Me and MMT

Readers of my last book will know that I agree with much of the analysis and many of the policy recommendations associated with Modern Monetary Theory (MMT). I do not, however, self-identify as an ‘MMTer’.

For one thing, I am not an economist – neither orthodox nor heterodox – and it is neither of use nor of interest for me to endorse any school of economics over others from my position of non-expertise.

For another, MMTers can be unattractively cultish. As Marc Lavoie writes: “the aggressive reaction of some non-academic supporters of neo-chartalism [i.e. MMT] whenever slightly different points from their cherished views are being made, push many post-Keynesian economists to become wary or even fearful of neo-chartalism” (8). Indeed. Many MMTers – not the big names but the general following on the blogosphere – take the attitude that anybody who claims anything outside of what is stated in the manifestos is ignorant of the basics and needs to be clobbered with a sackful of shibboleths.

On the other side, mainstream economists almost invariably misconstrue MMT. Paul Krugman and Thomas Palley, to take two fairly representative examples, push the common misconception that MMT amounts largely to the claim that governments don’t need to borrow or tax because ‘they can just print the money’. If you think that that is what MMT is claiming then you don’t understand MMT. It is, however, what almost all mainstream economists to whom I have spoken think MMT amounts to. They have no interest in having this or any other of their misconceptions corrected. Thus to identify myself as an MMTer to mainstream economists would only make me a victim of their mischaracterisation.

(I don’t mean, by the way, to put Palley and Krugman on the same level. Palley’s critique comes out of a detailed examined of the MMT literature. Krugman’s construal is based on what he calls “an MMT manifesto” that turns out to be written by a non-MMTer, one who has actually written critique of MMT. Most people would issue an embarrassed apology for making such a mistake. But then there is Paul Krugman. Needless to say, I won’t bother disputing his ‘analysis’.)

Here is Palley promoting the central misconception about MMT:

The central macroeconomic policy claim of MMT is that sovereign fiat money changes the nature of the financial constraint on government. In particular, there is no need for government to raise taxes in advance of spending as spending can now be financed in advance of taxes by having the central bank “print” (i.e. create) money. (4)

He then points out that this claim is “widely understood and acknowledged” outside the MMT community (5) Well, yes. It is an obvious truism that governments that can print money don’t need to tax or borrow in order to spend. This doesn’t stop Palley from labouring the point by using an equation:

the government budget restraint given by

(1) G – T = θ + β

G = government spending, T = net tax revenues after transfers and interest payments, θ = amount of budget deficit financed by issuing high-powered (sovereign) money, and β = amount of budget deficit financed by selling government bonds.

Thanks. We get it. Unfortunately, that’s not the point at all.

Where did Palley get the idea that this thumping truism is “the central macroeconomic policy claim of MMT”? I suspect he was confused by the statement often made by MMT types that taxes and borrowing don’t fund (US) federal spending. Palley seems to construe this as: “taxes and borrowing don’t entirely fund federal spending, since the US federal government can also just print money”. But that isn’t the claim MMTers are making.

Palley has identified the wrong contrast to the explanatory statement made by MMTers. The statement that government spending isn’t financed by taxes and borrowing is not contrasted with the statement that government spending is financed some other way (viz., by printing money). It is contrasted with the statement that the converse is the case: government spending funds tax payments and purchases of government bonds. This is most easily expressed by first rearranging equation (1) from above:

(1a) G = T + θ + β.

Palley reads this equation ‘right-handed’ (as Joan Robinson would say), interpreting it to mean that the government’s spending (G) is financed by net tax revenue (T) plus the printing of currency (θ) plus the selling of government bonds (β). MMTers read it ‘left-handed’: the equation tells us that the government’s spending finances the non-government sector’s payment of tax (T), accumulation of currency (θ), and purchasing of bonds (β).

This is a conceptual shift of extreme importance. But it is not shown in the equation itself. It is a matter of how the equation is read: left-handed or right-handed. Thus by proffering the equation as evidence that the central MMT claim is “widely understood and acknowledged” Palley shows only his own failure to understand or acknowledge that claim. The point, for MMT, is not the inclusion of the term θ. It is the way in which the whole equation is interpreted.

Why is the shift so important? If the equation is true, what difference does reading it left-handed make? Doing so gives us a new view on the central aim of macroeconomic policy. Standard macroeconomics sees two roles for government spending. First, obviously, it pays for the goods and services supplied to the public sector. Secondly, it supports aggregate demand – if and when monetary policy is insufficient for this purpose. The MMT insight – that equation (1a) should be read left-handed – gives us a different perspective on the second purpose. The point is not simply to support aggregate demand. It is, far more specifically, to finance the non-government sector’s tax payments, its purchases of government bonds, and its accumulation of currency balances.

