What can an economist with mainstream training learn from #MMT? I articulate my answer in a new paper titled “A Blue Paper on Modern Monetary Theory” #MMTBluePaper.
https://bit.ly/30puulV
Here are the background and a quick summary. 1/19
https://bit.ly/30puulV
Here are the background and a quick summary. 1/19
I, for one, have learned a lot. The MMT literature explores procedural, accounting, and institutional aspects of modern monetary institutions and their coordination with the fiscal authority.
An excellent bibliography of MMT can be found here
http://www.levyinstitute.org/pubs/wp_778.pdf
2/19
An excellent bibliography of MMT can be found here
http://www.levyinstitute.org/pubs/wp_778.pdf
2/19
The analysis naturally leads to a powerful message which is at the core of MMT: a government with a sovereign currency can always afford to pay in the currency it prints and it is not subjected to the same financial constraints of a household.
https://nyti.ms/3cScgME
3/19
https://nyti.ms/3cScgME
3/19
In other (more poetic) words, the government deficit is a myth. #DeficitMyth
https://stephaniekelton.com/book/
4/19
https://stephaniekelton.com/book/
4/19
My reaction, as I suspect one also from any economist with mainstream training, has been: well, we knew that already. In fact, it is almost a trivial conclusion.
But as I kept thinking about it, I gradually began to realize how liberating that message is.
5/19
But as I kept thinking about it, I gradually began to realize how liberating that message is.
5/19
Just think about it. Do we want to save the planet from climate change with a #GreenNewDeal?
We should not worry about how to pay for it, the Government always can.
We just need to find the political will to do it.
6/19
We should not worry about how to pay for it, the Government always can.
We just need to find the political will to do it.
6/19
In exposing the “affordability” argument as devoid of any accounting, procedural, and institutional underpinnings, #MMT casts itself as a seductive cry to political activism by calling for “the birth of the people’s economy.”
7/19
7/19
Energized by the call, I set out to investigate the economics of #MMT. In the #MMTBluePaper I argue that the economic theory in #MMT is still embryonic. The crux of the problem: the distinction between nominal and real magnitudes is often vague.
8/19
8/19
A quick refresher: “nominal” are things measured in the unit of account (e.g. dollars, euros, etc.); “real” are the same things measured in stuff – goods and services – that ultimately affect people’s well-being.
9/19
9/19
As a matter of financial accounting, #MMT’s propositions are correct, if not tautological, when applied to nominal magnitudes: the public sector’s deficit is always equal to the private sector surplus. “To the penny,” indeed.
https://twitter.com/StephanieKelton/status/1192900320839569410?s=20
10/19
https://twitter.com/StephanieKelton/status/1192900320839569410?s=20
10/19
L. Randall Wray puts in Copernican terms: “This reverses the orthodox causal sequence. […] The deficit spending by the government provides the income that allows the nongovernment sector to run a surplus.” Modern Monetary Theory, page 106, 2015.
11/19
11/19
In terms of nominal income, the statement is an accounting identity.
In terms of real income, it is a big deal.
The ultimate question is then when and how the public deficit/private surplus turns into higher real income, and thus higher people’s well-being.
12/19
In terms of real income, it is a big deal.
The ultimate question is then when and how the public deficit/private surplus turns into higher real income, and thus higher people’s well-being.
12/19
In the paper, I design simple economic environments featuring the foundational elements of #MMT, and obtain explicit conditions on individual behavior, technologies, and markets for the government deficit spending to increase real income.
13/19
13/19
The upshot: the government must have exclusive access to a "technology" – broadly interpretable as a way to either directly produce, coordinate, regulate, etc. -- that is superior to that available to the non-government sector. And the government must be credible.
14/19
14/19
A related insight is that, in the presence of a severe financial friction, typical of monetary production economies, the government’s deficit provides a financial instrument that allows resources to flow to their most productive uses.
https://www.jstor.org/stable/2006605
15/19
https://www.jstor.org/stable/2006605
15/19
Other environments may well indicate alternative, and possibly markedly different, conditions. The point here is that being explicit about assumptions facilitates the criticism of a theory and its progress (or dismissal).
16/19
16/19
A couple of concluding thoughts. I am grateful to #MMT because it has led me to question economic propositions that I took for granted and to put them to the test of an alternative approach.
17/19
17/19
I have also experienced the frustration of getting close to understanding the economics of #MMT, only to have the (unstated) assumptions changed under my feet. I fear the same frustration has kept many genuinely interested economists away from a fuller engagement.
18/19
18/19
I think a better way can be found. The #MMTBluePaper is my two cents to the cause.
Here is the link again: https://bit.ly/30puulV
Comments welcome!
19/19
Here is the link again: https://bit.ly/30puulV
Comments welcome!
19/19
A shout out to @mileskimball who has encouraged me to work on this project.