Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 2 October 2017

Why is MMT so popular?

I think, as a result of earlier posts, that I can be pretty confident that I can answer this question. But first some background. Although MMT has been around for some time, it recently held its first international conference and has in the last few years attracted a devoted band of followers online. According to this article, it has ‘rock star appeal’. In this post I just want to concentrate on the core of MMT which involves fiscal policy, and not talk about other ideas like job guarantees.

There are short and simple explainers around (e.g. here), but what these and MMT followers are typically not so good at is in explaining exactly why and how they differ from mainstream macroeconomics. To understand this, we need to go back to the 1960s and 70s. Then there was a debate between two groups in macro over whether it was better to use monetary policy or fiscal policy as an instrument for stabilising the economy. I prefer to call these two groups Monetarists and Fiscalists, because both sides used the same theoretical framework, which was Keynesian.

To cut a long story short the monetarist won that argument, although not quite in the way they intended. Instead of central banks controlling the economy in a hands off way using the money supply, they instead actively used interest rate changes to control output and inflation. Fiscal policy was increasingly seen as about controlling the level of government debt. I have called this the Consensus Assignment, because it became a consensus and because I don’t think there is another name for it.

The one or two decades before the financial crisis were the golden years for the Consensus Assignment, in the sense that monetary policy did seem to be relatively successful at controlling inflation and dampening the business cycle. However many governments were less successful at controlling government debt, and this failure was termed ‘deficit bias’.

MMT is essentially different because it rejects the Consensus Assignment. It regards monetary policy as an unreliable instrument for controlling the economy, and MMT prefers to use fiscal policy instead. They are, to use my previous terminology, fiscalists.

If you are always using government spending or taxes to control the economy, you are right not to worry about the budget deficit: it is whatever it needs to be to get inflation to target. Whether you finance those deficits by creating money or selling bonds is also a secondary concern - it just influences what the interest rate is, which has an uncertain impact on activity. For this reason you do not need to worry about who will buy your debt, because you can create money instead.

The GFC exposed the Achilles Heel in the Consensus Assignment, because interest rates hit their lower bound and could no longer be moved to stimulate demand. Alternative measures like QE really were as unreliable as MMT thinks all monetary policy is. What governments started to do was use fiscal policy instead of monetary policy to support the economy, but then austerity happened in 2010 for all the reasons I explore at length here.

Now we can see why MMT is so popular. Austerity is about governments pretending the Consensus Assignment still works when it does not, because interest rates are at their lower bound. We are in an MMT world, where we should be using fiscal policy and not worrying about the deficit, but policymakers don’t understand that. I think most mainstream macroeconomists do understand this, but we are not often heard. The ground was therefore ripe for MMT.

Policymakers following austerity when they clearly should not annoys me a great deal, and I am very happy to join common cause with MMT on this. By comparison, the things that annoy me about MMT are trivial, like a failure to use equations and their wordplay. You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly.

MMT is particularly attractive because it does away with the perennial ‘where is the money going to come from’ question. Instead it replaces this question with another: ‘will this extra spending raise inflation above target’. As long as inflation is below target that does not appear to be a constraint. In the US right now interest rates are no longer at their lower bound, but inflation is below target, so it appears to MMTers that the government should not worry about how extra spending is paid for.

Of course having a fiscal authority following MMT and a central bank following the Consensus Assignment once rates are above their lower bound could be a recipe for confusion, unless you believe what happens to interest rates is unimportant. I personally think we have strong econometric evidence that changes in interest rates do matter, so once we are off the lower bound should we be fiscalists like MMT or should we return to the Consensus Assignment? That is a question for another day.


  1. MMT is gaining popularity right now since it tells us what is required at this stage in the cycle is larger government deficits, meaning more government spending, either on investment in infrastructure, or buying everyone a pony (who wouldn't want new bridges and roads and a pony?).

    Where it might come unstuck is when (if) conditions require that the government runs a surplus to bring inflation down below target. I've never seen a democratic government successfully implement a policy which drains savings from the private sector, making everyone poorer. It's just not going to happen.

    Some pressure groups, such as PM, have advocated an independent, but democratic, body to instruct a (democratic) government on whether it should be running a deficit or a surplus and how large each should be. Hmmmm...I'm seeing a bit of an issue right there.

    1. In the US, Clinton ran surpluses despite current account deficits. In Australia, Howard ran surpluses despite current account deficits. The fiscal problem has been stinginess, not profligacy, just as deflation and ZLB is more the problem than inflation and high interest rates.

      So never mind where it might come unstuck when that is the opposite of where it has been coming unstuck.

    2. «I've never seen a democratic government successfully implement a policy which drains savings from the private sector, making everyone poorer.»

      You haven't looked around much...

    3. You have completely misrepresented Positive Money there and not in a slight or technical sense. You have either done this deliberately or you are relying on second hand information. Hmmmmm.

    4. Greece is a democracy, isn't it?

  2. right. I find MMTers irritating but if it's boiled down to "we can probably get away with more money-financed public expenditure from time to time" then I wholeheartedly agree, although the question then should move to political economy and the plausibility of discretionary helping of oneself to the money tree being conducted to avoid booms and busts

  3. Two weaknesses in the conventional assignment…

    First, artificial adjustments to the rate of interest do not on the face of it maximise GDP because GDP is presumably maximised where interest rates are at their free market level.

    Two, according to SW-L, the purpose of fiscal policy under the conventional assignment is “controlling the level of government debt”. But what’s the optimum level of that debt?

    “Conventional assigners” presumably think the optimum is whatever level gives a rate of interest which leaves room for interest rate cuts come a recession. But that, to repeat, is an ARTIFICIAL level. It presumably does not maximise GDP.

    Warren Mosler (founder of MMT) argued that the natural rate of interest (on government liabilities) is zero. That’s in his paper “The Natural Rate of Interest is Zero”. Milton Friedman thought likewise.

    Yours, devoted MMTer - prepared to convert to another religion when presented with persuasive arguments….:-)

  4. If you can pay tax only in Sterling then the government has to spend then tax - otherwise none of us would be able to pay our taxes.
    MMT it is.