Thinking simply in terms of aggregate demand leads standard macroeconomists to be ignorant of their own assumptions. To take one example, Palley believes that MMT has in no way challenged the standard macroeconomic policy objective of satisfying the following condition:

(2) y = y* = AD(G, T),

where y = current output, y* = output at full employment, and output itself is held to be a function, AD, of government spending and tax revenue. Palley derives (2) from the simple textbook ‘Keynesian Cross’ model. Effective aggregate demand is just C + I + G + Nx, where C is consumption, I is investment, and Nx is net exports. The government chooses G, and it determines C, I, and Nx by adjusting T. This is most easily seen by considering the ‘sources/uses’ national accounting identity:

C + I + G + Nx ≡ C + S + T, where S is private saving. If the government increases T and does not increase G by a corresponding amount, it is assumed, then something on the left side of the identity must fall: C or I or Nx (or any combination of the three) . Likewise, if the government reduces T and does not reduce G by a corresponding amount, then C or I or Nx (or any combination) must increase. That is how we get to equation (2), which tells us that the government can only increase the level of aggregate demand by increasing G or reducing T or both.

Yet here we have simply taken S as given. This is a blind spot in the New Keynesian textbook picture Palley paints (note that I do not say that Palley is himself a textbook New Keynesian). Filling it in helps us to see the significance of the MMT insight.

Rearranging the ‘sources/uses’ identity, we get:

S ≡ I + G + Nx -T.

Substituting from  (1a), we get:

S ≡ I + θ + β + Nx.

The crucial MMT insight is that the whole private sector, in any given period, desires to save a certain amount – call this S*. This saving can only be financed by private investment, net sales of exports, money-creation, and/or bond-financed deficit spending. S* is, if you like, simply the inverse side of the “propensity to consume” that determines C in the standard Keynesian cross model. Where S < S*, if there is no compensating adjustment in the sources of savings, then C can fall until the gap is closed. Where S > S*, C can rise until the gap is closed.

Now introduce Palley’s next New Keynesian claim, which is that at full employment:

(3) D = G – T(y* , t) = 0,

that is, the government’s deficit will be zero, since the tax rate, t, will be such as to make G equal to T. Palley claims that “once the economy reaches full employment output, taxes (T) must be raised to ensure a balanced budget” (8).

This is another way of saying that at full employment S will be equal to I + Nx. After all, we have seen that:

S ≡ I + G + Nx – T.

If G = T, then we will have:

S = I + Nx.

But what happens if, in this condition, S* ≠ S? Suppose that S* > S. Then C can fall. Look again at the uses/sources identity:

C + I + G + Nx ≡ C + S + T.

A fall in C will mean a fall in aggregate demand (C + I + G + Nx), unless I, Nx, or G increases. To suppose that I and/or Nx automatically adjust to compensate for a fall in consumption is to revert to a pre-Keynesian assumption of permanent equilibrium. To see any role for fiscal policy at all is to imagine that a fall in C can move the economy away from full employment and that the government should in that case run a deficit to restore full employment.

Once full employment is restored, however, the government should, on Palley’s recommendation, balance its budget. The problem is that this will again mean that S = I + Nx, and if S* > S at that level then there will again be a fall in C and a dropping away from full employment. There is, in other words, no stable equilibrium at the full employment level.

The same instability will be present if S* < I + Nx. Then a balanced government budget will provoke an increase in consumption, which will move the economy past the full employment point and into inflationary territory. The government can adjust by running a surplus. But then, again, if it balances its budget it will bring about a condition in which S* < S and the move into inflationary territory will be repeated. Again, there is no stable equilibrium.

The upshot is that where S* ≠ I + Nx, if investment and sales of exports do not automatically adjust to provide the desired level of private saving, then only bond finance or money creation can make up the difference. We have seen that:

S ≡ I + θ + β + Nx.

If S* > I + Nx, then θ and/or β must be positive for S to equal S*: the state must be issuing new bonds and/or new currency. On the other hand, if S* < I + Nx, then θ and/or β must be negative for S to equal S*: the state must be retiring bonds and/or taking currency out of circulation for S to equal S*.

