Have you recently been hearing about Modern Monetary Theory (MMT)?
It’s everywhere!
And rightly so – it raises some serious and pertinent issues.
MMT
I’ve been getting absorbed with MMT lately. With all the fiscal stimulus that has been introduced I felt I needed to understand more about the Federal Deficit.
Is it important?
Should I be concerned that it’s rising so much, and so fast?
Can we “afford” the stimulus that seems necessary to avoid a complete depression?
I needed to know more and started watching videos and reading articles about MMT.
I wasn’t expecting to have my mind blown – but I was. One video of an economist Stephanie Kelton completely changed how I saw these issues.
So I was very excited when I obtained a review copy of her upcoming book “The Deficit Myth“. Look out for that review in an upcoming post!
However to give you a quick primer on MMT I’ve departed from the standard blog format (oooh!) and done a quick video – Modern Monetary Theory (MMT) In Under Two Minutes.
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What do you think about MMT - comment below!
Author Bio: I started actuary on FIRE as I did not see any actuaries taking a prominent role in the personal finance area and wanted to remedy a shortage of actuary jokes and write for those that appreciate rigor with fancy charts. In my regular day job I advise corporate US on investment and retirement strategies. I’m a qualified actuary, investment adviser and have a PhD in mathematics and reserve the right to have the occasional math post.
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Only, it doesn’t work. It will create mountains of debt. See Japan: decades of stagnation and low inflation or even deflation.
You’re trolling me right?
‘Mountains of debt’ – a large proportion of which is held by the Japanese Govt. Yes, they’ve chosen to issue interest bearing Yen, as compared to just issuing Yen bills, and they could monetize this “debt” in an instant with no ill effects. And despite neoliberal warnings, this huge increase in money supply (or debt if you wish to call it that) has still not caused rampant inflation and rising interest rates.
Perhaps you’re concerned about their debt servicing costs? Given negative rates they are actually making money on their debt, and in any case as the sole provider of the Yen they are free to control the rate at which they can borrow. We’ve seen that with their yield curve control and a willingness to buy unlimited JGB. Or maybe you’re concerned about “bond vigilantes”. But Japan is not Greece or Argentina that have not been borrowing in their sovereign currency.
Actually what Japan points to is confirmation that many of the traditional warnings from deficit hawks around sovereign government debt levels is unfounded and won’t cause rampant inflation and untenable debt servicing costs.
Japan is indeed a good example that mountains of debt can cause stagnation and deflation. And it’s completely consistent with classical economics: Ricardian Equivalence!
MMT is not a new, better, alternative way to think about economics. MMT was developed by people who never even bothered to study and understand modern macroeconomics. Neo-classical and neo-Keynesian economists are unified in rejecting MMT. MMT is not even science at all. It starts with a dogma (“more government is good”) and then reverse-engineers a “theory” to accommodate that. The end justifies the means. MMT is not science, it’s not a theory, because nothing is falsifiable. MMT is the economics equivalent of “creationism”
Very different from the actual science of economics, where you first develop a (quantitative) model, test it and then – afterwards!!! – draw policy conclusions from models. But with an open mind and humbleness, that models are incomplete representations of reality.
That’s my honest opinion. 27 years of experience in economics, Ph.D. in economics, taking classes from Nobel-winning professors (Ed Prescott – 2004 Nobel, Leonid Hurwicz – 2007 Nobel), numerous peer-reviewed published papers and teaching economics at all levels from intro to microeconomics to Ph.D.-level macroeconomics.
Ricardian equivalence – there are plenty of refutations of this if deficit spending is centered around targeted social spending. Personally I’m skeptical of any dogma that asserts that increased Government austerity will be met with more private spending (due to individuals’ relief at a future lower future tax burden). That seems to be backward to me.
Japan – has seen decently increasing real GDP, a much more equal wealth distribution than the US, longer life expectancies, lower incidence of poverty, far better public infrastructure, higher educational attainment etc. The debt is irrelevant. If Japan is an indictment of MMT then it feel pretty weak.
“are unified in rejecting MMT” – it’s not universally embraced by economists for sure, and quite contentious. But that’s a mis-characterization to say it’s universally rejected.
“It starts with a dogma” – No. It starts with an observation about how the economy actually works. Not a model, but how it works in practice.
MMT founder Warren Mosler a hedge fund trader spotted a risk-free trade with Italian bonds (pre-Euro). Most investors were fearing Govt default. Mosler met with the Italian Govt to confirm they would simply print Lira to meet good any obligations and over many years he made $100m+ for his investors. That’s not a dogma or a model, that’s a confirmation with hard cash that this is how the world works.