    1. Banks are given a charter (franchise) to create bank credit money in the form of checking deposits and other bank liabilities by expanding loans or purchasing other assets. The central bank must provide "daylight credit" to ensure that payments clear in federal funds. The central government can re-circulate funds existing in the aggregate bank by matching its spending with taxing and borrowing so there is no need for the central bank to "spend" before the government taxes on a unit-for-unit basis. If the banks are considered branches of government and the consolidated Fed/Treasury unit is recognized as similar to a bank then the argument that government lends/spends before it can tax or borrow seems to hold water - but most people stumble on the concept of seeing government as a bank and banks as a branch of government in a modern system. MMT authors should have enough subtle understanding to realize one must consolidate banks with government to make this argument stick - that spending must always go before taxation. Bank credit expansion often provides the funds that convert to Treasury securities or are paid as taxes which the government then spends back onto the aggregate bank balance sheet when it covers the deficit and increases the Treasuries float.

  5. Simon, how (if at all) do MMT's recommendations for fiscal policy differ from those of Lerner's Functional Finance from the 1940s ?

  6. What about the balance of payments constraint?

    1. Hey! That's my usual story. Because as H Minsky said “everyone can create money; the problem is to get it accepted”.

      But for debt-based economies like the USA and UK the "balance of payment" is one of those topics that proper Economists don't talk about...

  7. "but you will hardly ever see the government’s budget constraint"... Please elaborate! - Are you referring to Fiscal Rules?

  8. One of the man differences between MMT and neo-keynesians is that MMT completely rejects theoritical modelling, DSGE, IS-LM, rational expectations, microfoundations etc... These are rejected on the grounds that they simply do not reflect the real world, and are a futile attempt at formalising a social science with imagined mathematical rigour.

    So MMT concentrates on the real-world monetary system and buils its foundations on that. Seems to be a fairly significant difference with neo-keynesian economics.

    1. «differences between MMT and neo-keynesians is that MMT completely rejects theoritical modelling, DSGE, IS-LM, rational expectations, microfoundations etc»

      That seems to me an inappropriate comparison, because MMT is mis-named, as it is not a "theory", it is a description of how things actually operate, it is not a model from simpler principles.

  9. Hi Simon. Some years ago, Larry S asked me to send him readings on MMT. Like you, he was already very close to us on a number of levels. I'll tell you what I told him -- I think our views track closely until we get to the question of interest rates. I sent him this paper by Scott Fullwiler to show how/why.
    I think it will crystallize an important difference in approaches. And it begins with the intertemporal budget constraint so you'll be happy to see some equations along with the wordplay.
    We had a former Treasury official from the office of debt management at the MMT conference last week. He spoke very candidly about how the Treas and Fed work hand-in-glove to ensure that payments always clear and debt is always "sustainable." More than any other macro approach, I think, MMT is concerned with actual monetary operations. Scott's paper explores the IGBC by looking at actual monetary/fiscal operations.

  10. "but you will hardly ever see the government’s budget constraint "

    There's a reason for that. It is simply not relevant or a constraint in the MMT analysis. As Bill Mitchell explains

    "However, once we strip this off the erroneous theory (that governments are like households and have to “finance” their spending) then the GBC is a n accounting statement. In a stock-flow consistent macroeconomics, this statement will always hold. That is, it has to be true if all the transactions between the government and non-government sector have been correctly added and subtracted.

    So in terms of Modern Monetary Theory (MMT), the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance.

    But for the mainstream economist, the equation represents an ex ante (before the fact) financial constraint that the government is bound by. The difference between these two conceptions is very significant and the second (mainstream) interpretation cannot be correct if governments issue fiat currency (unless they place voluntary constraints on themselves to act as if it is).

    In fact, the mainstream economists know that there is no constraint – what they really want to say is that using ΔH to fund government spending is inflationary and therefore undesirable. They should be more open about that so that we can move beyond it being a debate about constraints and discussing when inflation becomes possible."

    1. «the previous equation is just an ex post accounting identity [ ... ] for the mainstream economist, the equation represents an ex ante»

      Congratulations for making "ex-post" and "ex-ante" distinctions, something that apparently is a lost art :-)

      But there is a substantive point: the contention that "the equation is just an ex post accounting identity" holds only in the special but common case that government money is accepted.

      «the second (mainstream) interpretation cannot be correct if governments issue fiat currency (unless they place voluntary constraints on themselves to act as if it is).»

      If government money is not accepted, the constraint is not voluntary. Seignorage as a source of revenue only works as long as government money is accepted.

      «what they really want to say is that using ΔH to fund government spending is inflationary and therefore undesirable»

      What they should really say rather is that "inflation" means that government money becomes less accepted than before, so it takes more government money to buy the same things.

      But a realistic minskian perspective on money is rejected by both MMTers and "aligned" Economists because it means things are not simple anymore. As H Minsky said:

      Money not only arises in the process of financing, but an economy has a number of different types of money: everyone can create money; the problem is to get it accepted.

      and accepting :-) this (and M Pettis related arguments about balance sheet relevance) requires a far more nuanced, realistic approach than most "money doctors" seem willing to talk about.

  11. «because interest rates are at their lower bound»

    The usual follows, but I note that our blogger has switched from "zero lower bound" to "lower bound", and from "the interest rate" to "interest rates", which is a definite improvement, and I suppose that it is quite a deliberate change of language and concepts.

    The theory of the lower bound, specifically but not only the zero one, is (rather simplified) that:

    * Investment drives demand and demand drives the economy in the short term if there is a a "general glut".
    * Investment is driven by the gap between the cost of capital and the assumed rate of return on the investment.
    * Therefore if investment is insufficient to clear the "general glut" at the “lower bound” of the cost of capital, the "general glut" may merely shrunk but it will remain.

