*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.

Comments

I did an undergraduate macro class with Prof. Kelton at UMKC back in the early 2000s. I don't remember much from the class, but I do remember her giving a very good overview of Abba Lerner's functional finance. I also remember she always came dressed sharp as a whip - usually in a suit - to class, which was a pleasant departure from the other rather dowdy professors.

I also did a class under Randall Wray. He was also pretty impressive, but was much less MMT forward. Came across as much more of a Monetarist, strangely enough!

Also - can it be? - FIRST!!!

You did it! I pass my mantle to you, Joker. You're #1!!

Now back to lurking...

Congratulations! You beat out that petulant German who incessantly whines in the comments.

I just wanted to say that the 3 comments above are a great way to start my day. Thank you all.

#2 isn't surprising - my experience reading the MMT people on Twitter (and especially Kelton) is that they are very big on the whole "this allows more government spending and maybe a Job Guarantee", not so much on the "we have to have high taxes to drain money back out of the economy to offset that spending". It's Supply Side Economics for the Left, in that it's mostly useful for their project insofar as it rationalizes decisions they already want to make.

Bingo. It's a solution to a political problem, not an economic problem, and no one would need to think it up if it was possible to rise middle class taxes. Since it's not, and leftists cannot limit their spending ambitions, it falls upon lefty economists to think up a reason why they can spend the money anyway.

"leftists cannot limit their spending ambitions."

We have a far-right party and a center-right party in the USA. We do not have a leftist party. And if you look at Federal Deficits when the far-right controls the government, they're higher than when the center-right controls the government.

You mean the US has a center-left party and a far-Left party of course.

The only way you see our parties as leftist is if your perspective is somewhat right of Attila The Hun.

I wonder where on the entire planet King George would find a party that he considers far-right, or even center-right.

"And if you look at Federal Deficits when the far-right controls the government, they're higher than when the center-right controls the government."

This can come, as it did under Reagan, from reduced taxation income rather than increased spending.

And why is that better?

I think most free-market types would argue that while both lower taxes and higher expenditures lead to deficits, lower taxes are less distorting of market forces than higher expenditures. Of course, that's often reduced to fairly binary reasoning ("Government bad! Market good!"), but in general I think most economists believe in the efficacy of market forces over a broad range of conditions.
That authentic disagreement among economists is so frequently hijacked to serve a political purpose, by both sides, is just a byproduct of living in a democracy.

Proof, if proof were needed, that both "parties" are corrupt. Our elected officials "manage" the budget so as to tell their constituents how much money they have brought home to the local district and gain re-election or, perhaps, how much they have reduced taxes, again, so as to be re-elected.

I've got a graduate degree and have studied macro and micro. I get the argument. But, still -- why did our legislative and executive branches decline even to pretend that in periods of full employment and robust economic growth that matching income with spending might be a good idea?

5), 6) and 12) are all anyone needs to know about MMT

I somewhat agree, although #3 and #7 are both getting at yet another important critique: can they even come up with a coherent model, or are they just making a lot of statements that do not, and cannot, fit together.

A number of major countries including the US have recently been pursuing what would seem to be an MMT-ish policy: spend like crazy and let the central bank buy up the debt. Though there are plenty of critics, I think most mainstream economists and policymakers think this is a good idea ... are we all Modern Monetary Theorists now?

A little more detail on Tyler's critique #3: "never reason from an interest rate change!"

Yeah, I had trouble understanding macroeconomics until I learned principles such as that one. (I think; I actually never heard the phrase "never reason from a price change" in school so I've deduced what people mean by it.)

It's fine when building the elements of a macro model to talk about what happens when interest rates rise. Or how the government should react.

But when you've finished building the model and are trying to describe how it works, you can't merely ask "what happens when interest rates rise?" It's not a well-formulated question.

In just about any useful macro model, interest rates are endogenous. They don't simply rise -- something had to happen in the economy to make them rise. And until you've worked out those causes and effects, your model of the economy is incomplete, and you can't make useful statements using your model.

This might be one of the most common intellectual failures that we see all around us: failure to be aware of the endogeneity of important aspects of life.

R0 changes its value, depending on a ton of things.

