I read an article in the Financial Times earlier this week (September 23, 2023) -…
There is now a procession of wannabee Modern Monetary Theory (MMT) critiques coming out of the woodwork all around the place seeking cover from the criticisms coming from the likes of Larry Summers, Paul Krugman, and Kenneth Rogoff, who are regularly referred to as “the world’s leading economic thinkers” or “Nobel Prize-winning economists” as if any of that established authority. These ‘Nobel Prize’ winners are not Nobel Prize winners at all – the economics prize is not part of the original Nobel gift and was instead invented by a bank because economists were feeling left out (inferior). But in recent days, across two jurisdictions, where the so-called party of the workers – the Labour Party in the UK and the Labor Party in Australia – are struggling to gain electoral traction, and in the Australian case, just lost an election against one of the worst governments we have ever had, we have seen two erroneous attacks on MMT that really sums up the existential crisis facing social democratic parties – the loss of identity and revolutionary zeal. This is Part 1 of a two-part series examining how ‘walk the plank that you erect yourself’ strategies play out within our so-called progressive social democratic parties and deliver abysmal results.
One of the repeating criticisms that mainstream macroeconomists have of our work is that there is no formal mathematical model at the centre of MMT along the lines of the way the mainstream present their theoretical approach.
In August 2008, when the world was going into financial collapse that none of the New Keynesian macroeconomists saw coming – nor could have seen, given they didn’t even have a financial sector in their theoretical framework – Olivier Blanchard wrote his self-contented article – The State of Macro – which attempted to summarise the consensus that mainstream macroeconomists had reached on how to do economics.
The article would have been written before the worst of the GFC was revealing itself and tells you how far removed the mainstream profession had become from reality.
The mainstream has evolved into following a standardised approach to the discipline. All those who sought to publish in the discipline had to follow that approach in order to engage and be considered successful. Variation was discouraged.
Blanchard wrote glowingly, that macroeconomic analysis had become an exercise in following:
… strict, haiku-like, rules … [the economics papers] … look very similar to each other in structure, and very different from the way they did thirty years ago …
Graduate students are trained to follow these ‘haiku-like’ rules, that govern an economics paper’s chance of publication success and improve the prospects of appointment to academic jobs and promotion up the academic scale. It is the way the mainstream macroeconomics is done and the way the sociology of the economics academy operates.
There are framing rules, language rules, and no-go territory. The standardised framework is crafted on a series of erroneous propositions, first, about human behaviour that no psychologist or sociologist would identify as being relevant to our decision-making at all; and, second, about the way the fiat monetary system operates.
It is a cloistered (claustrophobic) approach, trading on a series of linked myths about these operations, and the dissonance between reality and the predictions that come from this structure are assumed away by the discipline of the Groupthink that has paralysed my profession.
So when the MMT literature emerges as a threat to this status quo in the academy the immediate response is to assess it and to try to corral it within the mainstream straitjacket.
A sort of ‘we write equations for everything even if they mean nothing at all, so you should’ approach.
Or, ‘if you want to communicate with us then you do it on our terms’, ‘use our language’, ‘use our frameworks’ and the rest of it.
A sort of – My way or the highway – ultimatum.
Well, the MMT economists chose the ‘high’ way.
We chose not to get trapped by the way the dominant mainstream New Keynesian economists talk, think, or write.
After all, to pretend their way is the only way to do economics is to deny a very long history of economic thinking that adopted a totally different method of discourse – Marx, Marshall, Smith, Riccardo, Say, Malthus, Mill, Kalecki, Keynes, Veblen, Lerner, Myrdal, Ostrom, JK Galbraith, Commons, and a host of others.
The mainstream approach has a very short history in fact and has reached its modern day form as the political agenda of neoliberalism has become dominant. The two ‘developments’ are, of course, related.
The myths of mainstream economics are designed to reinforce a predominantly market-based, individualistic way of thinking which then militates against government intervention.
They construct the ‘market’ as some sort of natural tendency with the government as a nuisance or noise that undermines the ‘natural’ workings.
But the institutional literature makes it very clear that ‘markets’ are legal constructs which are given meaning and operational structure by the legislative fiat of the state.
By choosing the ‘high’ way, we have created significant dissonance among the mainstream profession, who are finally realising that something has been going on while they smugly denied the existence of the economic cycle, claimed fiscal policy was ineffective, promoted monetary policy as being the opposite, claimed all manner of disasters would follow the use of fiscal deficits, eulogised the power of global capital, demanded deregulation of financial and labour markets to make them work for all of us, and predicted that governments who didn’t follow their orders would face escalating interest rates, accelerating inflation and become insolvent as bond markets deserted them in droves.
Not much of what the mainstream has said ever turns out to be the case.