    One of the the critical assumptions here is that the "the cost of capital" is "the interest rates". But for various reasons this is far from the case: in particular the policy rate, which is at zero, is the rate charged by the BoE to their customers, the insolvent financial conglomerates of the City, and they use it indeed to invest, but in 3% government bonds and in 4% (effectively government guaranteed) mortgages, to make money fast with no effort and risk, and minimal effect on employment and wages.

    Solvent businesses are not investing in part because "the interest rates" charged to them are much higher than those charged to insolvent financial conglomerates.

    But solvent businesses also have internationally enormous cash reserves available to them, and they are not deploying them (in the UK at least :->), probably because the assumed rate of return on productive investment is too low, or because they are investing them in share buybacks so their shareholders can invest in property, which has much bigger assumed returns.

    «once we are off the lower bound should we be fiscalists like MMT or should we return to the Consensus Assignment? That is a question for another day»

    That is an interesting question, but only in the context of the extremely simplified (that was an euphemism) models used by New Keynesians.
    In the overrated "real world" policy is very path-dependent for example, as M Pettis has been arguing so well, on balance sheet composition issues; as an instutionalist keynesian supply siders I reckon that it mostly depends on supply side fiscal policy and good luck, and monetary policy is best managed conservatively.

    In large part the question is whether once the "general glut" is no longer the case we have a significant "partial glut" or not. But the concept of "partial glut" seems to have disappeared from Economics because of a both noddy-keynesians and their markets-are-gods friends. It has been partially euphemized as "structural unemployment" though, but it is a much more important concept than that.

    Side note on «MMT is particularly attractive because [ ... ] ‘will this extra spending raise inflation above target’». That is not a bad summary, but I prefer the roughly equivalent one that in some situations seignorage on paper money is a reasonable source of government income, where the key-words are "some situations" and "reasonable".

  12. RE: "... ‘will this extra spending raise inflation above target’ ..."
    - The Job Guaranty as part of a Full Employment Fiscal Policy is an important component of MMT as it serves as a buffer stock which expands and contracts - depending on economic activity and other govt priorities - so spending is always just at the appropriate level. (see Bill Mitchell, billyblog).

  13. Simon, I see that you were recently awarded the Speri Prize, which is "given to the scholar who has succeeded most effectively in disseminating original and critical ideas in political economy to a wider public audience."

    Surely, the popularity of MMT suggests that it is the MMT scholars (of which there a quite a few) who should be next in line for the Prize. After all, it is they who have very successfully disseminated original and critical ideas to a wider audience.

    Furthermore, if it is indeed the case (as you so often claim) that there is nothing new in MMT, then there is an even stronger argument for recognising the MMT scholars, for they have, in effect, been working alongside you all along. In the words of the advertisement, they have refreshed the parts other economists cannot reach. You should be praising them.

    Flippancy aside, let's look at the content of your article. In common with other detractors, you choose (deliberately?) to distort or leave out the bits that don't fit your narrative. In particular, you continue to label MMT as primarily a policy prescription; as something that government can choose to adopt; as a switch that can be turned on or off. It is none of these and this point is made clear over and over by MMT proponents. MMT is primarily a description of how things are right here, right now.

    That doesn't mean that policy prescriptions cannot follow on from an MMT-aware understanding of the political economy. They can, and for economists of progressive bent the Job Guarantee is the most important. The Job Guarantee is the counter-cyclical element of MMT; it is the inflation anchor; it maintains price stability with full employment; and it chucks the Phillips Curve in the bin. In some ways, the fact that the Job Guarantee happens to give everyone a job is a secondary effect.

    But the Job Guarantee also strikes a chord with a wider public audience and is, I believe, the main reason for the popularity of MMT. The Job Guarantee is illuminating. It allows people to see that unemployment is a choice made by the government of the day; to see how we can get all those jobs done which are never going to get done by the private sector; and to see that there can be an effective counterweight to the excesses of the market.

    Unfortunately, you say that you will "not talk about other ideas like job guarantees" and then go on to criticize MMT for not having a mechanism for controlling inflation. A critique of MMT that does not include a discussion of the Job Guarantee can only ever be a very shallow analysis.

    Finally, MMT is popular because it leads to understanding. In some ways this chimes with your claim that there is nothing new in MMT. Yes, there is and must be some overlap with the mainstream. But, where other economists have failed, MMT has been able to explain in simple terms some core economic truths: that the UK government can never be forced to default; that there is a one-to-one relationship between the government sector deficit and the non-government sector surplus; and that 90% of government spending is removed from the economy by tax, with the remaining 10% being removed by saving.

    These are politically charged concepts and understanding them helps us dispel the myths put about by our politicians. That understanding gives us political power and it is into the political arena that MMT is moving.

  14. "You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly."

    See Scott Fullwiler, "Interest Rates and Fiscal Sustainability" (2006) SRRN

    1. The summary says:

      «not applicable to governments issuing their own currencies while operating under flexible exchange rates.»

      Oh please that's a stupid claim just like the "aligned" Economist claims.

      All that MMT says is as to that is that government can fund themselves with seignorage as well as taxes.

      It is really very obvious that there are limits to the quantity of real resources governments can acquire by paying with "assignats" or mere paper, that is there are limits to the profit of seignorage. Perhaps "aligned" Economists preach that the profits of seignorage must or should be zero, and noddy-MMTers fantasize that they can be infinite.

      In practice currency issuers, like crypto-coin ICOs show, can make some profit out of seignorage, but as history shows very many times over thousands of years, they cannot be unlimited, because eventually vendors of real resources stop accepting excessively "soft" currency. Especially in the case of foreign vendors, who usually quite insist on being paid in "hard" currency, and are outside the reach of local governments.
      Exchange rates cannot be infinitely flexible because nobody likes autarky that much, and having a currency that has some degree of international acceptance is a good thing.

      Unless one wants to adopt the position that there should be a dual currency regime: domestic "scrip" currency for paying domestic vendors, and foreign "hard" currency for paying international vendors, like Greece or Argentina (or many other cases) in various periods, and that simply means screwing workers that are paid in domestic "scrip" currency.