Palley can only legitimately claim that there is a stable full employment equilibrium consistent with a balanced budget on the assumption that, at full employment, S* = I + Nx. This assumption seems unmotivated, and standard macroeconomists do nothing to motivate it. They do nothing to explain why the psychological features that Keynes identified as mismatching desired savings to private investment suddenly stop operating once full employment is reached.

Since John Hicks, the ambition of New Keynesianism has been to restore all the classical assumptions by adding to them the qualifier “at full employment”. The classical idea that investment always supplies the desired level of overall savings, while rejected as a general thesis, is gloriously restored at full employment. Proper Keynesians know, of course, that Keynes’ General Theory is general. All that what I have called the MMT insight shows is what every proper Keynesian knows to be true: that desired savings are a mysterious thing and that no automatic mechanism supplies them under any conditions.

Thus to this extent MMT is simply a reversion to traditional Cambridge Keynesianism. Lavoie, in the article I linked, points out that “Robinson could be considered as an honorific developer of modern monetary theory.” (14) Still, the reversion is useful. It pinpoints the precise point at which New Keynesians strayed from the path of righteousness. If I am attracted, as a non-economist, to any economic school at all, it is traditional Cambridge Keynesianism. But to MMTers I can say, with Bunyan:

Yea, may this Second Pilgrim yield that fruit,

As may with each good Pilgrim’s fancy suit;

And may it persuade some that go astray,

To turn their feet and heart to the right way.




30 thoughts on “Me and MMT

  1. NeilW

    “net sales of exports”

    Which is just more private saving. Quite why, in an integrated financial world, the saving in Bangkok is somehow different than Birmingham is never really explained other than in the usual dismissive fashion of people who have read scripture or by appealing to ‘tradition’.

    Tradition is what you do when you’ve forgotten the real reason you’re doing something.

    1. grkstav

      Like the ‘traditional’ labeling of public debt held by non-nationals as “external debt” even if it is denominated in the the freely-floating, fiat, inconvertible currency the governemnt in question issues, spends, taxes in, and offers interest-bearing financial instruments in, and is fully ‘governed’ by its own domestic law.

      If one dares to challenge that usage, one is declared ‘cultish’, etc.

      1. Calgacus

        Grkstav: There is nothing wrong with calling that “debt”. It is debt according to the standard, basic, universal meaning of that word, and that is what MMTers, what Keynes & Lerner call(ed) it. If non-MMTers are suspicious if someone unfortunately says such external debt should not be called debt, they shouldn’t call other people cultish, but they’re right.

  2. NeilW

    “Once full employment is restored”

    Whenever I see the phrase “full employment” in the literature I’ve taken to substituting the phrase “light speed”.

    Since economists generally have physics envy they should try it. It would highlight quite a few fallacies.

    1. axdouglas Post author

      I love the idea that full employment is the light speed of economics, but what then do we do with the standard idea that “demand-pull” inflation means spending *past* the point of full employment?

  3. grkstav

    “For another, MMTers are unattractively cultish”

    Let’s stipulate that we/they are so. It would be entirely predictable/understandable that we/they would be, given the systematic, blatant, persistent, outrageous mis-characterization, mendacity, and, in effect, symbolic violence directed at MMT/neochartalism.

    The strategy of distancing oneself from a ‘label’ or group affiliation because the powers-that-be and the ‘mainstream’ consider it “cultish”, “dangerous”, “outrageous”, etc. reminds one of the Atlanta Compromise against which W.E.B. Du Bois argued eloquently and convincingly.

    1. axdouglas Post author

      In fairness, some MMTers – not the big names, as I said – genuinely do act cultish. They’re not helping with the PR. Marc Lavoie is a pretty fair person and not at all hostile to MMT (or friendly to the powers that be). If he feels that way there must be something to it.

      I don’t identify as an MMTer because if I were forced to lay down my “this is what I believe” it would be Cambridge Keynesianism rather than MMT. MMT is right to correct the mainstream on macroeconomics. But there’s a lot more wrong in the mainstream that MMT doesn’t address (and the Cambridge school does): the incoherence of the standard concept of capital, the meaninglessness of utility and production functions, etc. I identify with *all* those critiques, not simply the critique of standard macroeconomics found in MMT.

      1. NeilW

        It’s important to remember that MMT is a money theory, and is based on Post-Keynesian theory largely for everything else. It argues for a floating rate exchange system rather than a fixed exchange rate system and using buffer stock employment to link money to value.

        So the reason MMT doesn’t address those other things is because it only describes where it differs from standard Post-Keynesian theory.

