*The Deficit Myth* and Modern Monetary Theory

That is the new book by Stephanie Kelton and the subtitle is Modern Monetary Theory and the Birth of the People’s Economy.  Here are a few observations:

1. Much of it is quite unobjectionable and well-known, dating back to the Bullionist debates or earlier yet.  Yet regularly it flies off the handle and makes unsupported macroeconomic assertions.

2. Like many of the Austrians, Kelton likes to insist on special terms, such as the government spending “coming first.”  You don’t have to say this is wrong, just keep your eye on the ball and don’t let it distract you.

3. “MMT has emphasized that rising interest income can serve as a potential form of fiscal stimulus.”  You don’t have to believe in a naive form of Say’s Law, but discussions of demand should start with the notion of production.  Then…never reason from an interest rate change!  Overall, I sense Kelton has one core model of the macroeconomy, with a whole host of variables held fixed (“well…higher interest rates means printing up more money to pay for them and thus greater stimulus…”), and then applies that model to a whole series of quite general problems and questions.

4. She thinks “demand” simply puts resources to work, and in this sense the book is a nice reductio ad absurdum of the economics one increasingly sees from mainstream writers on Twitter.  p.s.: The economy doesn’t have a “speed limit.”  And it shouldn’t be modeled using analogies with buckets.

5. We are told that the U.S. “…can’t lose control of its interest rate”, but real and nominal interest rates are not distinguished with care in these discussions.  The Fed’s ability to control real rates is fairly limited, though not zero, and those are empirical truths never countered or even confronted in this book.

6. The absence of a nominal budget constraint is confused repeatedly with the absence of a real budget constraint.  That is one of the major errors in this book.

7. It still would be very useful if the MMT people would take a mainstream macro model and spell out which assumptions they wish to make different, and then solve for the properties of the new model.  There is a reason why they won’t do that.

8. I don’t care what the author says or how canonical she is as a source, a federal jobs guarantee is not part of MMT.

9. Just because the economy is not at absolute full unemployment, it does not mean that free resources are on the table for the taking.  Again, in this regard Kelton is a useful reductio on a lot of “Twitter macro.”

10. I am plenty well read in the “money cranks” of earlier times, including Soddy, Foster, Catchings, Kitson, Proudhon, Tucker, and many more.  They got a lot of things right, but they also failed to produce coherent macro theories.  I would strongly recommend that Kelton undertake a close study of their failings.

11. For all the criticisms of the quantity theory, I would like to know how the MMT people explain the Fed coming pretty close to its inflation rate target for many years in a row, under highly varying conditions, fiscal conditions too.

12. The real grain of truth here is that if monetary policy is otherwise too deflationary, monetizing parts or all of the budget deficit is not only possible, it is desirable.  Absolutely, but don’t then let somebody talk loops around you.

You can order the book here.


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