  15. Regarding your remark on the GBC and MMT, I would suggest you read S. Fullwiler's " Sustainable Fiscal Policy and Interest Rates under Flexible Exchange rates" pp. 1-6.

    It would be interesting if you presented your objections, if any, on this.

  16. Can you link to what you see as some of the strongest econometric evidence that monetary policy matters? It seems like a tricky question to identify and control for all the relevant factors.

  17. MMT is attractive because it means that the Left can have basically everything they want - free healthcare, free education, jobs for everyone, etc. They're right in the sense that the US government can "afford" to do a lot more than Conservatives think. Yes, a government with a printing press can't run out of money to spend. MMT thinks that since we can afford anything in nominal terms then we can also control the price of things in real terms. Every socialist regime on Earth has some theory that is similar to this.

  18. " . . . they instead actively used interest rate changes to control output and inflation."

    But, did they?

    “The funny thing is: they haven’t. In fact, among the more than 10,000 research articles produced by the major central banks in the two decades prior to the 2008 crisis, none explored the correlation or causation between nominal interest rates and nominal GDP growth. Fortunately, this task is not very demanding, and once we conduct such an examination, we conclude that, in actual fact, there is no evidence to back these assertions whatsoever. To the contrary, empirical evidence shows that the central banking narrative on interest rates is diametrically opposed to the observable facts in two dimensions: instead of the proclaimed negative correlation, interest rates and economic growth are positively correlated. Secondly, the timing shows that interest rates do not move ahead of growth, but instead are either coincidental or even follow it.”

  19. Hi, an interesting post but you do say some things that deeply puzzled me.

    MMT displays "a failure to use equations"! It was the equations that first attracted me to MMT, although I am not an MMTer. MMT, in this respect, is based on Godely's Sectoral Analysis and Stock-Flow Consistent modelling, which is full of behavioral equations. Being a former quant, unless I see an argument I can model, I am dubious of it. MMT is eminently modellable, which requires converting MMT framework equations which according to you its lacks.

    "wordplay" this is more subtle and I am still exploring this myself using BoE, OBR, ONS data, Hansard, WGA accounts etc. Certainly under an MMT POV it can be shown operationally that " taxes do not finance government spending, or that spending comes first". This is very interesting given the Media Macro POV and TINA, since MMT shows that there other ways of looking at the current, past and potential operations of the Whole Government.

    As for "you will hardly ever see the government’s budget constraint", well a cursory reading of MMT will show you that it is argued that the GBC is an ex post accounting identity of no behavioural significance, therefore unless directly addresses (which it has been repeatedly) an MMT analysis will, ipso facto, ignore it. That criticism is hardly the basis to dismiss all the detailed operational analysis as just semantics. (The real debate there, IMHO, is about framing (e.g. Lakoff/Turner)).

    As for "having a fiscal authority following MMT and a central bank following the Consensus Assignment once rates are above their lower bound" reflects ISLM thinking which is IMV empirically questionable as well as not Stock Flow consistent.

    As for your last point, I will await your future posts on this topic. Note that MMT argues, and as a former trader this also attracted me to their work, that the relation of interest rates to the economy is quite different to an ISLM analysis and much of their alternative explanation makes much empirical sense. Indeed an interesting MMT argument is ZIRP, the natural rate of interest is zero, whilst I am not convinced by that myself, to completely ignore it in your post, is, on the pain of repeating myself, puzzling.

    Now it is one thing to have examined MMT and disagree with their arguments, I certainly still do and I am always seeking good critiques of MMT to help me learn more. However you have glossed over a number of key issues, tacitly implying that MMT has never considered them, such as GBC, ZLB, ZIRP). This, for me, sadly, makes your post a poor critique of MMT.

    1. «an interesting MMT argument is ZIRP, the natural rate of interest is zero»

      The argument is that it is or should be zero on totally safe assets like money. And indeed it is zero on things like banknotes.
      The question then becomes whether assets like loan to (government insured) banks (aka current/checking accounts) or to the government (aka treasuries) are also totally safe and should pay zero interest, and whether that "zero" should be before or after inflation.

      Going a bit deeper the question becomes whether interest is usury, and whether usury is legitimate.

  20. "They are, to use my previous terminology, fiscalists."

    I consider myself someone who understands MMT, but I may be wrong. If my understanding is right, that's ok. You can call MMT an "fiscalist" theory.

    "but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly."

    That's because MMT acknowledges that there is no such a thing as a budget constraint. Actually, MMT believes that there is seldom any circumstance where the government shoud spend less then it taxes. Usualy governments should always spend more than they recieve in taxes. A country that exports a lot may be a exception, but that's it. All other should spend more than they tax. Also, not all spending is inflationary (see below).

    "Instead it replaces this question with another: ‘will this extra spending raise inflation above target’"

    Yes. I guess that's more or less the point. But there is something more complex than that. In my understanding (and I may be wrong) MMT believes that there are some kinds of government spending that may indeed cause inflation, while there are other kinds of spending that do not cause inflation.

    For example, a big Job Guarantee program, with a big federal budget and controlled wages would not be inflationary. You could spend a lot and have huge deficits, but still achieve price stability (AND full employment).

    That's something that no mainstream economist will agree with. Not a single one.

  21. Why is MMT so false?
    Comment on Simon Wren-Lewis on ‘Why is MMT so popular?’

    Simon Wren-Lewis positions himself as follows: “Policymakers following austerity when they clearly should not annoys me a great deal, and I am very happy to join common cause with MMT on this. By comparison, the things that annoy me about MMT are trivial, like a failure to use equations and their wordplay.”

    When the all-pervasive cloud of blather is blown away the hard formal core of MMT emerges in the form of the familiar sectoral balances equations.#1 These equations can be traced back to Keynes’ General Theory and they are provably false since then. Here is the mother of all false macro relationships: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

    Being scientifically incompetent, After-Keynesians did not spot the lethal blunder in this two-liner. Fact is that Keynes got macroeconomic profit wrong. Because the formal core as given with the two-liner is false the whole analytical superstructure of Keynesianism, Post Keynesianism, New Keynesianism, and MMT is false. All share the same foundational defect. This means that MMT policy proposals are plucked out of the thin air of common sense and populism.