        In systems the difference is that standard Post-Keynesian argues for monolithic highly coupled structures – aka a world government on the failing EU model. Whereas MMT argues for a modular low coupled model using currency zones, where each currency zone is highly cohesive within itself.

      2. axdouglas Post author

        That’s very nicely put. I agree with the monetary theory of MMT and with the broader economics of Post-Keynesianism. But I don’t call myself an “MMTer” for the same reason that while I agree with the Peano axioms I wouldn’t call myself a “Peano arithmetician”.

      3. NeilW

        I was just trying to answer the generic “Why doesn’t MMT address X” question. It comes up a lot.

        Like everything it stands on the shoulders of giants.

        I’m not an MMTer because I’m not a Post-Keynesian Economist. I’m just a systems engineer that fixes things so they work properly. I’m not fussy where I nick ideas from – as long as they work.

      4. axdouglas Post author

        That’s exactly how I feel. I’m not any sort of economist. I just follow what appears to be the soundest argument in each case.

        People keep telling me that if I’m not an economist then I have no right to judge any of these arguments. I just don’t see that at all. You don’t have to be an expert on pelicans to know that there’s something wrong with the following argument: On the assumption that all pelicans are male, no pelicans are female. Therefore there are in fact no female pelicans.

      5. Simon

        Regarding-MMT and PR, I feel some of the ‘big names’ don’t always help. Both Wray and Bill Mitchell can be rather abrasive and disdainful without explaining the linguistic framing differences that cause people (whose aims are similar) to talk past each other. At one talk when asked what is money’, Bill replied ‘money is nothing’. A seasoned MMTer would understand what he was getting at but the audience didn’t and got (understandably) shirty about it -all Bill needed to do was bridge a few conceptual gaps in a user friendly way but he didn’t-I think this needs to be sorted out because MMT insights CAN help people!

  4. Stephen Ferguson

    Richard Murphy accused me of belonging to the “MMT cult” this week.

    My crime? Politely asking he put up a detailed (i.e. balance sheet) post to substantiate why he’d gone off MMT (he used to be semi-keen). That might have irked, but I think what pushed him over the edge was my also asking he consider withdrawing his ludicrous allegation that Bill Mitchell is a ‘Debt Free’ money believer.

    Not that I don’t get what you mean. There’s a culture clash between those who believe in abstract hand-waving (e.g. Ann Pettifor) and those (e.g. Minsky) who believe we should be disciplined by concrete identities, logic and accounting. The former get very dismissive and sniffy at MMT Whilst supporters of the latter get annoyed at being (in their eyes) very weakly dismissed.

    1. axdouglas Post author

      I don’t understand Murphy’s position on this.

      “Bill is usually hopelessly wrong on tax.”

      The issue of taxation came up at the “Reframing” event. Mitchell said that taxation is coercive. Murphy countered by saying that we vote for it: “That’s democracy, Bill”. Mitchell replied that democracy is coercive, and people laughed at that, as though it were an absurdity.

      But Mitchell was obviously right. In a democracy laws are decided upon by majority rule (representative or direct), and there is a coercive apparatus to enforce the laws thus decided upon. This becomes obvious when you’re coerced into obeying laws you voted against.

      Murphy is just being silly. He seems to think that he can’t argue for the merits of taxation without showing it to be non-coercive. But I don’t know why he thinks that. He isn’t some radical anarchist who believes that no form of coercion is ever justifiable.

      1. Stephen Ferguson

        The MMT vs Murphy debate continues…

        I think one commenter hits the nail on the head. He suggests that Murphy’s objection to ‘tax is coercion’ is not technical, but an emotional overreaction as, in Murphy’s view, Bill is foolishly validating something Murphy has fought against his whole career as a tax justice campaigner: namely the libertarian line that ‘tax is theft’.

        He seems to have calmed down a bit, though he couldn’t resist throwing accusing the “cult of MMT”, Bill included, of being “abrasive” and bemoaning that “Regrettably too many in MMT just take umbrage when asked to think”.

        Pot, kettle, black.

      2. Stephen Ferguson

        By the way agree on coercion, as surely the defining feature of government is the holding to itself the exclusive power of the ‘3 Fiats’: Fiat Law, Fiat Money and Fiat Tax.

        We might get a vote, but government is fundamentally a very non-consensual entity.

  5. grkstav


    The problem is with the “external* part of “external debt”, when that debt is still denominated in the currency which the issuer of the bonds&notes (the ‘borrower’) also issues, and the debt itself is still governed by domestic law (i.e. the law of the country issuing the debt instruments) but happens to be owned (to have been bought) by foreign nationals.

