Thursday, February 23, 2012

"Modern Monetary Theory"

Dylan Matthews, at the Washington Post has some funny ideas about what "Modern Monetary Theory" is. The modern monetary theory in the article appears to be some kind of post-Keynesian movement. Does anyone know what this is about? My coauthor Randy Wright would probably have a cow. Please don't tell him.


  1. I first saw this on mankiws site. Between his sly links to wolfers and Stevenson, and now this, he's very sly.

    In this case, he knows perfectly that these guys are fringe people not taken seriously by anyone active in yhe field, and that these nuts are unwilling to interpret the mainstream's rejection as informative as to the coherence of their work. I think hes poking at you...

  2. If you haven't heard about them yet, this post will probably attract a few in the comments section.

    They don't believe in the money multiplier, which is something you have in common with them.

    They are chartalists, and since deep money theories seem to be driven by market adoption, I'm going to guess you'd disagree with them on that?

  3. WOW. If macroeconomics were a science, I'd totally nominate Randy Wright for the Luxuriant Flowing Hair Club for Scientists. (My father is already a member...)

    1. I thought Randy was unique. We'll have to introduce him to your father. Does your father play a musical instrument? If so, he could play with the Contractions.

    2. Unfortunately not. He's more of a jock type...

      Another economist with long flowing hair is Justin Wolfers.

  4. This article in the WP is unbelievable. The government can never run out of money?? Evidently, for these people, these MMTs, the Weimar Republic never existed, the hyperinflation of Bolivia in 1985 never happened, the hyperinflation in Argentina 1989 (which caused President Raúl Alfonsín to resign 6 months before his mandate was over, because of the disaster he caused), was just a small insignificant footnote. As if there were this huge free lunch out there, where the government never runs out of money. What a joke.
    And these people call themselves economists?

  5. MMT people are utterly insane. Remember when you got into a tussle with the loony *** **** people? (name redacted so you don't get swarmed again) Yeah. It's exactly like a left wing version of all that craziness.

  6. His hair is not too well taken care of, and his bad breath is more famous in the profession than his silly model with Lagos.

    1. My nose is not all it could be, but I never noticed any bad breath, and we have spent many hours together. I don't stay out late though.

  7. Krugman had a number of posts debunking/arguing with the MMT folks about some things (chiefly the argument that government solvency is never a concern because of seignorage). That's where I heard of them:

  8. “It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.”

    Did I miss something? Seems that I have read similar comments here, before.

    It is unfortunate that the charge of being a "chartist" is not applied as often as it should be.

  9. They want more "Zimbabwe" countries XD

  10. Writing often on MMT, I can confirm that the goal of MMT is to provoke hyperinflation. MMTers are actually Leninists. We don't deny the hyperinflation, we try to trick capitalist fools into provoking it.

    Yeah, right. Sophisticated commenters you have on here, dude...

  11. Steve: think of some sort of updated version of 1960's British Keynesianism, with a mixture of: Abba Lerner's Functional Finance, a sort of version of the fiscal theory of the price level, vertical IS, horizontal LM, reverse-L-shaped AS, and you have got the basic idea. (That's a crude caricature, but it helps). They aren't daft, and sometimes I think have good insights.

    Philip is teasing. They aren't hyperinflationists, and seem to be mostly middle of the road politically (and not very political animals at that).

    But very very different from your sort of monetary economics.

  12. Yeah, Nick Rowe's characterisation is pretty apt.

    I'd add that they incorporate recent historical research on the origins of money (which indicates that Innes and Knapp were on the right track). They deny the money multiplier (hence, flat LM). They stress the need for currency sovereignty (to avoid the Euromess).

    Their more unusual ideas are about the function of government bonds. They see them as only being issued to control the interest rate (which can be done by paying interests on reserves). They don't think that spending by issuing bonds or spending by creating money directly differ in their inflationary impact (hence, the 'closet Leninism').