    For the general public, the essential points are:
    • MMT has NO sound scientific foundations,#2
    • MMT’s sectoral balances equations are mathematically false,
    • MMTer violate scientific standards on a daily basis,
    • MMTer camouflage the profit effects of their economic policy agenda,#3
    • MMT policy advances the cause of the one-percenters,
    • MMT is political agenda pushing in a scientific bluff package.#4

    Egmont Kakarot-Handtke

    #1 Wikipedia, Modern Monetary Theory

    #2 For the full-spectrum refutation see cross-references MMT

    #3 MMT and the magical profit disappearance

    #4 MMT: Just political heat, no scientific light

  22. «You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly.»

    Uhm, I have some sympathy for that, but when it really matters, like war budgets or bailing out fraudulent City conglomerates, those “semantics” become very real, "MMT" triumphs, and worries about the “budget constraint” becomes curiously as lot less important, and the BoE bends whatever can be bent.

  23. “A … projection from the Center on Budget and Policy Priorities … has public-debt interest payments rising to 15 percent of GDP by 2050, with total debt to GDP at 300 percent. But that [won’t] happen. ... Long before you even got close to those … ratios, … the Federal Reserve would stabilize the interest payouts, simply by keeping short-term interest rates (which it controls) very low.”

    - James Galbraith

  24. "Fiscalists" is an anagram of IL fascists.

    Conincidence? I think not!

  25. More seriously, I've a half formed thought that I'm not really sure how to articulate. Feeble, disjointed attempts as follows..

    1. I think the main attraction of MMT, which you've kind of hit upon in second to last paragraph, is that it takes us a way from unnecessary worries about debt in a way that the terminology of mainstream macro cannot.

    2. Put another way, people have a gut reaction againt debt that they don't have against interest rate changes. The terminology of MMT abstracts us away from that.

    3. One thing missing from all the models - how does the way the model is described affect public perception and hence political feasaibility of the recommendatons of this model.

    4. So, you complain that people don't listen to mainstream macro folk like you - I sympathise from the perspective of having read your and similar blogs for the last seven or eight years and thinking you're right - but if you want to do something about it perhaps, in the long run, it's about changing how we discuss these things. MMT might be away towards this, even if the model needs fixing to take some elements of mainstream macro it misses just now.

  26. MMT is popular because it is honest and direct which makes it simple to understand with very little of economic knowledge.
    MMT follows money and human behaviour. Compare that to all other economic theories that are based on translating actions into money value and then behave as if there is no money but only actions, goods and services that relate to each other.
    Such translation of values into money value but pretending that all those actions are done through money is making theories so complicated and random where we find academics themselves confused on what model to use at what time.
    And another confusion that mainstreamed economics are creating is by such use of mathematics where the starting definitions of signs loose the meaning by the end result. The end result becomes a value that can be treated with any random explanation where many economists are themselves confused with what purpose they started the calculations. Or are easily abused for propaganda.

    MMT just follows the money knowing that all else in the real world follows it. Muney turns the world around, doesn't it?

    Another important point about MMT is that points to the most important things while pointing to unimportant marking them as such. Example. The most important definition is sovereignty. Are the countries monetary sovereign or not points to only 6 countries in the world as monetary sovereign and all those are "former" empires.
    This sovereignty is important to show how trade is sqewed and non-sovereign cuntries have to trade only in sovereign money:Dollars, Yen, Franc, Pound and hence have to borrow in those money that they can not print but can only use.
    Such trade where non-sovereigns have to keep going into more debt if they want to trade and then sovereign banks can force their default no matter even if they have more foreign reserves then foreign debt. It becomes a political decision to use IMF and world Bank to force any trading relationship and force non-sovereign country into very damaging reforms that will place them into even more debt and more problems.

    By signifying the importance of a monetary sovereignity on different economic outcomes MMT is talking about colonization manipulation that is going on and which no other economic school will dare to mention.
    Mainstream economics are hiding a lot of important insights and trying to translate it into obfuscating theories that can be used at random. This obfuscation by mainstream economists is what makes economics very hard and imposssible to comprehend so the MMT is obvious choice because it is honest and direct.

    Academics can keep hiding the manipulative sides of economic relationships and then complain that they are not understood.
    Keep on it, you know where will it all end. People recognise honesty and openness and will keep shunning obfuscating economic theories that can lead them to the bottom.

    MMT is simple, honest and direct pointing to important questions so it is popular. It makes people understand economics like never before.

  27. From the way you describe MMT, it sounds like they're largely missing the point. There's quite a lot of evidence that monetary policy is effective within a certain regime of interest rates, and also evidence that governments usually seem to be reluctant to engage in sufficient fiscal policy to really stabilize the economy (China may have done this in the recent crisis, but I don't think anybody else ever has since the start of the 20th century).

    To me, the issue is that fiscal policy is quite effective as long as it isn't counteracted by monetary policy (e.g. raising interest rates). But governments very rarely engage in effective fiscal policy, making the easiest path forward to a more stable economy being to minimize the number of times that fiscal policy is needed by increasing the inflation target.

    The only real alternative would be to create systems which automatically produce fiscal stimulus in the event of a crash, without the direct intervention of elected officials. But that's never been done (social safety net programs do something like this, but I'm pretty sure it's impossible for them to entirely close the gap).

    Convincing central banks to raise their inflation targets seems to me to be a far, far easier hurdle than creating an entirely new governmental system from scratch. It's sad that it's still a significant hurdle, though.

  28. I wonder if Nick Rowe is still talking about hot potatoes.

    You cannot possibly deny that larger deficits increase demand and smaller deficits/larger surpluses decrease demand. So fiscal policy is much better tool for managing demand.

