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.
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On April 25, 2023, the economics correspondent with the BBC, Andrew Verity published a – long Twitter stream<\/a> – in response to the recent data release from the Office of National Statistics about the current state of public finances in the UK.<\/p>\n Notable quotes from this stream include:<\/p>\n 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 \u00a388 billion in the 12 months to March 2023.<\/p>\n Taken together, I concluded that Mr. Verity is still operating in the mainstream ‘government budget constraint’ paradigm, which is antithetical to MMT principles.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n Determining how close the economy is to that constraint may, in fact, be a ‘subjective judgement’, given the intrinsic measurement difficulties involved.<\/p>\n All sorts of judgements have to be made about the state of the economy in an imperfect information environment.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n When there is idle capacity, that likelihood is remote.<\/p>\n Note: the current inflationary episode is not an example of this type of situation despite claims otherwise.<\/p>\n There was massive disruption to supply during the pandemic and certain spending categories (such as hospitality) were ‘closed down’ for a time.<\/p>\n 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.<\/p>\n And since the disruptions, household consumption spending has fallen back to the average growth rate..<\/p>\n 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.<\/p>\n One has to then assess whether the supply has permanent contracted or not.<\/p>\n 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.<\/p>\n That is the problem with the current macroeconomic policy strategy that is treating the inflationary pressures as a demand-side event.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n Households cannot credit bank accounts with currency amounts whenever they choose.<\/p>\n Currency-issuing governments can and do<\/strong> on a daily basis.<\/p>\n Households use the currency that the government issues.<\/p>\n 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.<\/p>\n Soon after Andrew Verity had tweeted his stream, one Rupert Harrison waded in with his own Tweet (April 25, 2023):<\/p>\n \nThis is a BBC economics journalist expressing fringe economic views (essentially pure MMT) that have been tested to destruction within the last year!<\/p>\n The truth is that fiscal policy is already about as loose as it can sensibly be given future risks around debt sustainability.\n<\/p><\/blockquote>\n Before we consider the content of this intervention, one might to reflect on the competence of the author.<\/p>\n Rupert Harrison works in the financial markets for one of the largest speculating firms.<\/p>\n Prior to that he was the ‘Chief of Staff’ for the Tory Chancellor George Osborne during the worst of the austerity years.<\/p>\n He has one of those stereotyped Tory backgrounds of privilege – Eton, Oxford, and on.<\/p>\n During Obsorne’s time as Chancellor, the media referred to Harrison as the “most important person in Government who you’ve never heard of”.<\/p>\n 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<\/a>).<\/p>\n 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.<\/p>\n Over the next two years, the economy grew by only 1.9 per cent – creeping pace.<\/p>\n 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.<\/p>\n 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.<\/p>\n When Harrison finally bailed in 2015, the press reported that he had denied “previous reports that he would join a hedge fund” (Source<\/a>).<\/p>\n Well despite his denials, he moved from the advisory post to the hedge fund in August 2015.<\/p>\n Now, it seems he is an expert on MMT as the above Tweet quote would indicate.<\/p>\n Except he clearly isn’t.<\/p>\n Pure MMT cannot be ‘tested’.<\/p>\n The accuracy of a particular prediction can be ‘tested’.<\/p>\n 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).<\/p>\n The effectiveness of a particular policy or policy stance can be ‘tested’.<\/p>\n We can calibrate the policy effectiveness of an intervention against its stated goals.<\/p>\n So a policy to improve productivity, can be tested against the actual evidence.<\/p>\n But you cannot ‘test’ the veracity of an analytical framework, except for logical consistency.<\/p>\n You can test the inferences that might be drawn from using that framework.<\/p>\n 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.<\/p>\n There are several dimensions to MMT as a body of work.<\/p>\n 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.<\/p>\n There are no loose ends in the variable structure.<\/p>\nEnter the mainstream arrogance<\/h2>\n