Modern Monetary Theory, basically it's a preposterous idea that central banks and governments can just willy nilly print money to their hearts content to do anything they want without ever having or worrying about inflation or any negative side effects whatever.
In practice politicians are happy to cite MMT as justification for increasing spending on their favored programs, and then conveniently forget about it when the time comes to raise taxes. So we end up with an exploding national debt. That can appear to "work" for many years, but eventually the system will hit a tipping point that results in either hyperinflation or (more likely) a debt default. It's impossible to predict when that crisis will hit but by that time most of the politicians responsible for causing the problem will be out of office anyway and we won't be able to hold them accountable.
> eventually the system will hit a tipping point that results in either hyperinflation or (more likely) a debt default.
Neither of which are even close to occurring in the United States.
Politicians are going to politician. Just look at the “dynamic scoring” models republicans apply to tax cuts. It isn’t the job of economic theory to ideologically reign in politicians, it’s job is to model to world accurately. I haven’t read enough into MMT to actually assess that for myself, but it’s ridiculous to assert that it’s flat out wrong because politicians run deficits (which they have done for decades before MMT even came into existence)
I didn't claim that MMT is wrong necessarily, just that trying to apply that theory will in practice accelerate the arrival of an eventual fiscal crisis. We aren't close to such a crisis, but we are getting closer every year. Based on what has happened in other countries I expect the crisis will probably hit in a couple decades once the national debt to GDP ratio reaches about 250%, but many factors could change that timeline.
TFA asserts that MMT lacks a model, and instead is a collection of ideological policies with a facade of science. If true, that puts it outside the above definition of economic theory as well.
The core of MMT’s story is that money creation begins and ends with government spending and taxes respectively. Beyond that I am unsure as to how much their theory differs from mainstream economic theory.
At the end of the day they seem very much rooted in the question of wether there are productive economic assets that can be utilized. Yes => the government should spend money to use them, don’t worry about deficits, No => either spend less (create less demand for resources) or tax more (remove demand from somewhere else). In the end, there’s no reason assets should be left to no productive use, by their estimation.
MMT claims that money creation happens when the government spends money, and it is “destroyed” when the government “taxes it back out”.
This differs from traditional theory wherein the banking sector, specifically central banks, play the primary role in managing the money supply.
Proponents of MMT also advocate spending to maintain full employment, to the point when inflation occurs, at which point it becomes necessary to cut deficits.
Note that this policy prescription is only the case when a country actually controls their own currency.
Also, anyone who says things like “it means money printer go brrr” likely has spent close to zero time actually attempting to understand even basic facts about MMT, and likely gained anything they know about MMT from memes or shallow criticism.
> Proponents of MMT also advocate spending to maintain full employment, to the point when inflation occurs, at which point it becomes necessary to cut deficits.
So do Keynesians, relying on the Phillips Curve, which has to be one of the most embarrassing, historically invalidated concepts of all time.
> Also, anyone who says things like “it means money printer go brrr” likely has spent close to zero time actually attempting to understand even basic facts about MMT, and likely gained anything they know about MMT from memes or shallow criticism.
Waves macro finance degree here. MMT, magic monetary theory, is very much "money printer go brrrr" in practice. They rely on a qualitative understanding of inflation like the Austrians as opposed to a CPI quantitative understanding. Where Austrians see nominal credit expansion as money creation, MMT proponents see credit expansion as being able to be cancelled out via taxation at the aggregate level. It's argumentation via definition.
MMT also is of the "heads I win tails you lose" style of argumentation, because it pretends that state extraction of resources via taxes nets out the impact of state extraction of resources via inflation. Implicit in the (false) argument of no net impact on inflation is that those taxes will be transferred to deserving members of society via fiscal transfer payments, and therefore CPI-style inflation is mitigated. It's monetary communism and a philosophy promoted by charlatans.
> They rely on a qualitative understanding of inflation like the Austrians as opposed to a CPI quantitative understanding.
Perhaps I’ve missed this, but what the hell is a “qualitative” understanding of inflation, and where have MMTer argued this?
Edit: after doing some basic searching, it seems that MMT’s primary critique is that CPI is a poor measure of overall inflation, and that it shouldn’t be a primary target of fed policy, because monetary policy mechanisms don’t have a very direct impact on moving the index.