  29. in a perfectly competitive market you could not have runaway inflation

    because wages could and would rise to their worth but no more

    and profits would rise to the worth of the employers and investors, but no more

    excess inflation is always blamed on "unemployment being too low"

    causing wages to increase because workers are in a better bargaining position and can demand increased wages

    in a perfectly competitive market they would demand increase wages up to a point
    but no more

    but it is not a perfectly competitive market, there is some degree or monopoly power

    so when workers get a bigger share of the income then the firms to the degree they have monopoly power can just raise their prices to protect their excess profits,

    so I would suggest that firms with monopoly power protecting their economic rents is a central component of excess inflation and so we have another tool to combat excess inflation

    that is , attempt to reduce monopoly power as a way to battle inflation

    did you notice how Volcker got inflation down by reducing employment and wages, and how ever since we have focused on keeping wages from getting to high

    so real median wages are flat ever since

    all the profits from increase productivity have gone to the wealthy

    this means while we have been controlling wages, which should keep pace with productivity

    that economic rents have done nothing but continue to increase?

    1. The structuralists have been arguing in favor of a view on inflation along these lines since the 50's.

    2. This comment has been removed by the author.

    3. this is something everybody but the economists seem to know

      they don't use words like economic rents

      but that is what they are saying, the economic rents keep increasing while wages stay flat

      and as society advances, requirements of what we need to possess increases,

      for example we probably need to have cell phones, and in rural areas we mostly need to have cares, and we need to have internet access etc etc

      so if median real wages don't keep pace with production and productivity, the only way to buy all that extra production is by borrowing and this is an unstable situation

      circa 2008

  30. Please define this:

    "hardly ever see the government’s budget constraint"

    without once mentioning anything related to, "where does the money come from" and I'll begin to give credence to this post.


    Rich Reinhofer

  31. I beg to differ on a couple of points. Policy makers, even those who decry government deficits, seldom act that way. They do so mainly for other political reasons, such as saying that we cannot afford what their opponents want to do. Even Dick Cheney said that deficits don't matter. Second, if mainstream macroeconomists are not heard about using fiscal policy and not worrying about the deficit, it is mainly because they do not speak up. In 2010, when it really mattered, who was speaking out against austerity? MMT economists and James Galbraith. In 2009, when President Obama said on CSPAN that the US had run out of money, where was the outcry from the economic profession? Why didn't his economic advisors tell him different, or resign?

    1. Krugman coined the term "The Deficit Worriers"....

  32. MMT might also be popular because some people think it makes more sense than the economics they learned in school. MMT is certainly 'fiscalist' and mostly agnostic about monetary policy as far as interest rate effects, but it also focuses intently on the details of the central bank operations and how commercial banks make and fund loans and create money. So it does not ignore monetary policy, just interprets it differently I think.

    1. Take a look at the world dude.
      Monetary policy has been used up - there is nowhere left for it to go ... Negative rates and QE dont work.
      What has caused interest rates to be so low ????
      Govt have ignored fiscal policy because increased govt spending flies in the face of the neoliberal myths about govt having to "live withing their means"
      They are reaping from what they have sowed.

  33. "I just want to concentrate on the core of MMT ... the things that annoy me about MMT are trivial, like a failure to use equations and their wordplay. You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly. ... once we are off the lower bound should we be fiscalists like MMT or should we return to the Consensus Assignment?"

    1. Can you explain what the "government’s budget constraint" is? Is it something fundamental to fiat currency or some institutional carry-over from pegged or commodity currency? If the latter, how does it make MMT's fiat currency issuer/user dichotomy seem silly?

    2. The economics academy - present company excepted - is awash with complex equations featuring mathematics that make applied mathematicians laugh, assumptions derived from admiring one's reflection in the mirror, and presences or absences of variables that make sane people cry. Not many equations stand up empirically and their value is to test, check and hopefully explain, more than to predict.

    3. Why cannot fiscal and monetary policy co-operate? (ok we're still living in a world where monetary stimulus is being negated by fiscal austerity, but ...)

  34. Sectoral balances are based on an equation or identity, this provides a useful way of looking at deficits & surpluses. In addition, modelling the economy in terms of government spending as an input & taxation as an output follows from sectoral balance and provides an alternative and illuminating view of a national money system, All this serves a purpose, that the economy should serve society eg full employment rather than serve a consensus view of the economy. That doesn’t mean monetary policy need be abandoned, it just makes people look at the economy in a different way rather than fixate on deficit & debt.

  35. When assessing why MMT is so popular one has to go back to the GFC. The GFC was for many a cataclysmic event that has had a significant impact on their lives in the real world so we are not talking about an issue of merely academic interest. Those of us who had not gone further than economics 101 at university wanted to understand why it had happened and why so very few economists had seen it coming. All "traditional" economics seemed to offer was a mass of technical jargon laced with complex mathematical equations. MMT is so popular because it provides a clear and understandable explanation of how the system actually works in the real world that the intelligent layperson can understand.

  36. Ralph Musgrave

    In their Working Paper No. 37 ‘The Natural Rate of Interest is Zero’ Warren Mosler and Mathew Forstater state:

    “The government budget deficit is also ‘normal’ in the sense that it is the mirror image of the non-Government surplus in the basic macroeconomic accounting identity:

    Government deficit = non-Government surplus

    where non-Government surplus includes both the domestic (or resident) private sector and the foreign (non-resident) sector, which includes foreign firms, households, and governments. It is therefore equivalent to the well-known identity:

    (G – T) = (S – I) + (M – X)

    Government budget deficit = domestic private sector surplus + foreign sector surplus where the foreign sector surplus is another way of expressing the trade deficit. The government budget deficit permits both the domestic private sector and the foreign sector to ‘net save’ in the government’s unit of account. Only a domestic government budget deficit permits the domestic private sector and foreign sector to actualize their combined desired net saving.” (p. 8)#1

    Let us ignore foreign trade here, i.e. M, X=0, then MMT asserts

    Government deficit = non-Government surplus

    This is false because non-Government consists of the household sector and the business sector. Therefore, for any given level of household sector saving/dissaving holds:#2

    Government deficit = Business profit

    Because the fundamental balances equation of Mosler/Forstater is false most of the paper’s content is worthless or misleading or mere descriptive/historical storytelling.

