As I noted yesterday, last evening I accepted an invitation to speak on a panel…
A nation does not shift to an MMT regime
Earlier this week (April 25, 2023), I saw a Twitter exchange that demonstrated to me two things: (a) some mainstream media commentators are now understanding some of the principles of Modern Monetary Theory (MMT) and relating that knowledge to practical matters that concern them (lens being applied to values); and (b) high profile financial market players still command a platform in the media but have little understanding of what MMT is and consistently issue false statements. A lot of misinformation continues to be circulated about our work. Cursory inferences, usually based on an extrapolation of what the flawed mainstream theories say about policy interventions, are then conflated with assertions about MMT. In other words, MMT is interpreted through the terminology and conceptual structure of a rival paradigm. We reject such inferences and comparisons.
On April 25, 2023, the economics correspondent with the BBC, Andrew Verity published a – long Twitter stream – in response to the recent data release from the Office of National Statistics about the current state of public finances in the UK.
Notable quotes from this stream include:
1. “Before we accept it when we’re told the government ‘can’t afford’ something that might be to the public good we should remind ourselves of facts like the following from the Office for National Statistics this morning:” – he then quoted some ONS data showing that tax revenue in the UK had risen by £88 billion in the 12 months to March 2023.
Taken together, I concluded that Mr. Verity is still operating in the mainstream ‘government budget constraint’ paradigm, which is antithetical to MMT principles.
He implied in the next few Tweets that somehow the extra tax revenue would give the government extra capacity to spend – which is the flag that this his Twitter stream was not an unfolding MMT narrative.
2. “The truth is that whenever a government says it ‘can’t afford’ something, it’s expressing a subjective judgment, dressed up as an economic fact” – it is true that for politicians operating in the fictional world of mainstream macroeconomics, the idea of a ‘budget constraint’ is very real.
They think of it in numbers – deficit/surplus, public debt ratios – and fail to understand that the constraint the government faces and should not violate in any systematic way is economic, in the sense that it relates to the availability of real resources that can be brought into productive use through currency outlays.
Determining how close the economy is to that constraint may, in fact, be a ‘subjective judgement’, given the intrinsic measurement difficulties involved.
All sorts of judgements have to be made about the state of the economy in an imperfect information environment.
The BBC commentator might have more correctly said that government dress their political statements as to what they can or cannot afford as a financial constrain, when, in fact, they know full well there are no financial constraints.
3. “That doesn’t mean a Chancellor can spend whatever he likes (notably there’s never been a female one). But the real constraint is not some arbitrary fiscal target but the risk of inflation” – now we are getting closer to the reality.
If government net spending drives nominal demand growth faster than the productive side of the economy (the real resource availability) can cope with then the likely result will be emerging inflationary pressures.
When there is idle capacity, that likelihood is remote.
Note: the current inflationary episode is not an example of this type of situation despite claims otherwise.
There was massive disruption to supply during the pandemic and certain spending categories (such as hospitality) were ‘closed down’ for a time.
So, while there were sectoral imbalances between goods and services and wild fluctuations in spending patterns, the overall trend rate of growth in, say, consumption spending in the UK (for example, given we are talking about a BBC correspondent) was not elevated.
And since the disruptions, household consumption spending has fallen back to the average growth rate..
When there are declines in supply availability such that we observed in 2020 and 2021, there will be inflationary pressures at the existing growth rates of spending.
One has to then assess whether the supply has permanent contracted or not.
The point is that to then set about causing a collapse in demand to match the ‘temporary’ fall in supply is a poor strategy because it will create new problems (uneployment, lost income, etc) which will then persist beyond the supply recovery.
That is the problem with the current macroeconomic policy strategy that is treating the inflationary pressures as a demand-side event.
4. “What the public too often too meekly accept is this idea that government’s are constrained by the public finances in the same way that households are. This is (insert suitable fruity word)” – fruity words – fictional, dishonest, fantasy.