Thanks for following up, but I'm not sure that you've put the issue to bed. Do MMT types use some other quantitative understanding of inflation? If not, it seems like main thrust of GP's criticism ("they rely on a qualitative understanding of inflation...as opposed to a... quantitative understanding") stands.
Unfortunately it is really challenging to know what the field as a whole says without undertaking some serious lit. review, but from my understanding their main issue with CPI isn’t that you shouldn’t attempt to understand inflation from a quantitative perspective, rather, CPI itself is but one (imperfect) measure of inflation. The “true” value of inflation isn’t perfectly observable, and further, from a policy making perspective, because of its limitations, CPI shouldn’t be a be all end all target. One should look at other measures, such as economic growth and unemployment (inflation after all, occurs when the money supply grows faster than productive capacity). Perhaps that’s “qualitative” by some definition, but it seems to be that it’s more just a case of goodhart’s law.
> Proponents of MMT also advocate spending to maintain full employment, to the point when inflation occurs, at which point it becomes necessary to cut deficits.
This is basically the same conclusion as Keynesianism or even Fiscal Theory. The difference is these other theories actually care about when inflation will occur. Meanwhile MMT kind of handwaves it away with "we'll know when we get there". And it only took about 5 feet out the driveway to find it.
> Also, anyone who says things like “it means money printer go brrr” likely has spent close to zero time actually attempting to understand even basic facts about MMT, and likely gained anything they know about MMT from memes or shallow criticism.
It doesn't help that most vocal proponents of MMT to tend to treat it like an infinite money glitch hack of the economy. And to be fair, the only insight MMT provides over more mainstream economic models is that deficit spending could be much higher than it is.
MMT is a philosophy or branch of economics. The Bretton Woods System was an actual binding set of resolutions (based on its own philosophies). They are not related or even sequential in any way.
Also, Bretton Woods was very much covered in my high school history classes.
Isn't it pretty obvious at this point? The NYT likes MMT because MMT is commonly used as a justification for massive deficit spending (even if technically MMT doesn't advocate for this under certain conditions). The NYT wants deficit spending because they want to ram through a bunch of progressive grab-bag social programs, all to achieve racial harmony, or a permanent underclass, or equity or something. All the NYT does at this point is put out blatant spin articles to try and gaslight you into supporting the equity agenda. I respect Noah Smith but I think responding to the NYT is at this point beneath him.
You really ought to read Stephanie Kelton's very-accessible book, The Deficit Myth.
What we call "money" is, at bottom, simply a set of widely-distributed tokens that we use in lieu of centralized bookkeeping. When you accept any kind of money, including gold, in return for goods given or services rendered, you're trusting that you can in turn use the money in the future to acquire goods or services yourself, in a quantity you find acceptable. As long as price increases remain "reasonable" (EDIT: for whatever value of reasonable is politically feasible), it really doesn't matter how much money is in the system.
The central thesis of MMT, as I understand it, is something like this: As long as the economy has the capacity to produce more goods and services than it is currently doing, AND there are people who want to buy those additional goods and services (i.e., demand exists), then it makes sense for the government to put money in the hands of those people, so that they can buy the goods and services and thus keep workers and assets productively employed — and, ideally, increase our productive capacity still further, in a virtuous cycle.
Chapter 3 of The Deficit Myth is online at https://www.milkenreview.org/articles/the-deficit-myth — excerpt: "When I arrived in Washington in 2015, I was the only staffer on the U.S. Senate Budget Committee who looked at the world through the lens of a currency issuer. I knew the federal government wasn’t like a household or a private business. I knew Uncle Sam could never run out of money. I knew that inflation, rather than insolvency, was the relevant punishment for overspending. I also knew I was alone in this thinking."
This is all well and good, but it largely describes standard economic models - that reasonable inflation is generally good.
MMT's only unique proposition was that the upper bound of money creation was much higher than previously thought. MMT kind of promised an infinite money glitch hack of the economy, and the reality has been closer to a bit of loose change.
Also, Kelton et al have severely underrated how much people hate inflation. So it's well enough to say we can pay for a ton of government programs with a bit of inflation, but people are going to hate, hate, hate it.
I don't really think it's fair to just say right wing media is the only reason people hate inflation. I certainly hate it, because well for one, the CPI is bullshit and doesn't include key items such as college tuition and housing prices. It's a common refrain in my generation that nobody will be able to afford a house, and you hear it on the right and the left.
