These blogs provide debriefs to those who a beguiled by the false logic paraded as economic theory by mainstream (neo-liberal) economists

The inexact science of calibrating fiscal policy

In the showdown between France and the European Commission last week, France clearly is the winner on points, which is not surprising given the impossibility of the task the Commission had set it in meeting the Excessive Deficit Procedure (EDP) rules and the danger to the latter if France was to openly defy it. We have a sort of stand-off between the surrender monkeys – France is going along with the rules sort of and the Commission is bending the rules to save face. It is 2003 all over again. The public might actually think this EDP process is based on a fairly definite science with respect to measuring fiscal policy positions which provide unambiguous statements of deficits. The public would be very wrong if they did adopt that conclusion. In general, the applied work associated with informing the EDP process is very inexact. But, moreover, it is ideologically tainted which makes the process very damaging for any notion of prosperity. All applied work has measurement and other technical issues, which means it is always just an approximation. But when those errors are overlaid by a systematic bias against government net spending and therefore full employment, then the exercise becomes a scandal.

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MMT – lacks a political economy?

There was a ‘Guest Editorial’ published on the UK site Renewal last week – Modern money and the escape from austerity – by one Joe Guinan, who lists himself as a Senior Fellow at The Democracy Collaborative and Executive Director of the Next System Project. He is a journalist by background. Renewal is a “A quarterly journal of politics and ideas, committed to exploring and expanding the progressive potential of social democracy”, so it would seem to be wanting to head in the right direction, which reflects my values. The article’s central message is that “Modern monetary theory destroys the intellectual basis for austerity but needs a more robust political economy”. It is a serious embrace with our ideas and it is welcome that Modern Monetary Theory (MMT) is entering the progressive debate in a thoughtful manner and being advanced by others than the small core of original developers (including myself) who, in turn, built the ideas on the back of others long gone. The problem is that I don’t necessarily agree with many of the propositions advanced in the article. Here are a few reasons why.

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How to discuss Modern Monetary Theory

I have been travelling a lot today (nearly 6 hours starting early) and so haven’t much time for blog writing. I am working on a paper at present on the use of metaphors in economics and how Modern Monetary Theory (MMT) might usefully frame its offering to overcome some of the obvious prejudices that prevent, what are basic concepts, penetrating the public psyche. Here are some notes on that theme. The blog is just a rough sketch and will be refined over the coming weeks. There is a section at the end that encourages reader feedback – lets see what you think.

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Modern Monetary Theory and environmental sustainability – Part 1

There is regular commentary here that seeks to argue that Modern Monetary Theory (MMT) is flawed, bereft or worse because apparently it avoids any discussion of the natural environment. This apparently arises from the inherent conclusion in MMT that growth in aggregate demand (and real GDP) is required to maintain high levels of employment, which are considered both economically and socially desirable. This is the first part of a two-part blog on this topic. We will see that MMT is highly sympathetic to the challenges posed by anthropogenic global warming (a catch-all term) and central policy indications that follow from an understanding of MMT (for example, the superiority of employment buffer stocks) lead to an understanding of how MMT is a green paradigm as opposed to mainstream (neo-liberal) economics and much of Post Keynesian thinking, the latter which relies on generalised expansion as the solution to entrenched unemployment. We conclude that those who seek to dismiss MMT because it doesn’t satisfy their particular pet solution to climate change issues have probably not read some of the earlier MMT literature nor understood fully what is required to develop and disseminate a new way of thinking about the economy. Further, MMT is not a theory about everything! What we will see is that when MMT advocates economic growth it does so with a very different view of what that economic growth might be comprised of and driven.

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Not everybody can de-lever at the same time

The title reflects fact not opinion. However, most commentators still fail to grasp that reality. In the current economic climate it means one thing – imposing fiscal austerity in the hope that governments can reduce debt levels will fail and bring with it devastating consequences for the non-government sector. It is the latter sector that has reduce its debt exposure and under current institutional arrangements that means the government sector has to increase deficits (and debt) not other way round. The simple fact is that when private spending is subdued the government sector has to run commensurate deficits to support the process of private de-leveraging by sustaining growth. Those advocating fiscal austerity or those who claim that the amount of outstanding private debt is simply too large for the Government to replace with public debt fail to understand the basic tyranny of the sectoral balance arithmetic. Put simply, not everybody can de-lever at the same time.

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Whatever – its either employment or unemployment buffer stocks

Since I published Wednesday’s blog – MMT is biased towards anti-crony – there seems to have been a fair bit of commentary on other sites some bordering on personal attacks (against me). I’ll steer clear of that level of discussion. I also note that John Carney over at CNBC responded with this article – Can the Government Guarantee Everyone a Job? – saying that if the notion of employment buffers is a central aspect of Modern Monetary Theory (MMT) then “it would mean that MMT is wrong”. I found his response interesting but essentially a rehearsal of the mainstream errors that arise when you haven’t really come to terms with what MMT is adding to macroeconomic theory. So today’s blog is a supplement to the Wednesday’s blog (and many others) and aims to provide some more context especially to those interested in the evolution of ideas and schools of thought. The point is that whatever else happens we are left with a choice – employment or unemployment buffer stocks. MMT provides the theoretical insights to show that employment buffers are superior whether you like them or not.

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MMT is biased towards anti-crony

There has been a couple of interesting articles written by John Carney who is a Senior Editor at CNBC.com on Modern Monetary Theory (MMT) – starting with Monetary Theory, Crony Capitalism and the Tea Party (December 22, 2011) and followed up with Modern Monetary Theory and Austrian Economics (December 27, 2011). I am happy that our work is penetrating in to the mainstream business and economics commentary space. It is good that John Carney has spent some time coming to terms with MMT and its departure from the failed mainstream macroeconomics. But some problems remain with his analysis. The issues he raises relate to political matters rather than the economics of MMT. In that context, MMT is neither anti- or pro-crony. But if you delve deeper and really understand the MMT macroeconomic framework then you realise that MMT is biased toward anti-crony.

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Painstaking, dot-point summary – bond issuance doesn’t lower inflation risk

I will finish this week with a painstaking, dot-point summary of some key elements of Modern Monetary Theory (MMT) to show clearly why bond-issuance which might accompany a budget deficit doesn’t lower the inflation risk of the deficit spending – not now, not tomorrow, nor at some mythical “long-run” point in time. All the inflation risk is on the spending (aggregate demand) side. The monetary arrangements that might or might not accompany the spending decisions of government do not add or subtract from the inflation risk. Mainstream theory thinks they do. That theory is demonstrably false. I will also cover several related myths that seem to have cropped up over the last week – both in the international media and among the comments made on this blog. It seems that we need some baby steps. So with my fire-suit (always) on I hope you all enjoy it. Some of the critics might like to read this news item before they start.

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The role of bank deposits in Modern Monetary Theory

I get a lot of queries from readers about how the banking system operates. One recurring theme relates to the role of deposits in the banking system. Mainstream economic theory considers banks to be institutions that take in deposits which then provides them with the funds to on-lend at a profit. Accordingly, the ability of private banks to lend is considered to be constrained by the reserves they hold. While students find it hard to think outside of this construction, the reality is very different. Banks do not operate in this way. From the perspective of Modern Monetary Theory (MMT) private bank lending is unconstrained by the quantity of reserves the bank holds at any point in time. We say that loans create deposits. So then what is the role of deposits in MMT. That is the topic for today. I am deliberately simplifying to get the essential understanding across.

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