    Egmont Kakarot-Handtke


    #2 Rectification of MMT macro accounting

  37. Whilst MMT correctly shows the circular flow of money (government spending to government receipt (tax)), it appears to fail to acknowledge the concept of the need for no "money" at all.
    Consider a "pop larkin" scenario, where the landowner produces all he needs, plus a surplus which is given away/traded for luxuries (such as a vintage Rolls-Royce)
    Why should such a theoretical entity engage with the whole world of "money"?
    Perhaps too Robinson Crusoe for macro, but surely macro should aggregate all micro-economics?

    1. Theoretical entity? You are pretty well describing slave owners in the American Ante-bellum South. Yes, they had little need for cash.

  38. I was asked by some followers of your blog who are also interested both in MMT to write a reply to this. It's here if anyone is interested:

  39. hhahahahhaha...."where we should be using fiscal policy and not worrying about the deficit, but policymakers don’t understand that."...Krugman calls them Deficit Worriers....And I don't think the politicians, and the general public, know that austerity causes fiscal drag and lower GDP..

  40. Federal taxes do not fund govt spending - if you believe that it does then then you believe that taxes must be raised to cover the spending - which is total BS.
    The only people that believe that it does are the govt debt worriers.

    Federal taxes are not used to fund govt spending ... simple get over it.

  41. This Bank of England Bulletin explains money creation in detail:

    The interesting phenomena in this bulletin presents a picture of unlimited money creation based purely on the loan's ability to be repaid.

    In fact the Banks making loans have no restriction whatever, except in their own view of a borrowers credit worthiness, meaning no matter how the real economy is affected they can still issue money.

    We of course have empirical evidence of this during the Thatcher housing boom when interest rates were at around 15%. Yes the housing market crashed, but the banks never stopped lending and money creation continued.

  42. "provides an alternative and illuminating view of a national money system"

    not alternative and also wrong

    savings that equals investment is just the preservation of investment money

    does not add or subtract from wealth

    only net production can increase wealth

    the real story is savings equals investment plus net production

  43. Notwithstanding MMTer's not knowing a debit from a credit, more importantly, it's about the Scorpion and Frog fable (mal-investment and inflation).

    The Fed's "overdraft" privilege, "subject to the limitation that the Reserve banks may not hold at any one time more than $5b of securities purchased directly from the Treasury, was extended from time to time by Congress.

    The reasons given for this direct borrowing amendment were: “the convenience of the Treasury, economy in the amount of cash the Treasury would otherwise consider if prudent to hold, the smoothing out of interest rates in the money markets, and an immediate source of funds for temporary financing in the event of a national emergency.”

    The Treasury obviously didn’t meet the 4 C’s of credit; character, capacity, capital, and collateral. I.e., Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED's responsibilities were subordinate to the Treasury's (e.g., the very reason for the 1951 Treasury-Federal Reserve Accord), this country experienced intolerable rates of inflation.

    That's why folks subscribed to Dr. Franz Picks’ “Pick's Currency Report”, a monthly newsletter, and “Pick's Currency Yearbook” (90 currencies each year).

    1. Thx for your waffle ... just try and cope with:
      A govt = a non govt surplus
      Before you try and confuse yourself.

  44. Anonymous

    Yous say “the real story is savings equals investment plus net production.”

    THIS is the real story: Keynes got the paradigm shift from microfoundations to macrofoundations wrong. His methodological blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

    This two-liner is conceptually and logically defective because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)#1, #2

    The axiomatically correct macro relationships are:
    Qm=−Sm in the case of the pure production-consumption economy,
    Qm=I−Sm in the case of the investment economy,
    Qm=(I−Sm)+Yd+(G−T)+(X−M) in the general case.
    Legend: Qm monetary profit, Sm monetary saving, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import.

    All I=S and IS-LM models are provably false.#3

    Egmont Kakarot-Handtke

    #1 How Keynes got macro wrong and Allais got it right

    #2 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

    #3 For the details of the bigger picture see cross-references Refutation of I=S

  45. Ask an MMT proponent precisely how the government generates money to spend - give accounts, flows of money - they can't and won't.

    Here is the US Code:

    31 U.S. Code § 3104 - Certificates of indebtedness and Treasury bills

    (a) The Secretary of the Treasury may borrow on the credit of the United States Government amounts necessary for expenditures authorized by law and may buy, redeem, and make refunds under section 3111 of this title. For amounts borrowed, the Secretary may issue—
    (1) certificates of indebtedness of the Government; and
    (2) Treasury bills of the Government.

    It is illegal for the government to sell debt for any other purpose.

    What MMT also neglects to mention is that all of that interest they claim is so benign, comes directly from the public and is funneled directly to the banking industry. So if you want to continue paying off debt with new debt - a cockamamie scheme, consider the theft of money from the public in terms of interest. An MMT proponent will waive this off but will not respond in a substantive manner. Believe me, I've tried.

    Somehow they believe convincing the public, politicians and economists that paying off debt with more debt is a great plan rather than stepping back and asking the question that is begging to be asked, why should the a government with sovereign control over its money borrow in the first place? You will get crickets.

  46. +Common cents
    It looks like you don't understand MMT at all - which is kind of expected.
    MMT is a description of the monetary system as it is.

    The govt could spend billions on the military and war or it can spend billions on infrastructure and the public purpose.

    It also looks like you are govt debt worrier.So you worry about $$$ in a savings account at the Fed as opposed to those very same $$$ being in a checking account at the Fed ? and you try and make others sound crazy ?

    There is plenty about why sovereign govt borrow ... its to control interest rates not to fund spending. But you wouldn't know about it.

    It looks like you haven't researched much.
    Maybe next time understand what you are talking about first and people may just give you some cred.
    It is the ideological choices of how the govt at the time runs the monetary system.

    Looks like mr common cents lacks common sense.

    1. Made my point - You did not even attempt to respond to the statement. So typical of MMT to attempt to discredit the questioner rather than the question. Still crickets chirping.