    Claiming that “external [sovereign or corporate] debt” is problematic, even in the above scenario, is the problem.

    1. Calgacus

      Just saw this. Surely “external” is even less problematic than “debt”? If someone in France holds a US bond or currency, it’s external debt.

      People who do not understand that such “external debt” is still a debt, that fiat currency with all the named properties is still a debt, is still “a burden”, can still be “problematic” are disagreeing with MMT (& FF), not supporting it, and are quite wrong.

      MMT (or FF) says that such a nation can not be forced into default – which is right, but is not the same thing. There can conceivably be “negative” consequences of such an external debt even if there is no default.

      I’m not sure of what you are saying, because the word “problematic” is not specific enough.

      1. grkstav

        I am losing the plot, Calgacus. I am not sure what you’re disagree with.

        If the sovereign debt of the U.S. is held by non-U.S. entities, is it ‘external debt’? If so, is that problematic?
        If it’s not problematic, in that it can be serviced exactly the same way that U.S. sovereign debt held by a U.S. entity can be serviced, fretting over ‘external debt’, when it’s denominated in the currency the sovereign issues, the currency itself is a floating fx, nonconvertible fiat, and the instrument is governed by domestic law, is misplaced.

        If I have to define ‘problematic’ in this context, then I give up.

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  7. Simon

    Alex (or Neil): One argument used in the UK that Tax payers’ money is spent in the UK used against MMT analysis is the Government’s ‘Consolidated Account’ which is where Tax money ‘goes’ everything else beyond that being ‘financed’ by bond issue. I try to explain that this is gold standard accounting and just disguises the fact that the Government is the money issuer.

    So what would be the MMT explanation for this archaic accounting? Is the consolidated Account really recycled Tax money or just an amount that happens to be consonant with Tax collected but still sovereign money?


    1. axdouglas Post author

      I don’t know why the ORDER of funding/spending matters so much to people. As Neil puts it, there isn’t really a before and after here at all – just asynchrony. The point isn’t whether you ‘fund’ before or after you spend; it’s whether there’s ever any spending that you can’t afford.

      There’s always money flowing in and out of the Consolidated Account – the point is that the Tsy never runs out of funding options since the BoE effectively guarantees its short-term debt at a target rate. Also, as a point of detail, the Tsy has an overdraft facility at the BoE in the form of Ways and Means Advances:

  8. Boolean, Logic from India?

    My problem of m.m.t. as rpresented on the internet is that it breaks the following accounting rules.

    1. Entity Concept in accounting. Resulting in ability to count only financial assets (personal accounts) thus ignoring real assets (real accounts).
    2. For every debit there is a Credit (within an entity)
    3. Full disclosure principle of accounting.

    A purchase paid in cash is a real item traded for a financial asset. If one follows the rules above one cannot limit the analysis to only financial assets. Thus savings can include real items like businesses, gold, property and education. This would negate the claim on the internet that gov. deficit or debt = private savings rate or wealth. That m.m.t. argument is couched with only counting financial assets.

    1. Stephen Ferguson

      “2. For every debit there is a Credit (within an entity)”

      Maybe I’m missing some accounting technicality, but how does MMT break that rule?

      By the way, in spite of its name, surely one of MMT’s great insights is that the constraints on government are physical (never financial). In other words MMT holds to a model very much more rooted in reality than that held by the mainstream.

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  10. Senexx

    As for the “cult of MMT” by other economists mostly not within the post-keynesian community, it is because the economist probably has not defined anything in MMT terms, they may have said taxes fund spending and had absolutely no nuance on the subject, of course someone aligned with MMT is going to say something. Modern economics is filled with jargonese that only current economists understand and have completely different meaning to the lay person.

    I don’t get what other economists fuss over MMT being cult and aggressive like is all about – they just need to define their economic terms closer to lay English initially as MMT does – from William F Mitchell to Warren Mosler to Stephanie Kelton. Fullwiler & Wray tend to do more technobabble stuff but that’s when they’re launching into reserve accounting and doing what economists call graphs which are not graphs at all.

    I’ve read every critique I can find on MMT including Palley’s (though it was sometime ago) and I find them all lacking. The closest I ever found was by Malcolm Sawyer and it was more about achieving the politics of MMT being accepted as an economic consensus and the politics of getting its policy prescriptions through the political process.

    MMT and its mechanical like operations make incredible sense and I am yet to find an argument against it & I looked for a long time. I am not an economist, but I do call myself an MMTer because it is the closest thing to the truth that I have ever found.


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