The deregulation has harmed citizens and transferred massive amounts of real income away from workers towards capital.
Monetary policy is in a state of disarray and has proven to be totally ineffective. Central governments have expanded their assets massively in an attempt to drive inflation up with little effect. This isn’t an ephemeral failure. It has been going on for decades (in Japan) and lengthy periods elsewhere (for example, the ECB’s behaviour).
Fiscal policy saved the world from financial collapse during the GFC and when austerity is imposed we see immediate negative consequences.
Government fiscal deficits have been relatively high over the last decade and interest rates remain low.
Bond investors are paying governments for the privilege of buying bonds – in some cases over 10-year maturities.
Mainstream macro has failed – it is categorical. And that is despite several of the big names trying to reinvent themselves by backtracking (‘we knew it all along’) or adding caveats (that weren’t there before) or whatever.
Le roi est mort!
Only through an MMT understanding can one understand what has been going on in the world economies.
It is just a matter of time before this new framework is adopted as the economics profession evolves.
However, I have always been mindful of the insight provided by German physicist Max Planck – who famously said in his 1948 book – Wissenschaftliche Selbstbiographie. Mit einem Bildnis und der von Max von Laue gehaltenen Traueransprache that:
Eine neue wissenschaftliche Wahrheit pflegt sich nicht in der Weise durchzusetzen, daß ihre Gegner überzeugt werden und sich als belehrt erklären, sondern vielmehr dadurch, daß ihre Gegner allmählich aussterben und daß die heranwachsende Generation von vornherein mit der Wahrheit vertraut gemacht ist.
Or: “A new scientific truth does not prevail by convincing its opponents and making them see the light, but rather by the fact that their opponents eventually die, and a new generation emerges that is acquainted with the truth from the outset.”
Or more prosaically: “Science advances one funeral at a time”.
I might add that we didn’t unambiguously choose the ‘high’ way from the outset.
We did try to engage for some years before MMT became popular with our mainstream academic colleagues. There was participation at conferences, workshops, seminar papers presented and all the rest of it. But the mainstream Groupthink dominated.
Their way or the highway!
I actually learned the lesson early when in graduate classes, a senior professor told me in front of the class that I should leave the program and move across to sociology. He thought it would diminish me. It gave me strength instead.
Anyway, after some time, we acknowledged what Max Planck knew. What Thomas Kuhn wrote about in his The Structure of Scientific Revolutions.
And what Irving Janus wrote about when he exposed the operations of Groupthink.
And what Keynes realised when he, at first, tried to parlay with the dominant neoclassical school (Chapter 2 of the General Theory), only to see his insights hijacked back into a orthodox framework with much of his brilliance muted.
And what George Lakoff knows when he talks about the ‘truth sandwich’ in the cognitive linguistics literature.
All this literature and more, tells us that we should set the rules by which our work is to be presented. And we avoid being hijacked back into conventional language, frames and concepts.
That upsets the mainstream but remember Max Planck.
What will eventually triumph will be what helps people understand the things they care about.
In our field, the mainstream has worked for years to convince us that what we should care about are financial ratios and have engendered that conviction through a massive process of indoctrination.
But, of course, the smokescreen could only work if all governments obeyed their strictures and no unseen events occurred.
Well, first Japan had a major property market collapse that changed the course of policy history in that nation. During the 1990s, economists regularly predicted the rising deficits and public debt would send the nation broke.
Corrupt rating agencies downgraded the government’s debt. The latter ignored them.
And so it went.
None of their predictions came to fruition. Whenever the mainstream conservatism gained political leverage (say in 1997 with the sales tax hikes), the economy went backwards again.
All the time, the economists were ‘crying wolf’.
And then the GFC arrived and the realities became global. Again the cries. Nothing!
Many have tried to claim this and that was special (for example, zero-bounds, liquidity traps, r < g, etc) as an attempt to vindicate their mistaken predictions or make it seem that they are on top of the situation.
But they have been crying wolf for too long and the public are finally seeing the results – degraded public infrastructure, retrenched public services, rising inequality alongside obscene salaries being paid to the top-end-of-town while real wages for the rest of us stagnate, and all the rest of it.
And faced with a climate disaster as a result of lax regulation and poor production practices, many are starting to see through the ‘how do you pay for it’ narrative and finding that an MMT understanding opens up a new vista.
What we really care about is our well-being and the ‘fiscal ratio’ smokescreen is starting to look like a threat rather than a solution.
People power is once again reasserting itself against the vested interests of the elites – as it has done several times in recorded history.