From Kelton in April 2021: "The key to responsibly spending vast sums of money lies in carefully managing the economy’s real productive limitations. Just as my son’s Lego projects are limited by the amount of bricks we have bought for him, we can’t squeeze more goods and services out of our economy once we’ve made use of all available resources. ... Depending on how big Congress ultimately decides to go on infrastructure, and how quickly, it may need to unleash a whole suite of inflation-dampening policies along the way — all of it unrelated to deficit neutrality." (Emphasis added.)
Is the polemical tone really necessary here? You can disagree with MMT without resorting to vitriol and accusations of the Times wanting an "equity agenda." Whatever that means.
> Is the polemical tone really necessary here? You can disagree with MMT without resorting to vitriol and accusations of the Times wanting an "equity agenda." Whatever that means.
It is necessary. MMT an immoral economic theory used to justify a very specific set of policies that would not otherwise be feasible. You'd have a very difficult time selling an enormous expansion of the state if individual citizens had to directly foot the bill through taxes, so instead you convince them that you can just print the money at no cost to anyone, the ultimate free lunch. MMT is by its very nature political since it involves transferring a large amount of wealth from individuals to the state (and bankers) via inflation, which is an inherently political decision.
At least they know to inform readers what MMT stands for. Not every viewer does and abbreviations and acronyms often conflict across different industries.
I understand that MMT is controversial. And I can’t quite bring myself to believe that MMT (magic money tree?) is possible. But I also watched the US and European governments use quantitative easing to bail out the financial sector and then again rescue the economy during Covid.
Was QE not MMT in action? I’d appreciate enlightenment from someone who understands better.
Did the inflation happen because there was no tax applied? From what I can understand (difficult as this space has been so politicized), money creation requires taxation in order to avoid inflation. But taxation is way more problematic than money creation, and so I wonder was the tool only half applied?
QE is central banks liquidising private assets to improve the balance sheets of large businesses. This gives them access to more capital and in theory allows them to invest more. It is controversial since the benefits of it are hard to measure. Since the money is not guaranteed to be spent we might expect it to be less inflationary than conventional government stimulus.
Proponents of MMT are often arguing for conventional government stimulus. The basic idea is that the shape of the globalised economy is such that we have more deflationary pressures than were observed in the 20th century when standard monetary theory was conceived. Typically proponents argue that the government can assume a larger role in the consumer economy without adding inflationary pressure.
Thanks for this answer. My understanding is that GFC QE created money to buy back gilts, substituting cash for other assets on bank balance sheets. The element of choice here is what seems to make it a species of MMT - the creation of money can be used for any purpose. I’m not arguing the point here - just trying to work it out. To my utter frustration, and like so many things, the concept MMT has been politicized, and it’s the usual suspects shouting at each other and creating so much noise, it’s difficult to discern and evaluate the signal.
MMT, stated simply, is an independent reinvention of what sensible macroeconomists call the fiscal theory of the price level (FTPL). (Noahpinion's excellent blogpost mentions "fiscal dominance", which is shorthand for the same general idea.) It's a nice way of looking at things like hyperinflation in Zimbabwe or Weimar Germany. But it has little worthwhile to add to "mainstream" economics when it comes to describing reasonably stable, well-behaved economies like the United States. Indeed, its "alternative", unintuitive interpretations of existing mechanisms can be unfamiliar and cause confusion. This is basically what's happening in that NYT article: proponents deluding themselves into believing things that don't really stand up to serious scrutiny.
Some of the related ideas, like the "job guarantee" as what amounts to a supply-side intervention, show a similar "twist" on labor economics: it's hard to tell whether they're interesting or new, but if they're interesting they're not new (you can achieve the same effect with an EITC-like wage subsidy), and if they're new they're not interesting.
There's been a bit of a brouhaha about this whole thing on Twitter. Emily Peck's article in Axios https://www.axios.com/male-economists-are-freaking-out-over-... characterizes that as "male economists piling on against a female economist and a female journalist" and one can't fault her for that - the optics are quite bad given that such harsh criticism is involved, and Twitter being Twitter does not improve things. But also, we're all supposed to be in favor of good science, so it's also bad when the NYT doesn't bother to report on what more mainstream opinion says, or put more unusual points of view in the right context. It's clear enough that this has made some people upset.
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