A couple days ago, there was a blog on the rec list, How to clear the room of Progressives, inviting us all to the New Economic Perspectives blog to get educated up on monetary policy. While I agree that a better understanding of nuts and bolts economics would be valuable for a wide range of progressive advocates, unfortunately the economic theory that is put forth by this particular blog can be best described as hackery.
The University of Missouri-Kansas City (UKMC) economics department is wedded to a particular economic theory, known as Modern Monetary Theory, sometimes shortened to MMT, with its adherents sometimes referred to as Post-Keynesians. Modern Monetary Theory's central conclusion is that budget defecits do not matter-- that is, defecits won't cause upward spiraling inflation and interest rates-- unless the economy is running at full employment and no resources are idle, conditions which MMT proponent Jamie Galbraith claims have not existed since World War I and will likely never be repeated. So, budget deficits only matter rarely (but don't say that they claim that deficits NEVER matter, that makes them mad!) Even if the bond market doesn't want to buy your T-bills to finance the debt, no problem, you can just turn on the printing press and still, there will be no inflation problem, unless we are at full employment, which they define as an unemployment rate of around 1 to 2 percent, no underemployment, and no hidden employment. (But again, don't say that they claim that deficits never matter, they are touchy about that, even though the conditions under which they allow that deficits do matter are extremely rare-- I do not recall 2% unemployment in my lifetime. I get the feeling that the MMTers are not so subtly implying that if only their policies were enacted, 2% unemployment would NOT be rare.)
The more credulous elements of the left are attracted to Modern Monetary Theory like bees to flowers. Notice that if Modern Monetary Theory were correct, liberal economic policy in a recession or even in a recovery becomes almost trivially easy. As long as the economy is not running at full throttle, you can throw unlimited money at your unemployment problem, whether that be through infrastructure spending or make work programs or paying unemployment benefits or providing worker training or grants for education and it won't be inflationary. At even the hint of an uptick in unemployment, you can unleash a new New Deal, the bigger the better, and get all the workers back to gainful employment in no time, with no worries of damaging inflation or punishing interest rates. Indeed, many proponents of MMT propose that the government have a permanent Job Guarantee... a guarantee of a government job paying a modest wage to anyone who wants one.
Now, you probably have heard any number of left-of-center economists, led more or less by Paul Krugman, advocating for significant increases in spending on such programs during this recession. But make no mistake-- neither Krugman nor most other left-leaning economists currently advocating for increased deficit spending subscribe to Modern Monetary Theory. To the contrary, they strongly refute MMT's holding that deficits do not matter unless there is full employment. They believe that it is safe to increase deficit spending now because, and only because, of the particular characteristics of the recession we are currently in:
The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate — won’t always prevail. As long as those conditions DO prevail, it doesn’t matter how much the Fed increases the monetary base, and it therefore doesn’t matter how much of the deficit is monetized. But this too shall pass, and when it does, things will be very different.
Paul Krugman, Deficits and the Printing Press, 3/25/2011
Not all economies without full employment are in liquidity traps or have lots of excess capacity in the economy, and if those characteristics are not present, deficit spending would be inflationary, even at less than full employment. Moreover,
negative effects kick in once a government can not credibly finance its debts, and this places a constraint on how much can be financed through bond sales. The MMT proponents claim that the government can simply print money if it has to with no ill effects, but history says that this is not the case:
There are plenty of examples of governments trying to finance their operations through the printing press, and the outcome is always the same: inflation at first, then hyperinflation later on, then the end of the currency. Zimbabwe, which now has no currency of its own, is just the latest example. There are various possible mechanisms by which this outcome occurs, but the central point is that the monetary base is typically around 10 per cent of GDP…. Any substantial increase in the monetary base can be sustained only if interest rates are pushed down to low levels, ultimately to zero. And, except in crisis conditions like those of the present, zero interest rates will lead fairly rapidly to inflation in asset prices and ultimately in consumer prices.
John Quillin, as quoted by Brad Delong, 10/1/2013
Indeed, MMT is a fringe theory in economics with an appeal largely based in its promises, not its rigor. Its critics have destroyed it like a cheap piñata. But much like their more well-known counterparts on the libertarian/right, the "Austrian School" economists, the Modern Monetary Theorists tenaciously cling to their ideology no matter what, and just dig in deeper when sharp critics such as Krugman
point out the gaping holes in their theory. (Krugman, on the other hand, has a history of adhering to the wise words of Keynes himself as far as acknowledging error and changing his mind when the facts have shown him to be wrong.) Or they twist words and claim that critics such as Krugman
have been forced to admit that MMT is correct, when
nothing of the sort has occurred.
As an aside, I note that perhaps the most vocal of the UKMC proponents of MMT is Professor L. Randall Wray, who gives himself much credit for the development of MMT. Wray publishes essays on other subjects on a regular basis, and when he has ventured onto ground with which I am well acquainted, I've noted that he just flat out made stuff up. From what I have read from him, he seems to pretty much just say what his audience wants to hear. And really, that is what MMT is-- it is a theory crafted to deliver a message to liberals that they want to hear: that government can always spend money to create jobs and put the unemployed to work, and the spending can be financed if necessary by printing whatever money is needed, without unwanted side effects.
But to keep you coming back-- and probably more than a little bit to deflect from the fact that MMT is hard to explain and harder to defend-- Wray and the crowd at the New Economic Perspectives blog spend most of their time on stuff other than economic theory. They will draw you in with their copious attacks on the usual villians, railing against "banksters" and "Wall Street" and "Rubinites", using all the proper terms to appeal to an audience that believes-- not without some justification-- that their future has been stolen away by financial elites who should rightfully be in prison but are not. Far from "clearing rooms", anti-Wall Street opinions have proven to have a significant potential for an audience on the left, here and elsewhere.
So if you want to go there to scratch that itch, go on over. William Black writes there and I'm sure he writes some interesting opinions on how the finance industry should be policed.
If you go there to learn about monetary policy however, you will be misinformed. Modern Monetary Theory is snake oil.