Super-spreaders can only spread infection depending on what events they attend and how they behave at those events. Being a super-spreader, in the sense of being one of those people who caused a lot of other people to become sick, is not some fixed or exogenous destiny. (Being a person who sloughs a lot of virions for a long time while being unaware that one is infected makes one a potentially bigger super-spreading threat -- the key word there is potentially, i.e. the outcome is endogenous.)

Is one race better at basketball than the others? When the BAA (the direct predecessor of the NBA) started, Jewish players and coaches were heavily over-represented in basketball. Similarly, black athletes are not inherently inferior at water polo -- or at quarterback. Change the social conditions or even just coaches' attitudes and now we have Russell Wilson and Patrick Mahomes.

And women can do math. That doesn't mean that we should strive for equal gender representation in the sciences nor that the best mathematicians will or should be half women. It does mean that we should not put up useless artificial barriers against women in science and math -- including self-imposed ones; way too many people think that their math ability is fixed and exogenous, rather than endogenous. Practice and work at it more and you'll get better. That doesn't mean you can turn yourself into the next Gauss, nor even get a PhD in math. But you can probably get through calculus and linear algebra.

Great comment, +5 internet points

I really hope people can follow this. That investors might simply think about treasuries differently is something everyone is having a hard time accepting.

Why would that be a problem? A sovereign doesn't need to borrow or tax in order to spend.

What don't you understand RE: MMT? Be specific.

No, this is the problem. The burden of proof is on MMT advocates is to fully articulate their model and then answer questions about it.

They have done so. Lots of books, papers and blogs. But there is also a burden on questioners to actually read what MMTers have said and ask relevant questions based on their reading. The author of this article hasn't.

Like many "critiques", it is like reading a critique of Newton's physics - from an astrologer.

Here: Read this blurb and come back to me with fully articulated questions: https://fflorescpa.wordpress.com/2018/07/28/financing-economic-solutions-to-unemployment-and-accompanying-social-problems/

Money Market Theory worked for a few weeks under Roosevelt until he repriced gold. MMT worked for Nixon over the course of a few days then he repriced gold. Worked barely under First, then Second bank of the US. worked well enough through the Civil War.

We need MMT for about four or five days of meetings until we decide the new Fed contract. We need some elders who can remember, or have historical memory of all the times we MMTed before. If we have deliberately Orwellianed into denial we are screwed. We have a low bar, just MMT a bit better than Nixon.

Isn’t MMT what Argentina has been doing ? How is it working out over there?

They are doing better than "Where's the oil?" Venezuela or the incompetent fascists that gave Brazil the national equivalent of a venereal disease. When the whole of Latin America is a basketcase, its okay to be a fruitcake.

You overlook Uruguay.

Inflation is too many dollars chasing too few goods and can come from different mechanisms. For example, it can come from:
1) an external shock in a commodity that an economy needs to import - such as the oil embargo in the 1970s, causing a price increase in gasoline -> fertilizer -> food -> and labor through union cost of living contracts.
2) excessive borrowing in an external currency or commodity and then a rise in that commodity and falling into a spiral as the country prints in order to make ever increasing payments (Weimer Republic making payments in gold, Venezuela, USSR, Argentina borrowing in dollars),
3) a catastrophic supply shock in the production of a key output/export product coupled with foreign currency debt or import requirements (Weimer Republic - > France took over their steel making capacity when they fell behind in gold payments; Zimbabwe -->Mugabe expropriated farms from experienced white farmers and giving it to his inexperienced urban cronies resulting in a 40% drop in grain production, swinging the country from grain exporting to grain importing.
- Its actually kind of hard to induce inflation (see: Japan in last 20 years and US in last 8 years)

Also: A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
a. issues,
b. borrows in, and
c. floats
its own currency, can NEVER run out of cash.

Argentina borrowed in dollars.

Have not read the book myself, so that makes it difficult to criticize your critique- which seems to mostly cast vague aspersions rather than offer any evidence of where Kelton is wrong.

I guess I will just have to buy it and read it. I cannot believe for even one second that Stephanie Kelton or any MMT economist would not explain the 'real' constraints that any spending comes up against. Those constraints are available resources. That is pretty basic in MMT. As in it is emphasized repeatedly.