The more accurate statement is that currency-issuing governments face no ‘public finance’ constraints – any fiscal rules that portend otherwise are purely voluntary and imposed for political and ideological reasons.
5. “As long as we labour under the delusion that financial choices are the same for a government as they are for households or firms, who don’t have a bank or a money printing machine in their front room whenever they need to spend, we’ll be having the wrong conversations” – it is a pity he invoked the ‘printing machine’ imagery to separate the household capacity from that of a currency-issuing government.
Households cannot credit bank accounts with currency amounts whenever they choose.
Currency-issuing governments can and do on a daily basis.
Households use the currency that the government issues.
His Twitter stream was much longer than those quotations above and presented a more optimistic and realistic account of what the choices governments have, subject to my qualifications above.
Enter the mainstream arrogance
Soon after Andrew Verity had tweeted his stream, one Rupert Harrison waded in with his own Tweet (April 25, 2023):
This is a BBC economics journalist expressing fringe economic views (essentially pure MMT) that have been tested to destruction within the last year!
The truth is that fiscal policy is already about as loose as it can sensibly be given future risks around debt sustainability.
Before we consider the content of this intervention, one might to reflect on the competence of the author.
Rupert Harrison works in the financial markets for one of the largest speculating firms.
Prior to that he was the ‘Chief of Staff’ for the Tory Chancellor George Osborne during the worst of the austerity years.
He has one of those stereotyped Tory backgrounds of privilege – Eton, Oxford, and on.
During Obsorne’s time as Chancellor, the media referred to Harrison as the “most important person in Government who you’ve never heard of”.
In early 2013, when it was becoming obvious that the British economy was being substantially damaged by the austerity imposed by Osborne, Harrison told a gathering of senior Tory politicians including the PM and the Chancellor that they had no reason for concern about the “perilous state of Britain’s economy” because by mid-2013 it would be “going gangbusters” (Source).
The British economy shrank 5.8 per cent between March 2008 and December 2009, and by the time the Tories took power in May 2010 it was still 3.9 per cent smaller.
Over the next two years, the economy grew by only 1.9 per cent – creeping pace.
And while by June 2013 it had returned to the March 2008 level, the only reason that growth accelerated modestly (hardly ‘gangbusters’) was because of somewhat of a reversal in the fiscal position as George Osborne started to realise that the economy was not recovering much under the austerity of his first two years of chancellorship.
While some would say Harrison predicted correctly, it was his policy stances (the austerity) that pushed the economy to the brink and a reversal of those stances that helped stem the tide.
When Harrison finally bailed in 2015, the press reported that he had denied “previous reports that he would join a hedge fund” (Source).
Well despite his denials, he moved from the advisory post to the hedge fund in August 2015.
Now, it seems he is an expert on MMT as the above Tweet quote would indicate.
Except he clearly isn’t.
Pure MMT cannot be ‘tested’.
The accuracy of a particular prediction can be ‘tested’.
The point estimate is either close or not and we have statistical diagnostics and tools to assess how close (standard errors, mean squared errors, etc).
The effectiveness of a particular policy or policy stance can be ‘tested’.
We can calibrate the policy effectiveness of an intervention against its stated goals.
So a policy to improve productivity, can be tested against the actual evidence.
But you cannot ‘test’ the veracity of an analytical framework, except for logical consistency.
You can test the inferences that might be drawn from using that framework.
So if a body of work leads to the prediction that cutting A will increase B other things equal, and after you control for the other things, B doesn’t increase when A falls, then one would start wondering about the value of that framework.
There are several dimensions to MMT as a body of work.
First, in the stock-flow tradition of heterodox economics, MMT ensures consistency between flows of things and the stocks they flow into, period to period.
There are no loose ends in the variable structure.
I wrote about that in this blog post – Stock-flow consistent macro models (September 8, 2009).
But that logical consistency is not testable – it just is by definition.
Second, there are accounting relationship inherent in the way in which MMT economists think, such as the use of the sectoral baalnces framework.
