much stronger subsidising of the weal regions by the rich regions by moving economical sectors goes in many cases (certainly Italy) at the expense of the "overall" effeciency and prosperity of the country's economy compared to other countries.
If that path is not taken, because of lack of solidarity and cohesion....

Is not the only way to move forward to split the two regions and giving them both their own currency ?

 

[rah]

MMT is just the most recent theory made up so economist can pretend they know what is actually going on and make us think we don't.
If economists really knew what the heck they were talking about, they wouldn't have to work since they could be taking advantage of the system to create their own wealth.

 

[El_Machinae]

It is very common for people to confuse finance with economics. But it's not true. It's like confusing psychology with neuroscience. Related, but also different focuses in a time of less than complete knowledge. Obviously, knowledge of one can help with understanding the other. But they aren't the same thing.

As well, different outcomes. If a increasing number of economist students increasingly figure out how things work, we can use that knowledge to make people better off. But the more financiers who develop good ideas and theory, the more we just trim towards average. It's why the increasing share of Finance theoreticians in the global economy hasn't improved things.

 

[rah]

True, but I still believe if you understand all the underlying theory it would make you a better manager of money. And if not, then maybe you don't understand as much as you think you do.