The mainstream writers on Twitter of “Twitter macro” need better fact checking.

Who are the mainstream “Twitter macro” accounts?

That is the sort of thing that Tyler knows - maybe he will share his knowledge in another post which is not a book review.

I don't have a good sense of how the economics profession as a whole thinks of MMT. Should I expect Kelton to win the Nobel in twenty years?

No. There’s at least one good reason for math in economic models (in moderation) and that is it forces proponents of a theory to spell out exactly what they are assuming, and demonstrate the internal logic of their position. That’s a minimal condition for a theory to be coherent enough to debate.

Thanks! Has any proponent of MMT used a precise-seeming mathematical model to spell out the theory yet?

Correct, AFAICT. MMT is perhaps moving beyond stage 2 of "First they ignore you, then they laugh at you, then they fight you, then you win" (often wrongly attributed to Mahatma Ghandi, instead it was Nicholas Klein
https://en.wikipedia.org/wiki/Nicholas_Klein).

But I do not expect MMT to win that fight. They're more likely to win an IgNobel than a Nobel. They're one of the few things that unites economists from Austrians to pro-business conservatives to neo-Keynesians to ... basically everybody except the weird fringe of MMT economists.

Of course, every major movement starts out as a small fringe movement.

And as I mentioned in another comment, most major economies are following MMT-ish policies right now, handing out cash, letting their budget deficits balloon, and not worrying about the possibly inflationary pressures.

But that doesn't mean that the economists who promote those policies believe in MMT theory. Rather they agree (obviously with plenty of dissenters) than right now is the time for governments to bail out the workers, firms, and students even at the cost of bigger deficits.

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.
---
Define deflationary as a negative value of the implicit price deflator. Government spending has never gotten that to rise much, an it has been in continual declined. It is a charted, know result.

Government really cannot produce inflation, except with partial default. Central banks can lose money, for example, a pile of it falls out of the armored car, that is inflation. Another method of inflation is a computer program that wiped the Fed accounts clean of some portion of its government assets on occasion.

Otherwise,m it is mathematically impossible for government to raise the implicit price deflator. The reason government cannot raise the implicit is because we have jillions of accountants adjusting relative prices, down. They remove price variance and skew.

So by inflation we must mean something else. Please someone define it. To raise the price on consumers? What exactly? Price variance? A sales tax raised prices on consumers almost always, is that what we mean?

Instead of talking about MMT on Twitter, this blog should get back to something serious. Like discussing UFOs.

Consider out covid check, mailed directly to us via bank check or transfer. We also get high bank fees and rates at the consumer level as seen by the number of retail banks that exit every time we do this. Those extra fees are exact;ly the gains the fed hands to government, the accounts balance, and it must be a loss passed on to the consumer credit system. That amount that gets passed to us is exactly the amount the banks will not pay, they consider it unprofitable. The consumer pays, it is a net zero on the implicit deflator but it increase price variance as all prices get reset in response.

" 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."

This is stated like Kelton and she alone is guilty of this. The truth is all of economics is guilty of this. It's just less obvious if you agree with the person or the position.

Personally, I take the vagaries of mining anyday over the vagaries of politicians.

6. I don't have a copy of the book. But anybody following MMT would kindly tell you that budgets are hard constrained by inflation so they agree with you on "real" budget constraints. In fact there's a section on Wikipedia stating as much:

"In this theory, sovereign government is not financially constrained in its ability to spend; it is argued that the government can afford to buy anything that is for sale in currency that it issues (there may be political constraints, like a debt ceiling law). The only constraint is that excessive spending by any sector of the economy (whether households, firms, or public) could cause inflationary pressures."

https://en.wikipedia.org/wiki/Modern_Monetary_Theory#Policy_implications

Doesn't some version of MMT include a sales tax that rises as inflation rises so politicians aren't faced with the impossible task of raising taxes whilst keeping their jobs? Isn't the purpose of the sales tax to provide consumers with an incentive to defer their spending, thus reducing demand thereby heading off inflation?

Where I am confused by MMT is what it does to international trade?

"Doesn't some version of MMT include a sales tax that rises as inflation rises so politicians aren't faced with the impossible task of raising taxes whilst keeping their jobs?"