One cannot test that because by definition accounting relationships add up and if they don’t then there is measurement error at stake.
We cannot get a different answer to 2 from the sum one and one!
While there is a debate in accounting about the theory of accounting, we will accept, here, that an accounting truism is one that has to be true (add up in this case) by the way we define it. It is not opinion or conjecture – it just has to be.
So the statement: the Government deficit (surplus) equals the Non-government surplus (deficit) dollar-for-dollar is such a truism.
It must be true given it is ground in the accounting framework we all accept as valid.
What that framework allows us to determine is the veracity of statements such as “fiscal surpluses build private wealth”.
As a matter of accounting that cannot be true.
Further, if there is an external deficit, then the government has to be in deficit for the private domestic sector to save overall.
It cannot be any other way.
That relationship might prompt all sorts of interesting enquiries about what adjusts to make that true by definition and whether a particular combination of balances (deficits and surpluses) are desirable and achieving goals.
But that is a separate issue.
Third, there are theoretical aspects to MMT as explained in the blog post – Understanding what the T in MMT involves (September 20, 2018).
If we think national income variations are crucial in bringing the three main macroeconomic sectors into stasis, then we need to understand why?
So why does saving rise with national income?
Why do imports rise with national income?
What is the relationship between household consumption expenditure and GDP?
And so on.
We can measure these relationships but to understand them we need theories.
The theoretical conjectures about the main macroeconomic relationships can obviously be ‘tested’.
There are many theories about household consumption.
Some are better able to deal with the movements in the real world data than others and in that sense they are ‘tested’ against that data.
Taken together, these MMT elements comprise an analytical framework.
But they do not represent a ‘policy’ stance or a set of policy interventions.
Take the case where one person has a progressive lean and wants more public schools, hospitals and transport.
Another person might be more ‘anti-state’ and wants to privatise everything.
Both of them might also have the same understanding of the monetary system and be labelled MMT economists even though their policy stances are diametrically opposed.
They would both know that there are no financial constraints on the currency-issuing government who wanted to invest in public schools, for example.
They would both know that privatisation of public utilities does not provide the government with any extra spending capacity.
But their choice of either policy position would reflect their values – one likes public spaces and the other does not.
They both think their policy position advance their objectives more effectively, even if those objectives are not commensurate.
Obviously, we can ‘test’ the effectiveness of those policy stances in two ways:
1. Against the stated objectives.
2. Against our own objectives.
So under (1), a privatisation advocate might claim it will improve the quality and scope of services and provide them at a reduced cost to consumers, while increasing employment.
All those propositions are testable.
Under (2), opponents of privatisation, who value say equity considerations can assess the policy intervention against inequality indexes etc.
But it would not be MMT that is being ‘tested’ here but rather the logic and design of the policy intervention.
So to say that “(essentially pure MMT) … [has] … been tested to destruction within the last year” is a mindless statement that reflects a deep ignorance of what MMT actually is.
No country ‘shifted’ to an MMT regime in the last year.
A currency-issuing nation does not shift to an MMT regime just because the government lifts government spending or cuts taxes.
We can test whether lifting government spending achieves its aims but that is not testing ‘pure MMT’.
Conclusion
A lot of misinformation continues to be circulated about our work.
Cursory inferences, usually based on an extrapolation of what the flawed mainstream theories say about policy interventions, are then conflated with assertions about MMT.
In other words, MMT is interpreted through the terminology and conceptual structure of a rival paradigm.
We reject such inferences and comparisons.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.
Verity may not (yet) be 100% in tune with MMT, though if he is smart and curious enough, no doubt he’ll get there eventually (why wouldn’t you ?) – but compared to every other BBC economics commentator, he is a breath of fresh air, so there is that.
I attempted to draw his attention to “real resource” constraints being key, in my post on that thread, as a way to head off the inevitable straw man attacks from critics like Harrison, and gratifyingly, Verity responded in agreement, though it was a bit late by then.