“more government is good” – because what? Has small government has been so successful in the US? The fact is that the economy is running woefully under its capacity, and that was true before COVID. There is mass unemployment, child poverty, embarrassingly bad infrastructure, no level of basic healthcare accessible to all and a huge amount of wealth locked up in the hands of a few that is not being utilized. The job of the economy is to allocate real resources to the people, it’s not to balance a meaningless budget. A Government is not like a household. Having a monopoly on the currency allows it to think wider about balancing our resources. To miss that observation is to miss the opportunity we have.
“you first develop a (quantitative) model” – you’re right here, MMT is not a model dreamed up by academics and then ‘tested’. MMT is a description of how things actually work by those who actually operate fiscal and monetary policy. Greenspan under oath said “There’s nothing to prevent the federal government from creating as much money as it wants and paying it to someone”. (And let’s not forget Greenspan was the biggest opponent of big government so this must have pained him to say.) Or take Bernanke “It’s not taxpayer money. We simply use the computer to mark up the size of the account”.
You’re right – these are not models. This is how the Federal Government actually enacts fiscal policy. They don’t tax or borrow and then spend. They just spend. They may choose to take some of the money back in taxes or convert some of the money into interest bearing Treasury bonds, but that does not stop spending now on Republican tax cuts, or COVID relief, or whatever. The money is there and the only restriction is inflation and real resources.
“27 years of experience in economics” – this is a blog for ideas that help people optimize their financial lives with the occasional post on bigger ideas like MMT. Everyone is welcome to read, comment and engage irrespective of their background and knowledge level. My goal is to float all the boats on a higher tide not browbeat my readers.
I can’t get on board with MMT. For the record, while no where near as experienced as ERN, I hold a minor in economics.
To me the MMT argument sounds like a bunch of BS cooked up by someone that wants an excuse to jack up spending to no end. It ignores all the past examples where printing infinite money ultimately resulted in massive inflation or stagnation. It largely ignored events like the Weimar Republic or the numerous currency collapses in places like Argentina. Just because we haven’t hit a tipping point in debt levels yet doesn’t mean there is not one.
I can’t get on board with MMT – I agree it’s a head-wrecker. I found that MMT seemed to be saying that everything I had been taught and told about Federal deficits is basically wrong. That’s a hard concept to accept. But it has energized me to look into this.
excuse to jack up spending to no end – To no end? You believe that everything is going so great in our country that there is nothing that could benefit by the injection of some additional capital?
Weimar Republic – There were some pretty extreme circumstances here. Massive war reparations after Versailles that demanded payments in gold or foreign currency. Then France and Belgium occupied Germany’s main industrial power-house the Ruhr valley. When you combine money printing, obligations in a currency you do not control and having your supply chopped off at the knees then hyper-inflation will result.
How is this like the situation we have in the US?
Argentina – The mistake Argentina and Greece made was borrowing in a currency they did not control (USD and EUR). MMT applies to those countries that have a very high degree of monetary sovereignty. Like the US, UK, Japan, Canada etc…
tipping point in debt levels – I agree there may be a tipping point we face in the debt. But the level of debt is not the measure of that. The measure of the tipping point is inflation control and the level of real resources in the economy. The debt is simply an accounting measure that simply records how much the Govt has spent into the private sector and not taxed back.
I hold a minor in economics – Good to know :), but honestly nobody needs to claim any kind of authority in order to comment here. I’m welcoming all who are keen to learn more and question some of the most important issues we face.
As always thanks for reading FTF.
Too many nonsensical claims to address all in detail. It’s your blog, you can write what you want. I’ll just leave it at that.
Huh? You walk into my house, take a big shit on the floor and walk off without being willing to debate anything?
27 years in economics and numerous peer reviewed papers clearly taught you little about how to read the room on the nature of debate and discourse that’s particularly required at this time.
OK, attempt 2: You said it yourself:
” you’re right here, MMT is not a model dreamed up by academics and then ‘tested’.”
Hence, it’s not a quantitative model in an inherently quantitative discipline. As such, the “theory” cannot be tested, it cannot be falsified, it cannot be compared in a proper horse race against traditional economics. It’s not a theory, it’s not science. MMT is a dogma, dreamed up by non-scientists and as some of your remarks here show, anyone can dream up all the beautiful things that MMT will cure in a complete intellectual and academic vacuum: MMT will allegedly increase life expectancy and lower inequality, go figure. I’m just waiting for people to claim that MMT will cure cancer and increase the number of sunshine hours.
Hence, MMT is a complete non-item in economics. It’s not in any economics text book I know, it’s not taught in any economics class, I’m not aware of anyone writing a PhD thesis on this, etc. In a different context we shut down the discussion when “97% of the scientists agree”. But in economics, 100% of the scientists agree that MMT is mumbo-jumbo. Only non-economists like MMT. It’s the equivalent of the people in late-night infomercials claiming that traditional medicine is bad and you should treat cancer with herbal teas.