Interesting idea.

Yes. A gentlaman and a scholar spells it out in a blurb: https://fflorescpa.wordpress.com/2018/07/28/financing-economic-solutions-to-unemployment-and-accompanying-social-problems/
The JG/GND law should include automatic across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales/VAT Taxes
c) Asset Value (or Wealth) Taxes
That'll cool things off pronto.

I thought only a sales/vat tax would produce a "voluntary" reduction in demand in an over-heated economy. I don't understand how an income tax or wealth tax would cause people to choose to defer purchases (thus temporarily reducing demand to come into better alignment with supply).

High income/wealth folks will have less money. That's one less yacht. Not as effective as Sales/VAT taxes but WILL have an effect.

As I understand it, inflation (in prices for goods/services) doesn't come from hoarding wealth. It comes from an imbalance in the demand:supply ratio. To cool demand, encourage people to save their money for later.

Again, as I understand it, a wealth tax does NOT encourage people to defer purchases. It encourages them to hide their wealth offshore.

Or just take their money so they have less to spend.

It would never work.

The Gramm-Rudman back in the 1980s was supposed to have a similar automatic nature.

It included binding spending constraints so politicians aren't faced with the impossible task of cutting budgets while keeping their jobs.

In fact budget sequestration has been enacted multiple times. It never makes any difference in the end.

Binding unpopular commitments only last until someone campaigns on a promise to abolish them, or loopholes are found, or emergency exemptions are routinely renewed, or whatever.

I love it when Tyler clearly says "I think the Author is a dishonest fool and this book is mendacious cant", without, you know, actually saying that.

This passage is not subtle - 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.

Yes, well, Tyler is really nice guy, but even he is tempted to sometimes hoist the Black Flag and begin slitting throats....

"The economy doesn’t have a “speed limit.” "

You mean if every person age 8 to 88 is working 14 hours a day 365 days a year, gdp can still increase? By adding a hundred days to the year? Making the day 30 hours?

The constraint on GDP is mostly buy paying consumers, aka workers, only 90-95% of the price of what they produce while demanding consumers repay the money they borrow to consume what is produced. Given government does the bulk borrowing, heavily when the gop is in the White House, but demand debt repayment when Democrsts are in the White House, with the gop demanding consumers who do the hard work be paid only 50%-75% of living costs, eg farm workers, food service, delivery drivers.

Consider, gdp per person in the US is over $60,000 but $30,000 in earned income is called way too high.

If $30,000 is too high a minimum, why not a maximum earned wage of $50,000.

Because wage floors and ceilings are destructive and wrong

Timing is everything, and there's no better timing than now for a book on MMT. No, I'm not suggesting that revelations in this book will change the course of history, I'm suggesting that the course of history has never looked bleaker than it does today. It's time for a miracle. If Messiah Jesus can overcome death, why can't Messiah Economists come up with a miracle to overcome a world economy on the brink. After all, economics is religion, with it's prophets and disciples, its holy books and holy places, its true believers and martyrs, its secret language and symbols, its Alpha and Omega. Apocalypse coupled with salvation. Faith over fear. Believe. Monetary Miracle Today.

I know, attempts at humor always fail. I don't understand why many economists today are compelled to have some grand theory for how the economy works. Markets know best, that's really all one needs to know. Adam Smith revealed this, coincidentally, in the year of our founding, 1776. Not much has been revealed since. Sure, there's been some ideas to avoid or overcome deflation, and some ideas to avoid or overcome inflation, but mostly ideas whose time will never come. Today, the ideas are about behavior, what I refer to as the illusion school of economics, and the tools to fool people into behaving in ways that are preferred. It's not really economics, though, even though many believe it is. I recall the sage advice given to the recent college graduate Benjamin Braddock: plastics. What the sage meant was the market in plastics.