    The most fair critical summary is Lavoie's paper:

  13. Oh, and they call it "*Modern* Monetary Theory" because it is a theory of *modern* monetary systems, with a fiat monetary system, not a theory to be applied to old fashioned monetary systems. "Modern" modifies "Monetary", not "Theory".

  14. Oh, should probably also note that the work derives in large part from Minsky's work. (One of the main developers was Minsky's student). Theories are very similar, but the MMT theories incorporate the above-mentioned understanding of government debt.

  15. I'm guessing Nick is engaging in typical Canadian generosity. I'm American though. MMT people are f***ing insane. Austrian comparisons are apt. Being associated with anyone having the last name "Galbraith" should be your first hint.

  16. This seems to be a website where these guys meet.

    I have tried reading some of their stuff. I am usually caught between thinking they are saying something trivial and baffled by the conclusions they get out of it. I guess a generous perspective is that, being on the fringe, they feel comfortable debating policy proposals which are way out there such as "job guarantees" and others.

    It would be fun to see your take on these guys....

    1. The Job Guarantee plan can be seen as their way of providing a nominal anchor to the system. It's like the gold standard, except that it's labour, not gold, that is convertible into money. Trouble is, these guys are sometimes a bit fuzzy on the real variable/nominal variable distinction, so sometimes it comes out as a way to pin down the price level and at other times it's a way to get "full employment". I think they are currently arguing among themselves over whether the JG is an essential or contingent component of MMT policy.

    2. Yeah, they're debating it. Some just opt for a payroll tax holiday to restore aggregate demand.

      It's weird to see some of the comments as are written above (comparisons with Austrians etc.). MMT policy percriptions are usually either some sort of stimulus or tax cut (usually in the range the likes of Krugman call for).

      As for the nominal/real distinction, I don't think there is the confusion you attribute. Price stability doesn't mean a 0% rate of inflation. If a jobs guarantee were introduced you'd see a one-off bump in the price level. Then you would use the minimum wage to negotiate between inflation and stable output. So, if inflation was rising too fast (say, 5% after the original price bump) you would be more reluctant to raise wages than you would in the case that there was, say, 2% inflation.

      The way Mitchell puts it is that currently we use a buffer-stock of unemployed people claiming welfare (NAIRU) to negotiate inflation. Under the jobs guarantee program you would use nominal minimum wages as the lever to control inflation.

    3. P.S. Most of the 'crazy' stuff on NEP is just the Godley sectoral balances model rejigged in some way or other. You get broadly the same stuff in the FT these days.

      "Battle not with monsters, lest ye become a monster, and if you gaze into the abyss, the abyss gazes also into you." -- Friedrich Nietzsche

  17. Read this:

  18. British Keynesianism. That worked out so well. But surely an entirely appropriate policy for America as it travels down the road of stagnating failed empire with rampant joblessness. Robert Lucas identified this as America's future in his Milliman lecture.

    1. Odd that Lucas only have one problem, the facts:

      1946 -- Truman, who was even more populist than FDR, was President

      2000 -- Team Bush,Greenspan, and a Republican House and Senate in Place and yet we, per Lucas page 14/15, drop from trend under their leadership

      I could go on but facts never matter to either Lucas or a Lucas follower

    2. The Lucas I know is apolitical in how he thinks about economics. The man is a scientist.

    3. British Keynesianism was a school of economic thought. Not a set of policy prescriptions.


      Especially Michel Kalecki, Joan Robinson, Nicholas Kaldor and, in the US, Paul Davidson.

    4. Professor Williamson

      You say that Lucas is a scientist. In the Milliman lecture Lucas wrote in his "slides" about why recovery was delayed in the Great Depression:

      "• Most important, in my view, but hardest to measure, were effects of
      demonization of business

      "• Businessmen were “malefactors of great wealth” (FDR)"

      Lucas also blamed the emergence of unions.

