One of the best questions I was asked, after a presentation involving a fair bit of MMT, was: ‘How might this be wrong?’ It’s just the right question. We should always entertain healthy suspicion about theories that can’t be extended to explain the possibility of their own falsity.
With regard to the operational realities of spending and debt, I can’t see how MMT could be wrong (see my post – Macroeconomic Theory and Operational Reality). So where it might go wrong is in the morals it draws from these operational realities, morals about how policy can and should be implemented. Mainstream and non-MMT heterodox economists sometimes express frustration on this point: ‘Yes, yes, of course that’s how the operations work; of course that’s how accounting works; but surely that can’t be enough to prove your whole case!’
Take, for instance, the big perspective-shift at the heart of MMT – its Copernican turn. Government debt is just non-government sector net saving. If the government has a big debt, it follows, from identity, that the non-government sector has a big fund of accumulated savings. People like having savings – they don’t want their savings to be wiped out – yet they’re always calling for the government to reduce its debt. Contradiction.
Well what moral do we draw from this? We should definitely stop confusing ourselves by describing one and the same thing with two labels, one that makes it look desirable and one that makes it look undesirable. Because government ‘debt’ is so unlike other sorts of debt, it’s the ‘debt’ description that has to go; just call it ‘non-government sector savings’.
The state spends by injecting new financial assets into the economy – either cash (reserves) or bonds. The reserves and the bonds are liabilities of the central bank and the treasury, but from the non-government sector’s point of view they’re both savings instruments – stores of value, if you like. There are interesting questions to be asked about whether the state should really provide this full range of savings instruments (Neil Wilson and Bill Mitchell have recently written excellent blogs on this). Why have the bonds? Many people insist that issuing reserves is inflationary in a way that issuing bonds isn’t. I have no idea why, since bonds generate as much spending power as reserves. But anyway, that’s what the net reserves or bonds injected by the government when it deficit spends are: savings instruments for the non-government sector. So far, so right.
Here is where it might go wrong. The MMT moral from this is that the state should provide sufficient public savings instruments to allow the economy to run at full capacity without generating private debt crises. This could be the wrong moral.
I think a hardline Austrian-type economist, for instance, would say that there is no such thing as a propensity to save; there is only a propensity to defer consumption. To accumulate financial assets is to indicate a desire for consumption in the future. Saving just means not spending all your income. So one reason people ‘save’ is that they aren’t sufficiently enticed by any of the goods currently on offer. They’re saving up for something better.
In that case, there’s an argument that the government shouldn’t accommodate private savings desires. Think of it this way. A company borrows £1 million to make some stuff, and people only buy £500,000 worth of the stuff, because they’re saving up for something better. The company is now £500,000 in debt, and the consumers have £500,000 in savings. Effectively, the company’s debt is the savings instrument for the consumers. The company needs to clear that debt, so in the ideal case it will break down its unsold inventories and try again to make the stuff people really want – the stuff they’re saving up to buy. The debt imposed on the company by the consumers’ saving is a market signal: it’s how the: ‘I don’t want that’ expressed by consumer saving gets converted to the: ‘make something else’ expressed by the company’s debt.
Now suppose the government interferes by running a deficit of £500,000. Maybe it buys the company’s unsold inventories. Or maybe it pays the consumers; they might as well now buy up all the unsold inventories, since they’ll still have £500,000 left over to buy what they really want. The problem is that the company has lost all incentive to produce what the consumers really want. It’s no longer in debt. As far as it’s concerned, its business was a success. It’ll just keep making the stuff people don’t want instead of the stuff they do want. So the government deficit blocks the market signal. The ‘I don’t want that’ of consumer saving gets absorbed into the government deficit instead of channelling through to a ‘make something else’ of company debt. People get what they want less, when they could’ve had what they want more. Suboptimal.
On that story, it is conceded that government deficit spending is merely the public provision of a savings instrument. But a different moral is drawn from the MMT moral. On this Austrian story, the moral is that the government can but shouldn’t provide a public savings instrument – not even in the form of non-interest bearing excess reserve balances. Doing so blocks an important market signal. Of course if people are saving for other reasons – as an insurance against uncertainty, for instance – then there’s no reason the government shouldn’t accommodate that. But can we tell which is which?
Naturally, I think the story is completely implausible. It’s full of implicit assumptions about human desire, the nature of capitalism, and the way businesses actually work. It is too sanguine about the enormous suffering a prolonged savings glut can cause before any ‘natural’ recovery occurs, if it ever does. But it is how MMT might be wrong. It’s the best I can do anyway.