Only because that is how people like yourself think. The minute you start practicing a more humble form of economics-you know simply studying human choice, then you can get away from fantasies such as MMT or other macro popcorn fart ideas...

i always thought he stole that from Sam Wainright's turning soybeans into plastic up in Rochester

Markets don't always work, because they are feedback-loop based control systems. The first thing one learns in studying control system engineering is that even in a loop with only negative feedback will be destructively unstable if lags and dead times (pure delays) around the loop cause 180 degrees of phase shift in the arrival of fluctuations in the the feedback signal at a frequency where the loop gain (amplification ratio) exceeds one. The only way to prevent this is to include a mechanism that reduces the loop gain at that frequency to less than one, in other words, to throttle the loop's responsiveness to changes that are "fast" relative to the lags and dead times. If the gain is only a little less than one at the 180 degree phase shift frequency, the system will behave poorly, "ringing" in response to disturbances. This is the fundamental cause of boom-bust cycles in markets. To prevent this requires conscious intervention to reduce market responsiveness to changes.

I'm confused as to why the much maligned "boom-bust cycle" *is* so much maligned. People step up to the tables, make their bets, and succeed or fail as a result. Every choice we make has a consequence - some good, some bad.

This is called "life".

If you try to make sure that no one fails - because someone might get "hurt" or lose their life savings or [insert bad thing] - you end up where we are today: Printing money for the 1% who provide so many people with jobs, but destroying hundreds of thousands of small business owners - who *also* provide millions of people with jobs - including themselves.

Sometimes I think that economists forget that they are playing with the lives of billions of actual living, breathing human beings. The "economy" is human interaction. It is not a machine with switches and buttons and cogs and gears and chains where you can make adjustments and get something that runs forever without breaking down.

The way I see it is: If in the end, by trying to make human interaction into a machine that you can control, you end up hurting millions anyway, why do it at all?

Great! The developing idea that most economists are actually evil incarnate misshaping the economy to their heart's content and a bitter end. Tyler's recent interview guest, Paul Romer, expounded on this . . . A GREAT QUESTION FOR OUR AGE! Have economists helped or hurt? Tyler is such a great "Genius Lawyer for the Libertarians." He has the most facts, and quickest arguments for their increasingly shoddy case.

Well, in the defense of economists in general, I didn't say (or mean) they were all "evil".

I don't believe that that many, if not most, of them intentionally set out to hurt anyone. However, they should realize that most cliches exist for a reason, including:

The road to hell is paved with good intentions.

Tyler just mad he didn’t think of MMT first.

Very good post Tyler! Thanks.

+excellente
muchos unos

Wouldn't MMT work if you combined the Federal Reserve and the US Treasury and ran it as free bank. That is if you got deflation you spend more. lend more and collect less taxes, if you get inflation you spend less, lend less and collect more taxes? I doubt that it would allow Gov to spend significantly more but it might increase response time,MAYBE.

Why am I still paying taxes at all? The Big Free Bank can just revalue the currency as needed.

a comparison of MMT with “ the “money cranks” of earlier times, including Soddy, Foster, Catchings, Kitson, Proudhon, Tucker” would be a great post

"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"

lol the Job Guarantee is what defines MMT. Can't be MMT without one. Its Post-Keynesian or Functional Finance without the JG.

America is an energy intensive consumer spending economy so our “speed limit” has been the first law of thermodynamics for the last 50 years. Here is Greenspan in 2003:

Chairman Domenici noted, in his hearing remarks, that he met recently with an industry CEO who said his company was moving its manufacturing operation to Germany because of high U.S. gas prices. Chairman Greenspan responded by noting that high natural gas prices were a U.S. phenomenon, not a global phenomenon. High natural gas prices currently affect household budgets, but over time, those prices could drive jobs overseas, he said.

https://www.energy.senate.gov/public/index.cfm/2003/7/press-41dcbf0e-4abc-4c94-a82f-5b57d94be946

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

Scott Sumner and the market monetarists would approve. I agree, the real point is that if the Fed doesn't do its job, fiscal policy becomes more useful. Though the best fix is the Fed doing its job, and not being overly tight.

Monetary policy is a very ineffective tool in modulating economic activity. Its obviously deflationary at very high levels as it curtails borrowings for real estate and M&A/capital equipment. But it represents an injection of net financial assets into the private sector as investors get more cash to spend. A muddled picture. Obviously fiscal policy is the more effective tool, and the process is a Job Gty as part of a Full Employment Fiscal Policy: https://fflorescpa.wordpress.com/2018/07/28/financing-economic-solutions-to-unemployment-and-accompanying-social-problems/

Just a few things.