Harrison of course knows exactly how it all works – how could he not? – but displays the usual disingenuous and patronising arrogance you would expect from one in his position.
On on…
MMT is the algebra behind a fiat currency,
That said, we have many different types of fiat currencies.
On the top of the currency championship, there is the US dollar.
On the middle side, we have dozens of other currencies.
Let’s focus on one of them: let’s say the turkish lira.
The Turkish state is as MMT enabled as the US state.
Yet, the Turkish state can’t do what the US is doing since 1971, which is “printing” big time, and bigger and bigger…
That happens because there’s little demand for the Turkish Lira and strong demand for the US dollar.
Because the US dollar is the reserve currency everyone is looking for; because international trade is done with the US dollar; because there are sanctions to anyone who don’t respect the US dollar; because there are 800 nato bases to enforce the US dollar.
And so, MMT is not beeing apllied neither in Turkey, neither in the US.
MMT is not about “printing” money.
MMT is akin to credit: the central bank “prints” money to give credit to the economy, so it can expand and build things, like roads, ports, airports, telecomunications networks, whatever, that will make productivity rise and turn cheaper the commodities that the country’s factories manufacture.
Credit to employ the labor force, so that they can build a strong internal market (hello China).
Real output so that the “printing” is offset by the return on the investment.
So that the “printing” was not in vain.
So that the “printing” does not end up bloating the real estate sector, in another bubble, that will burst and lead to the next crisis.
Of course, you can “print” money to buy dollars, so you can import more german cars and more oil to run them, but everything comes with a price, and the Turkish are paying the price already. Not all of them of course. Neither in the US.
The UK is not Turkey: any constraints they choose to impose on themselves are voluntary. The same might be said of Canada or Australia.
In the bottom side of the currencies championship, there are the colonial currencies: two examples, the Franc CFA and the Euro.
Any country that runs on a colonial currency, chooses to turn their economy into a household, dependent on the wages of the “family members” to get by.
There are no households building roads, as everyone knows.
Thanks for that thorough response to the “MMT has been tried and has failed” trope, Bill. It is one that I regularly encounter in the comments section under newspaper columns on the Internet, so having some of these concepts handy will be very helpful.
@eg
Many fly-by commenters conflate MMT with QE, either through ignorance, confusion, or deliberate obfuscation, so I think that’s where much of the allegation (“it didn’t work”) derives from.
But more generally, I have yet to find a single convincing critique of MMT, that doesn’t, when thoroughly examined, base itself on either an accidental or a willful misunderstanding.
For example, the inventor of Murphy’s Monetary Theory is currently tying himself up in pointless knots because he doesn’t seem to be able to appreciate that a tax liability can be imposed *in principle* (eg Kenyan Hut tax), even though it won’t, indeed can’t, be paid immediately, because the govt hasn’t yet spent its currency on employing the requisite labour, or purchasing the required commodities, to so enable that tax payment.
The *eventual* tax, that people know is coming, purposely impels a workforce to earn tax credits, and allows the govt to provision itself, (which is the whole point) – but… that doesn’t prove in any way that “tax precedes spending!!!!”, so undermining one of MMT’s major premises! Obviously, the tax can, and will, only be paid *after* the currency is spent; it’s absolutely not the “Gotcha!” he thinks it is; it’s just another failed broadside.
“Murphy’s Monetary Theory”
Ah, is *that* what it’s about this time‽
i thought that point had been dealt with in the movie _Dr. Strangelove_, when the Russians built a Doomsday Machine that would impartially blow up the world if anybody detonated a nuclear weapon …. and then kept its existence a state secret. Certainly you can’t use tax to make currency important if nobody knows there’s a tax.
I can accept that MMT is an analytical framework and does “not represent a ‘policy’ stance or a set of policy interventions”. It does not specify what objectives a society should have. The problem I always have is that there seems to be a tendency in most (all?) commentary to use MMT to defend leftist objectives and this conflates MMT with socialism. The argument should be not one of defending or attacking MMT but one of defending or attacking a specific set of objectives. Showing how MMT can support one set of objectives does not show that those are the objectives that should be pursued since the analytical argument is that MMT can support any set of objectives.