Sorry to hurt your feelings because you seem intrigued by and invested in this. If someone else had written this I would have just ignored it and hit the “unsubscribe button”. But since I like you and your blog I took the time to give you my brutally honest feedback. Honesty and integrity is “particularly required at this time.” Hope we can still be blogging buddies despite our disagreement on this.
You’re over-selling economics as a quantitative science with a rigorous process of hypothesis falsification. It’s a social science. Economics sits on the shifting sands of technological and demographic changes. A physics or mathematics textbook from 100 years ago will have broadly the same results and conclusions as today since they are based on an immutable reality. Economics on the other hand will have different solutions and theories based on the time. A barter system, gold standard, or fiat money, has made more or less sense at different points in time.
I’m sure there was no chapter in Economics textbooks on Quantitative Easing when Japan first began their program. And similarly I expect it was not taught in classes when the Fed started QE during the GFC.
You know what else is not taught, or doesn’t have a chapter in a textbook? How to revitalize the economy from an enforced demand cut from a global pandemic accompanied by the fastest drop in markets, the lowest point in oil, the entire yield curve under 1% and the largest rise in unemployment. Your textbook has no playbook for that, and so you’re giving me little comfort on that front.
The fact is we are now living MMT. We are seeing very large fiscal stimulus and a rapid rise in federal deficits with no appetite to match that deficit spending with taxation. There is an extremely valid debate around the nature of these deficits and whether they actually matter. You can call it MMT or not, but the cashflows are indisputably described correctly by MMT. I would say this debate is of interest to 100% of economists.
First, before we run off too far with MMT and what I DON’T like, let me specify what I consider good policy. We may not even be that far apart:
Monetary policy: low rates and QE in response to the GFC were appropriate. As was undoing QE over the last few years (letting principal repayments run off) and the gradual rise in rates until 2018. I also support the zero rates again right now as a hedge. But once the economy picks up again, I hope that we head back toward 3% in the FFR again.
Fiscal policy: I’m generally in favor of counter-cyclical fiscal policy. An economic slowdown would be a good time to start major infrastructure projects. Massive, unproductive spending, expansion of entitlements, etc. are not a good idea, though. Neither in recessions nor in expansions.
“You’re over-selling economics as a quantitative science with a rigorous process of hypothesis falsification. It’s a social science.”
You’re right. The economics that YOU have been exposed to is all non-quantitative; a little bit of economic intuition, supply-demand diagrams, etc. But that doesn’t mean that economics in general is not a science. It’s very mathematical and quantitative. You cannot get a PhD in econ at a quality institution without serious modeling and/or quantitative analysis. The fact that it’s evolving is not a denial of science. Quite the opposite, Nobel Prizes have been awarded to economists pointing out the social aspect and the human and strategic interactions of agents that make studying economics actually a lot harder than Physics. Electrons don’t have a mind. Electrons don’t change their behavior after scientists study and figure out their behavior.
“I’m sure there was no chapter in Economics textbooks on Quantitative Easing when Japan first began their program. “
In the context of a simple growth model it was pretty clear back then that you can’t spend yourself out of a recession. Now, was there a textbook in 1989 that had a solution to the 1990s problem in Japan? Probably not. And here’s the difference between you and me. You the non-scientist, me the scientist. You face a problem, you look for a ready-made solution in a book. Like a craftsman. I don’t derive my conclusions from “a textbook” but rather I think like a scientist in terms of models and theories. What model would be applicable to draw conclusions in this context? Is there a model already available? Do I still have to add features to that model? Is this something that can be characterized analytically or does it require numerical techniques? And so on.
So, the irony here: all your criticism of economics is actually the – pardon the pun – TEXTBOOK EXAMPLE of projection. You accuse me of all the shortcomings you and the MMT folks have yourself. MMT is a bunch of anti-science, social justice warrior grievance mongering. No science-minded person should take this seriously.
“The fact is we are now living MMT”
Never denied it. That doesn’t mean MMT is a good idea. The fact that (in the best case) clueless and (in the worst case) corrupt and power-hungry politicians push this seems to be a great endorsement for MMT in your eyes. In my eyes, I’m horrified about that. Looking at the sclerotic growth in Japan and Europe makes me worried. I hope we don’t fall for this nonsense in the U.S.
You’ve displayed the worst kind of intellectual gatekeeping. By over-complicating and hiding behind academic hegemony you’re trying to disenfranchise my readers from a real debate. MMT makes some very simple observations – like public sector deficits are private sector surpluses. These are important and insightful observation for people as we head towards Nov 3rd. We will all be bombarded by hysterical headlines from the left and right and one small contribution I can make to my readers is to provide an accurate description of how fiscal flows, trade flows and monetary policy is actually enacted. Whether those policies will achieve what we all want is up for debate; but simply stating how these operations work through an MMT lens is not up for debate.