  47. Common Cents,

    "Ask an MMT proponent precisely how the government generates money to spend - give accounts, flows of money - they can't and won't."

    I recommend you the book "Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems" written by L. Randall Wray. He can and does explain precisely how government generates money to spend.

    I will try to summarize here, but unfortunately I haven’t got much space.

    First, the executive branch proposes and the legislative branch approves a budget. Let’s suppose that the amount of 5 trillion dollars of annual spending was approved. It does not matter if the tax collected will exceeded or fall behind the approved spending.

    Second, the Treasury will issue bonds. For simplicity sake, let’s suppose that the Treasury will issue all $ 5 trillion at once. The private banks will buy it, providing $ 5 trillion to the Treasury. (In real life, the Treasury will issue bonds through the whole year, as needed, and taxes collected may reduce the amount of issuance needed)

    Third, the Central Bank will conduct its normal open market operations to achieve the nominal interest rate target. It means that it will probably buy all $ 5 trillion from the private banks. It will issue base currency out of thin air to buy the $ 5 trillion bonds. So the Central Bank will buy the bonds from the private banks, and provide $ 5 trillion in base currency to them.

    As you can see, the private banks acted as intermediaries, earning some kind of intermediary profit in the process. They both and sold the bonds for $ 5 trillion, and maybe made a profit by charged slightly different prices when buying and selling. But the fact is that the bonds were issued by the Treasury and purchased by the Central Bank, with the private banks in the middle. It was as if the Central Bank issued base currency to the Treasury, using private banks as intermediaries. That’s it.

    The Central Bank will earn profit from the interest rates that the purchased bonds provide. The Treasury (the bond issuer) will have interest rates expenditures, while the Central Bank (the bond holder) will have interest rates revenues.

    But do not forget the Central Bank remittances. The Central Bank will send, from time to time, its profits to the Treasury. So, basically, the Treasury is paying interest to itself. At the end of the day, the Treasury is neither paying nor receiving interest.

    So, as you can see, it’s complex, but, at the end of the day, the Central Bank issued base currency to the Treasury.

    The accounts and flows of money are in the book, I can’t show them here…

    1. Yes, that's the story. Base money does not enter the economy and is a small fraction of money supply. Treasuries are purchased by foreign gov'ts, individuals, corporations and interest is paid to those buyers. This is not government spending out of thin air as you claim. Meeting reserve requirements allows banks to create more real money in the economy which is used to purchase gov't debt and pay taxes. I get my money from bank loans, where do you get yours?

      The law is so clear. Do I have to quote it again?

    2. "Base money does not enter the economy"? "Small"? The government budget is huge, a lot of trillions. Don't know what is small to you.

      When the Central Bank buy Treasury bonds, it is creating money out of thin air. A lot of money each year. Do your research.

      As a public servant, my money is from the federal government. It issues money and then pay me. Or pay my bank, that then issue bank deposits in my name. No loans here.

  48. "Whether you finance those deficits by creating money or selling bonds is also a secondary concern-" This statement shows that you don't really understand MMT

  49. "I personally think we have strong econometric evidence that changes in interest rates do matter"

    Can you point me to what this evidence is? In undergrad macro, we learn that interest rates affect the economy via a negative relationship with investment: I = I(r). But from what I can find, there's actually little evidence of this relationship.

  50. MMT folk do indeed say things which are not 100% true when viewing things with a wider lens. (It drives me nuts.) For example:
    • "Taxes don't fund spending."
    - Taxes do indeed fund spending. As do borrowings. But neither are necessary in order to spend. The Central Bank can simply issue new currency and gift it to the Treasury. This narrative is not only true, but much clearer to the civilian population. Asserting that taxes don't fund spending breeds distrust.

    1. There are two very simple examples that explain how your post is not factual.

      1. When the whole world banking system crashed, where did they find the tax at short notice to pay for the bail out.

      2. When Theresa May was cutting the NHS and all the other public services, so say to enable them to cut the deficit, where did she find the tax receipts to fund her £1 billion bribe to the DUP in order to guarantee she remained in office.

      She printed it out of thin air.

      If you want more proof here is Cameron telling you precisely what you deny:

      So again in the middle of a crisis, when savage cuts to council and public service cuts take place, because we so say have no money, where is all the money coming from to fund this.

      The Tories sacked half of the environmental workforce, that worked maintaining the Somerset levels, only to find that when they were needed; like here, there were none, and all because of a lie that the government can run out of money.

      Whilst you state that it isn't necessary to tax to spend, the government doesn't just raise tax to spend, when it decides to it spends regardless.

      The present government is cutting public services in order to render them unworkable and to transfer them into the private sector.

      Most money in circulation is numbers on a screen in a computer, it doesn't leave much to the imagination to see how those numbers disappear and reappear.

  51. Merv: In the US:
    Congress appropriates,
    Congress Taxes
    Treasury borrows (from the Fed but borrows nevertheless;
    Congress sets the Debt Ceiling, which causes consternation and govt shutdowns every 3 years or so.
    These are legal artifacts but restrictions which make the statement that taxes and borrowing don't fund spending to be false.

  52. Modern Monetary Theory is: first i) an examination of how our monetary and fiscal economy works, and second, once that is understood, ii) the implications of policy prescriptions for solving our economic problems. In terms of our monetary system, four assertions are made:.

    1) The US government is unlike a:
    a. state,
    b. municipality,
    c. business, or
    d. household,
    in that it can issue its own currency.

    2) A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
    a. issues,
    b. borrows in, and
    c. floats
    its own currency, can NEVER run out of cash.

    3) The sovereign, like the US, can:
    a. issue currency to spend and buy anything the economy produces,
    b. up to the productive capacity of the economy (adjusted for turnover/velocity),
    c. without creating inflation.

    In other words the US government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled by i) selling government securities, ii) raising interest paid on deposits at the fed, iii) raising taxes across the board, or iv) a cut in spending.

    4) The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

    See the blurb:

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