I have been following MMT for ten years now. It becomes more obvious with time that politicians are either dishonest or deeply incompetent. One example given above, that privatisation does not save public money has been very clear for years. The subsidy given to (say) health companies or transport companies has increased the payout by government. The subsidy to British Rail as one example received a third of the subsidy that the private companies receive, Yet pay for workers has fallen while ticket prices increased. We know from this where government prefers the money to go. The most recent example in the UK was the 37 billion paid out to track and trace companies during the pandemic. Many to incompetent companies who happened to be connected in some way to the Tory party. It is becoming more blatant and corrupt. https://www.independent.co.uk/news/uk/politics/coronavirus-test-trace-dido-harding-report-b1814714.html
@Sergio,
A lot of supporters of MMT are on the left (though not all; I doubt Warren Mosler is??) because, I would imagine, they are seeking a way to change the prevailing neo-liberal “household economics” model, by attempting to show it’s based on myth, not reality – and that understanding that govts are not constrained by spending (but by available real resources) the damage to the ordinary population from almost 50 years of austerity can be reversed.
Those on the right have no incentive whatsoever to change the status quo, because they have hugely benefitted from it for nearly five decades. They have no motivation to test the govt-as-household myth, so accept it unquestioningly. Even if they know it’s a lie, they don’t want anyone else to find that out, lest their opponents use MMT to effect change to the existing paradigm.
That’s probably why you will find that the most vocal proponents of an MMT understanding are on the left and most detractors are on the right.
Of course an MMT understanding doesn’t force a right-wing govt to maximise resources and abandon neoliberal principles either – it might though have to explain to the poor and unemployed why it’s abandoning them them to their fate completely unnecessarily.
Furthermore, if MMT is a descriptive theory, of how the monetary system really works, and we accept that recent mainstream monetary policy moves like QE are not MMT. Then what MMT policy moves should the Australian government make now given current institutional arrangements and real economy supply problems?
From Bill’s post:
“They [politicians operating in the fictional world of mainstream macroeconomics] think of it in numbers – deficit/surplus, public debt ratios – and fail to understand that the constraint the government faces and should not violate in any systematic way is economic, in the sense that it relates to the availability of real resources that can be brought into productive use through currency outlays.
If government net spending drives nominal demand growth faster than the productive side of the economy (the real resource availability) can cope with then the likely result will be emerging inflationary pressures.
When there is idle capacity, that likelihood is remote.”
A few comments based on those statements (mainly):
1. Supplying money into the economy, e.g. by rent assistance, will only delay the resolution of, or at worse sustain or increase, the existing supply issue in the rental and perhaps other parts of the economy through flow-on effects.
2. The government cannot know what is happening in the economy at the micro level only at the macro level (the economic calculation problem).
3. Inflation and money supply are one of those macro-measurements, and that is the best a government can ever do.
4. An argument might be that the micro-level is best left to markets
5. A government can never control all supply chains or all parts of any single supply chain (labour, materials, services)
6. There is an inherent power problem if the government is both a player and the scorekeeper/referee. If the government wants to be one of the players then it is probably best that the scorekeeper/referee is an independent central bank.
7. There may be reasons other than money reasons why liberals have different objectives from socialists.
8. Does MMT ignore the economic calculation problem?
8. Is MMT really economically, institutionally and politically neutral?
9. Does a nation in fact have to shift to MMT?
Sergio, even by mainstrean economics your enumerated list of points is hard to believe.
Point number 1- you seem to suggest that more spending to pay for housing will not lead to any increase in in supplying housing. I don’t know how you come up with this conclusion. It makes little sense to me.
Points 2,3,4,5 all seemed based on a feeling that all the people the government employs are incompetent. Well they aren’t all incompetent.