When I saw Stephanie Kelton (who your readers should know is an advisor to Bernie Sanders, and a professor at Stony Brook. She is not taken seriously by main stream economic thinkers and is considered a fringe, radical economist). I nearly stopped reading. But for the purposes of intellectual inquiry I pressed on, as difficult as that was.
I don’t think you are really understanding the issues here, and why exactly you have not seen rampant inflation in Japan. ERN has done a good job of laying out the issues so I wont elaborate on what has already been covered. But the one issue you are not looking at is the velocity of money which has been steadily declining across the developed world. An increase in velocity would lead to an increase in inflationary pressure which can have a significant effect on the real economy. So the notion that MMT is the answer and has no consequences is just wrong.
The other contention MMT makes that debt does not matter, which is really at the core of this MMT theory, goes against the academic literature that has studied the subject in real life debt episodes.
In 2010, Carmen M. Reinhart and Kenneth S. Rogoff, concluded in Growth in a Time of Debt that “across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes.”(p.577)
Reinhart and Rogoff, along with Vincent R. Reinhart, authored Debt Overhangs: Past and Present – Post 1800 Episodes Characterized by Public Debt to GDP Levels Exceeding 90% for at Least Five Years, in which they state: “Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive.” (p. 1)
In The Real Effects of Debt, authors Stephen G. Cecchetti, M.S. Mohanty, and Fabrizio Zampolli conclude: “Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth. When public debt is in a range of 85% of GDP, further increases in debt may begin to have a significant impact on growth: specifically, a further 10 percentage point increase reduces trend growth by more than one tenth of 1 percentage point.” (p.21)
Cristina Checherita and Philipp Rother’s piece, The Impact of High and Growing Government Debt on Economic Growth, An Empirical Investigation for The Euro Area, states: “on average for the 12-euro area countries, government debt-to-GDP ratios above such threshold would have a negative effect on economic growth. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies. We also find evidence that the annual change of the public debt ratio and the budget deficit to-GDP ratio are negatively and linearly associated with per-capita GDP growth.” (p.6)
They further conclude: “a higher public debt-to-GDP ratio is associated, on average, with lower long-term growth rates at debt levels above the range of 90-100% of GDP. The long-term perspective is reinforced by the evidence of a similar impact of the public debt on the potential/trend GDP growth rate.”(p.22)
Andreas Bergh and Magnus Henrekson’s paper Government Size and Growth: A Survey and Interpretation of the Evidence, found that as government size increases, GDP growth declines.
The notion that MMT is the solution we have been seeking and will have no effects in the future, is delusional at best, and intellectually dishonest at worst. The conclusion we can draw from the analysis of real life debt episodes is that debt is deleterious to growth, and as it mounts it will continue to put downward pressure on GDP, and has the ability to strangle the productive engine of a nation.
I’ll be brief as I’m trying to finish my review of Kelton’s book, and I can see there is pent up demand for this!
Bernie Sanders – correct. Although my impression is that these politicians have leaped on the appropriation of these ideas for their own socially progressive agenda without actually getting the memo. Sanders, Warren etc… still talk in neo-liberal speak rather than using MMT language.
Velocity – Agree, I’ve not seen much that helps explicitly with that issue. MMT has useful comments (to me) on the quantity of money, but not necessarily so much on the flow.
MMT is the answer and has no consequences is just wrong – I produced a breezy 2 minute video to highlight some of the issues. The video featured cartoon animals. Let’s put my level of discourse in that context. I wasn’t producing a treatise on the subject.
debt does not matter – I think the one thing MMT enthusiasts maintain is that the debt does matter – just not in the ways that we’ve all been taught.
Reinhart and Rogoff – I would love to say that I dashed off to go through my well-thumbed copy of Reinhart and Rogoff, but… You make the case for the status quo thinking on deficits, and it’s a huge body of work; I agree. MMT flips the usual lens on these issues. For me, it completely changes the nature of the debate that I find energizing, particularly at the current time.
Government Size and Growth – would love to know where the Scandinavian countries stand in this study. By most measures of social development those countries rank high, maybe they don’t shoot the lights out on GDP growth (?)
debt is deleterious to growth – I had read that Federal surpluses (private sector deficits) preceded a number of downturns. I’ve not been able to verify that, but I would be interested to see any information on this.
Thanks for visiting. I know it would drive me nuts if some actuarial ‘flat-earther’ was spouting off so I do see where you and ERN are coming from.