I was reading a book recently about the – ‘Fuite à Varennes’ – when King Louis XVI and Marie Antoinette, along with family, servants and items of wealth, tried to escape Paris. They only travelled around 250 kms before they were arrested, sent back to the Tulieres, where the ‘revolution’ had confined them, and eventually beheaded.
The King delayed and their carriage was overloaded with items of personal wealth (silver dishes etc) so their progress was slow. At one point, the coach traces broke under the strain and had to be repaired.
But their mistake, it seems, was to think that the rising protests against the monarchy were being orchestrated by just a few radicals in Paris and that the rest of the French people – the rural commoners – were strongly supportive of the King. They were wrong.
People power ultimately ruled.
And that brings me back to the start – the existential crisis facing social democratic parties.
The problem is that people power is being expressed in ballot boxes around the world and the angst that people are feeling is being voiced, not by the traditional social democratic parties, but by fringe parties, often on the Right!
The social democratic parties are giving up their traditional ground and experiencing electoral failure, in part, because they have adopted the framing, language and frameworks of mainstream macroeconomics.
And as these parties wallow in electoral failure in one way or another across the globe, some of the more vehement attacks on Modern Monetary Theory (MMT) are coming from their ranks and serve to privilege the mainstream frames.
It is a downward spiral that engenders a message of trepidation and apprehension (about what global financial markets might do) and corrals any progressive dialogue into a narrow ‘how are we going to pay for it’ type straitjacket.
Just where the conservatives want these parties to play! They can easily pick them off that way.
Thomas Fazi and I replied to one British attack from an ex-Labour staffer yesterday in this Tribune article – For MMT (June 5, 2019).
In Australia, the opposition Labor Party just lost the federal election against one of the worst governments of all time.
It was no surprise really. They have spent the last three years in opposition carping on about how bigger fiscal surplus they would achieve (bigger than the conservatives) as some sort of badge of courage and honour.
This narrative locked them into having to accompany various spending promises (to make them look progressive) with a raft of tax hikes that impacted not just on the top-end-of-town but also others who are less endowed.
They failed dramatically.
Yet, within days of the election there was an article published (June 4, 2019) – When good economics loses its way – by a Canberra academic and former advisor to the now failed Shadow Treasurer Andrew Leigh attacking MMT.
Leigh, by the way, thinks the likes of Krugman and Summers are representative of the “sensible social democratic mainstream” and thinks MMT is crazy.
Anyway, this attack (from one Adam Triggs) eulogised the work of Olivier Blanchard, Larry Summers and others as producing “compelling, theoretically robust, empirically sound, and accepted by many of the world’s leading economic thinkers”.
The usual tripe:
1. “an increase in government spending has consequences if interest rates are anywhere above zero … causes inflation to rise.”
2. If a government is in deficit “it must sell bonds, pushing up interest rates at the same time the central bank is increasing rates to cool the demand-driven inflation.”
3. Printing money!
4. Australia is already near full employment so it is “difficult to argue that such a radical approach is warranted in order to knock 0.2 per cent off the rate”. So buying the NAIRU equals 5 per cent argument, which not even the Reserve Bank of Australia believes any more. And how does he explain the fact that before the crisis, the unemployment rate was around 4 per cent and falling without accelerating inflation.
And how does he justify saying we are at full employment when the broad underutilisation rate is around 13.6 per cent (once we consider underemployment) and inflation is well below the RBA’s lower targetting band and falling?
5. Government cannot get unemployment lower and microeconomic policies (deregulations etc) are required.
6. “The idea that this increase in spending should be financed by printing money is particularly problematic” – hasn’t read a thing other than Krugman and Summers probably.
7. Claims US Federal Reserve’s QE was all about pushing inflation up and “Once inflation and interest rates were rising again, it stopped buying bonds.” Factually that is incorrect. QE3 was terminated on October 29, 2014 at a time that the annual inflation rate in the US was falling and continued to fall for another two years.
8. Even so, how does he explain the ECB and the Bank of Japan? Cannot!
9. The ‘only defense against inflation is tax hikes’ argument.
10. The ‘open economy’ argument – apparently, MMT would drive up “inflation, interest rates, the exchange rate” and so the speculators dump our currency. Why in the face of constant external deficits for more than 50 years and mostly constant fiscal deficits over the same period haven’t any of these predictions come to fruition?
And after reciting these inane, rote-learned, copied out of a mainstream undergraduate textbook, claims that show he has read none of the core MMT academic literature or if he has he hasn’t grasped its complexity, you sensed he was frothing a bit, building himself up to a lather – to get his big point across.
And, he could barely contain himself until he eventually, just before the end of his article, blurted out his master stroke, his death stroke against Modern Monetary Theory (MMT) – and surprise, surprise, the deadly duo (Weimar and Zimbabwe) is now a cast of nearly a thousand:
Modern monetary theory is alive and well in Venezuela today, as it was in Zimbabwe in 2008, Yugoslavia in 1994, Italy in the 1970s, Hungary in 1946, Greece in 1944, Weimar Germany in 1923, and so on.