(1) I think there is a typo in point 9. You meant absolute full employment, I think.

(2) I am not surprised that Kelton was an advisor to Bernie Sanders. But now she is part of the macro team advising Candidate Biden. If Biden nominates her to take over the Fed, would you short Treasurys and the US dollar?

(3) I am sad about how ideology gets comingled with theory and evidence. For example, accepting a modern quantity theory of money like Milton Friedman does not imply libertarianism. An economist could be extremely left and yet still believe money growth causes inflation. And one can be libertarian but not accept monetarist theories of the business cycle, like Von Mises. Can we find some right wing MMT people?

(4) I understand the foundation idea of MMT, called chartalism. My old teacher Earl Thompson at UCLA told us that fiat money has value because you paid taxes with it, which is chartalism. But Thompson never thought the government had no budget constraint and he believed debt could cause higher interest rates. There is no progressive implications for chartalism, and chartalism does not undermine the quantity theory of money.

(5) I think I get a core concept of where MMT is going. In 1969, I had a very old fashioned Keynesian for a macro teacher. His view was that fiscal policy should be adjusted to keep full employment, and the Fed should keep rates very low to help finance the deficit, and price-wage controls should be used to control inflation, and anyway a little inflation is okay. If inflation gets too high, raise taxes.

Galbraith, both elder and son, seem to have these views.

This kind of MMT I can understand. Just old fashioned postwar Keynesianism. (I don't think Keynes himself had such views.) I think this where Abba Lerner and functional finance were.

But Kelton takes that view and flies off into the blue, and I can make no new sense of it. At a NABE conference, Kelton said she does not care what the debt-GDP ratio is, now or ever, whatever the level may be. Not relevant. Such a policy experiment could be dangerous.

(6) Where MMT gets play is a liquidity trap. Issuing T-bills at a zero rate and printing currency at a zero rate seem the same. We need positive interest rates to make a distinction between currency and bills.

What don't you understand about what Prof Kelton is saying?

This is from the book description:

Kelton busts through the myths that prevent us from taking action: that the federal government should budget like a household, that deficits will harm the next generation, that deficits crowd-out private investment and undermine long-term growth, that entitlements are propelling us toward a grave fiscal crisis.

The basic idea of MMT, as I understand it, is:
- deficits don’t matter; and
- debt to cover deficits doesn’t matter, because we can always print money.

If this is a correct summary, my questions for MMT are:
- why incur debt at all, why not simply print money now?
- and taking it a step further, why bother collecting taxes?

Rebes: Prof Kelton doesn't like to use the word print. But fine. Issue. See blurb for background: https://fflorescpa.wordpress.com/2018/07/28/financing-economic-solutions-to-unemployment-and-accompanying-social-problems/
A sovereign doesn't need to tax or borrow in order to spend. It can simply issue. Taxes are a very effective tool for modulating inflation IF it ever becomes an issue. For example, the JG/GND law should include automatic across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales/VAT Taxes
c) Asset Value (or Wealth) Taxes
That'll cool things off pronto.
Taxes can also be used as a tool for reducing wealth and income inequality.

I guess those preaching MMT, so as to use up all fiscal space, all borrowing capacity at reasonable rates, and all seigniorage, so to put a reverse mortgage on the economy and have a good time… have no grandchildren

Please review this blurb on intergenerational equity and come back with questions: https://fflorescpa.wordpress.com/2018/07/28/the-kids-are-not-alright-the-truth-about-the-federal-debt-and-intergenerational-equity/

On your list of money cranks you forgot Silvio Gesell (beloved of Keynes) and Major Douglas (much less so).

I occurs to me that supply siders like Art Laffer would love MMT.

Are taxes harmful? Get rid of them. Finance the government with deficits forever, via the Fed. Layoff the IRS. and private tax accountants. All tax distortions gone, Layoff economists specializing in tax economics.

Think of the economic boom with no taxes.

Why not? Can Kelton explain to Laffer why this is a bad policy?

Why do you hate IRS folk? Do you also hate the troops? How about America?

Comments for this post are closed