MMT: not so modern

Followers of Modern Monetary Theory (MMT) often comment on my posts. I had never heard of MMT before I started this blog. From what I could gather from comments

1. MMT seems obsessed with the accounting detail of government transactions
2. This seemed to lead to ideas that I thought were standard bits of macroeconomics

Occasionally I would out of curiosity try and read something by MMT’s leading lights, which reinforced these impressions. For example MMTers seemed to think that they had discovered that a government with its own central bank need never default on its debt, but as far as I was concerned that was a standard and rather trivial implication of the government’s consolidated budget constraint. MMTers also seem curiously averse to equations.

Lately these MMT comments have been getting rather annoying, so I thought I would write all this down. Luckily I do not have to, as Thomas Palley has already done it for me (here and here). I have absolutely nothing to add, except to note that the upshot is not that what MMT says about this budget constraint is wrong, but that it was well known long before MMT and that it is hardly a complete macro theory.

Let me give an illustration of this last point. Some have commented that my recent discussion of fiscal rules ignores the fact that governments can finance investment, or anything else, by creating money. What would happen if the government started doing exactly that: stopped issuing debt and just created money. Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why. Of course in a recession with interest rates at their zero lower bound (ZLB) things are different, but MMT does not pretend to be just ZLB macro.

This raises the question of why MMT seems to have quite a following. Perhaps it is a reaction to mediamacro’s often implicit assumption that a country like the UK or US could go bust through a forced default. And, to be fair, some mainstream economists seem to want to keep that misapprehension alive, while others take the existence of independent central banks as a binding constraint. It is suggested too often that the government cannot create money in reaction to a funding crisis because this would cause inflation, even when we are at the ZLB, inflation is well below target and the central bank is creating huge amounts of money.

Finally a request. I am bound to get comments on this post disputing what I say, which is fine. But please, for the sake of those people who may still have an open mind, keep these short and to the point. If you accept that a government’s deficit must equal new borrowing plus the creation of new (base) money, there is no need to go into the accounting or transaction details therein.