Well done, Adam. You passed the grade. Your senior colleagues will be applauding you. But like them, you know very little.
His use of Summers as an authority places him squarely in the failed category. I refer you to this blog post – Being shamed and disgraced is not enough (December 18, 2009) – for his bona fides.
And Krugman – remember his input into the Japanese debate in the 1990s? I refer you to this blog post – Balance sheet recessions and democracy (July 3, 2009) – for his bona fides.
And then Blanchard – he has not covered himself in glory. He was chief economist at the IMF from September 1, 2008 to September 8, 2015.
Remember back in October 2010, when the IMF published its World Economic Outlook Update and – Chapter 3 Will It Hurt? Macroeconomic Effects of Fiscal Consolidation – used estimates drawn from simulations of the IMF’s Global Integrated Monetary and Fiscal Model (GIMF) to tell nations that fiscal consolidation would inflict short-term damage of a relatively modest variety.
The estimated rise in net exports they predicted would “soften the contractionary impact” and fiscal consolidation had to be based on spending cuts rather than tax hikes because if the latter used the IMF told us that the consolidation would be “more painful”.
The IMF also said that there was “truth” in the “expansionary fiscal contractions hypothesis” because the cuts in government deficits would stimulate private sector business and household confidence, which would allow that sector to pick up the spending gaps left by the government withdrawals.
At worst, the IMF predicted that:
A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point.
All this stuff was wheeled out by conservatives and those in charge on economic policy to justify their vandalism. It was under the watch of the Chief Economist, Olivier Blanchard.
History tells us that these forecasts were not even remotely correctly. At the time, using an MMT understanding, I predicted disaster would accompany the austerity push. And disaster is what happened.
Over this entire period, the MMT economists have been consistent and provided very accurate accounts of what would and did happen.
The IMF indecency was revealed in October 2012, when they were forced to issue a statement admitting they had made a big mistake.
They told the world that they had “discovered” that that their policy advice, which has caused millions to become unemployed and nations to shed income and wealth in great proportions and all the rest of the austerity detritus, was based on errors in estimating the value of the expenditure multiplier.
The 1 per cent equals 0.5 per cent was declared null and void.
They admitted that the expenditure multipliers may be up to around 1.7, which means that for every dollar of government spending, the economy produces $1.70 of extra national income. And every dollar of spending cuts would lead to $1.70 (or whatever currency) of lost national income. Under their previous estimates of the multiplier, a dollar of government spending cut out would translate into only 50 cents national income lost (a bad outcome).
The renewed awareness from the arch-austerity merchants that they were wrong and that fiscal policy was, in fact, highly effective, means that the “fiscal consolidation” that they bullied nations into imposing was always going to be highly damaging.
It meant that the dominant obsession not only with fiscal austerity but also with relying on monetary policy to stabilise economies were based on false premises.
And now we have Blanchard and co crawling out of this mess and holding themselves out as knowing all along that fiscal policy with permanent deficits is okay and always was okay.
MMT economists never wavered.
But wannabees like Adam Triggs think their work is:
… compelling, theoretically robust, empirically sound, and accepted by many of the world’s leading economic thinkers.
The track record doesn’t suggest anything of the sort.
The procession of these ridiculous, one-size fits all critiques are not really worth responding to point by point.
The point that this two-part series is exploring is how badly the so-called progressive side of politics has become trapped in the neoliberal tradition.
Each of these criticisms wheel out the same points, which we have been dealing with for 25 years.
But when they come out of Social Democratic or Labour political machines one realises that these economic spokespeople actually believe in the causalities that the mainstream macroeconomics framework asserts.
Causalities that never seem to have any empirical traction or expression.
They use the frames and concepts of this tradition: natural rates of unemployment, Quantity Theory of Money, Loanable Funds doctrine and more.
All of which have been thoroughly discredited in the literature.
They preach progressive policies (sort of) and claim they are anti-austerity, yet build such a neoliberal prison cell for themselves – where running fiscal surpluses is the only ‘credible’ aspiration – that they will never be able to realise those policy ambitions.
They talk about global capital with trepidation and posit how strategically clever they are by duping the capital markets into going along with progressive policies under the pretense of this fiscal rule or another as if that piece of genius will work!
If the capital markets are so dangerous they are hardly going to be duped by some simplistic claim to fiscal discipline!
And then they wonder why they lose elections.
In Part 2 on Monday I will see how this sort of ‘walk the plank that you erect yourself’ strategy plays out within the British Labour Party.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.