      Now these do not, to me, appear to be the statements of a "scientist," as many have remarked. In fact, Mitt Romney would know better than to write such things.

      A scientist would realize that the two examples given above (Truman's first term and Bush, 2000-06) negate the really silly claims made by Lucas.

    5. I don't really want to weigh in here... but by any realistic standard this is pretty extreme stuff...

  19. Only MMT can solve our fundamental problem, which is private debt:

    econd, going forward, it seems unlikely that households can sustain large enough primary deficits to reduce or even stabilize leverage. ... As a practical matter, it seems clear that, just as the rise in leverage was not the result of more borrowing, any reduction in leverage will not come about through less borrowing. To substantially reduce household debt will require some combination of financial repression to hold interest rates below growth rates for an extended period, and larger-scale and more systematic debt write-downs. ...

    1. This post makes no sense. If MMT is a framework for economics, then it can't "solve" anything, because it is simply a way of organizing our facts. In this case, their framework seems useless and full of either vacuous assertions or out-right empirical inconsistencies.

      If MMT is instead a set of policy prescriptions, then we can evaluate those policies using standard useful economic theory, and find them either good or bad. In this case, their ideas seem poorly thought-out.

      Neither case looks too good for the nutjobs pushing this drivel.

    2. Your post is 1/2 good and 1/2 unclear.

      Good part: You're right, MMT is a way of organizing facts; it's a description of the economy. However, MMT's view of the economy informs several policy prescriptions its proponents might suggest.

      Unclear part: As for evaluating those policies using standard useful economic theory, how does that work if the whole issue is that MMT rejects standard useful economic theory, as do heterodox theories in general, such Post-Keynesian economics?

    3. By rejecting standard theory, MMT becomes worthless.

  20. " The government can never run out of money?? Evidently, for these people, these MMTs, the Weimar Republic never existed..."

    Complete misrepresentation of MMT which is typically the knee-jerk reaction of everyone who confronts MMT. It really gets tiring.

    BTW the article also misinterpreted and misrepresented MMT at several points. This is common since MMT is a very different way of viewing things, and as such, it takes a lot of effort to *properly* understand it (whether or not it's right). As FT Alphaville notes, it's like an autostereogram (

    I'll leave some papers for you if interested.

    Here is brief overview of what MMT is

    Here is an MMT paper critiquing the "Fiscal Sustainability" literature, so you can see it directly applied and it's nontraditional view of fiscal and monetary policy -

    Here is a paper on how MMT views Central Bank Operations. MMT is very operations-focused, as they believe a close look tells a much different story than mainstream econ theories (really, much of what they believe in the way of banking and operations isn't different from other Post-Keynesian schools)

    Here's the MMT view of interest rate setting

  21. Also, Krugman's critique of MMT was largely a strawman. Here is a paper explaining Krugman's misinterpretations as well as where MMT simply disagrees with him (I know it might get tiresome for others to see MMT proponents insisting they are always misinterpreted, but it is what it is):

    "Paul Krugman's critique of MMT is based on three incorrect assumptions about what MMT policy proposals actually are; it also demonstrates a lack of understanding of our modern monetary system (as is generally verified by volumes of empirical research on the monetary system by both MMT’ers and non-MMTer’s). While MMT’ers argue that all three assumptions made by Krugman are false, one does not need to necessarily agree. The point is that to critique MMT on the basis of assumptions that are inconsistent with MMT is to actually not critique MMT at all. It is a straw man. I explain these assumptions and how they relate to Krugman’s two posts as I go through the text of both."

  22. Also, a summary point to be made about Krugman's response:

    "To conclude by way of reiterating the main point here, one need not agree with MMT that the three assumptions Krugman makes are incorrect. The overarching problem is that Krugman has simply assumed the Neo-Liberal macroeconomic model is correct and the MMT view is incorrect. This is far different from actually demonstrating that MMT is incorrect, which Krugman has yet to even attempt."