6 is your personal preference perhaps, but I would rather have a chance to vote in or out an elected representative.
7, 8 and the other 8, I don’t have strong opinions about.
9- to me MMT implies that a currency issuing government that is able to tax effectively is already doing what MMT describes- there is no shift involved. That’s just what is happening already.
It is ironic, that the financial market participants, who are always adamant about the importance of seeking knowledge and attaining greater wisdom so as to not make decisions “based on emotions”, are so >emotionally invested< in "anti-collectivism" that their knowledge seeking succumbs to nothing more than confirmation bias and/or sunk cost fallacy. Their faith is so strong in the rival that they don't even recognise that their worshipping, not following….I fear they are in need of a blood transfusion because they have lost their common senses
MrShigemitsu,
The “valid critiques” are that MMT does not take into account the power of ~~gunboat~~ financial diplomacy of the reserve currency or deal with the falling rate of profit. No, unlike monetarism, it isn’t a theory of everything, but it allows the space to discuss it. You can fill it, it’s ok.
Sergio,
You’re assuming a commodity market with reasonably sized players, not a necessarily limited pool with suppliers tacitly colluding to keep prices high. A referee must collapse the unstable balance that it is, in fact, supporting with previously made up rules – there’s no law of nature protecting their property and means of production against a much larger hungry mob.
The market is great when the right conditions apply; it’s inhuman when they don’t, and they inevitably don’t. Assistance is helping the system stay afloat, but it’s only calling attention that it doesn’t just work, and can’t go on forever.
A few more comments to clarify my concerns:
1. The housing market problems are problems with the supply of housing for rent and of housing to buy. That is the real resource problem with the housing market. Subsidising rents or home loans will do nothing to fix that.
2. Government supply decisions made in a market economy means the government and business compete for resources (labour, services, materials). In a situation where there are resource constraints then inflation will result or the government will have to prevent/discourage/reduce business demand for those resources.
3. The government is not always in the best position (if ever) to make resource allocation decisions. This is the basis of the economic calculation problem (see https://econreview.berkeley.edu/socialisms-economic-calculation-problem/)
4. If a government wants to control supply then it should own the greater part of the means of production, distribution and exchange i.e. shift to socialism, and that requires the resolution of the economic calculation problem. That may be the shift required and I think MMT pushes in that direction.
@Sergio,
The best times for an ordinary person to be living in my country, the UK, were during the “post-war settlement” decades, when the Govt was heavily involved in resource allocation.
Plentiful public housing available for low rent; plentiful jobs, many in nationalised industries and services; free higher education; a growing and well-provisioned National Health Service; food banks unknown; and a fair standard of living possible even on a single wage.
The worst of times, at least in the last 75 years, have been the recent period since 2010, and the continuation of Thatcherite, market-driven, laissez-faire austerity by a succession of hands-off Tory Coalition and Tory governments.
Affordable public rented housing effectively non-existent, private-sector rents extortionate, gig economy and minimum wage jobs predominating, a huge precariat with massive growth of child and family poverty including food bank use in the millions, a deliberate policy of under-provisioning the NHS resulting in record 7-year waiting lists, staff shedding and a 140K vacancy recruitment crisis, a similar crisis in elderly care, deliberate real cuts to public sector wages, a dual-income now all but essential just for subsistence, but with a childcare unaffordability crisis to match.
The nation is crying out for activist government, and massive increases in public spending, to address all of these problems, but none are likely to be forthcoming.
So forgive me if I remain unconvinced of the market’s superior ability to provide, over activist government intervention of the sort we had during the 30-year post-war period.
Sergio,
it does not require socialism to force the excessive owned houses into the market, prevent bidding escalation, and kill airbnb licenses.
In one way, you are correct: the only option within the market would be for government to build them, because the market is completely uninterested in the low margins of supplying those it already doesn’t pay. I failed to see that in the liberalism brochure, but I should’ve been smarter.