    Lastly, force-fitting MMT into ISLM is a misrepresentation of MMT. Nick Rowe's response here was very kind, but that part is certainly something MMTers would reject. MMT comes out of the Post-Keynesian tradition, and ISLM does not fly over there.

  23. "In this case, he knows perfectly that these guys are fringe people not taken seriously by anyone active in yhe field, and that these nuts are unwilling to interpret the mainstream's rejection as informative as to the coherence of their work. I think hes poking at you..."

    You're probably right about Mankiw's motivation, but his critique, Smith's critique, and Gagnon's critique in the article are strawmen (not surprising because why would they have taken the time to thoroughly understand MMT by reading the primary lit?) or able to be rebutted. Mankiw falls into the "MMT says deficits don't matter/ hyperinflation" straw man fallacy, as does Karl Smith (and MMT has thoroughly addressed the Zimbabwe/Weimar/etc situations). As far as Gagnon's critique, MMT rejects the money multiplier and the cases of Australia and Canada can be easily explained using the sectoral balances approach (a favorite of the chief economist at Goldman Sachs), which Gagnon appears oblivious too (those countries ran massive trade surpluses).

    Furthermore, as far as the coherence of their work, they're a heterodox Post-Keynesian-associated theory. I don't expect the mainstream to immediately view it as coherent, otherwise the mainstream wouldn't be in the position they are. Secondly, there are many heterodox economists supporting MMT. Thirdly, there are also many financial practitioners supporting the MMT approach, and not just those at random hedge funds but also people located at bulge bracket ibanks (e.g. the head of interest rates at Morgan Stanley, analysts and economists at Nomura and HSBC etc). Lastly, several bloggers and major news sites, outside of the MMT core circle, have begun to show more support for MMT, even if they aren't 100% on board.

    1. The sectoral balances approach contains a misleading term, and MMT uses this to falsely imply that an increase in government debt is the only way to improve private sector wealth*.

      The misleading term is "positive private sector balance". Sometimes MMT calls this "private sector net savings" or simply "private sector savings".

      There is a sleight of hand, and the nature of that sleight is as follows:

      The thing that they call "positive private sector balance" is not a thing that improves the health of an economy. It is equivalent to an increase in the total amount of financial assets less financial liabilities held by private sector individuals and organizations.

      "Positive private sector balance" does not mean, and bears no relation to, increases in real private sector wealth. However, the term is used by MMT practitioners as if the term is synonymous with increases in real private sector wealth. It is presented as an obvious good, and this is swallowed whole (or blithely passed along) by many advocates of MMT or sectoral balances without a proper analysis of what the term means. I believe this is partly because of the way the term is constructed (the use of the words positive and balance) and partly because it suits certain vested interests to have people swallow it.

      It is no surprise that those who live off the government bond market wish to see continued issuance of government bonds, and sectoral balances and MMT are a handy propaganda device to that end.

      *I leave out the foreign sector here for simplicity.

    2. Further to this, you will occasionally see a pretty looking chart that shows a very symmetrical relationship between private sector surplus, and government deficits. The chart is used to imply that the "good times" of positive private sector surplus were always accompanied by times of government deficits.

      I have seen a similar chart from numerous sources, including Nomura. Those of you with suspicious minds may think that it almost looks too symmetrical, and if you do then you are right - the symmetry comes from the definition, not from any interesting information about the real world. If you assume no foreign sector surplus or deficit, the positive private sector balance as defined is exactly the negative government deficit.

    3. As someone who does not do research in monetary theory but who still teaches Macro I find this discussion very interesting but also highly frustrating. It is frustrating because in the classroom I still teach the quantity theory of money, monetary aggregates, and so on. Thankfully there are some textbooks that have moved away from the IS-LM framework, but surely we can do better in terms of incorporating at least those insights on which some consensus exists in a framework that is simple enough to teach to the average undergraduate. Or am I wrong?

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