Alberto Bisin has written an intriguing short review of Stephanie Kelton's The Deficit Myth. Alberto focuses on the rhetoric of MMT and the book. (My review here FYI.)
MMT's rhetoric is surely its most salient feature. It has been phenomenally successful in terms of gaining attention, and it has eschewed all the traditional rhetoric of economics -- academic articles, conference presentations, monographs full of equations, econometric estimates and tests, or even mountains of charts and graphs, PhD students fanning out to develop it.
[In response to JZ comment, that is not necessarily good or bad, it's just a fact. The conventional economic rhetoric produces a lot of garbage, too. Bryan Caplan has a point. The major distinction may be engagement with critics, which happens in conventional discourse and so far has been largely absent with MMT.]
Kelton's book is unusual in MMT rhetoric for appearing to be one definitive source that would lay it out, following standard rhetoric. The trouble with writing a book is that sometimes people read it carefully, and are emboldened that they aren't missing something in the usual flurry of blog posts tweets and videos. Then the world finds out the ideas in it are empty, the rhetoric artifice rather than explanatory.
(NB, "rhetoric" has gained an unfortunate pejorative in common usage. I mean no such pejorative. How we structure economic discussion is hugely important. If you have not read Deirdre McCloskey's Rhetoric of Economics article or subsequent books, do so immediately.)
Alberto:
The book should be seen as a rhetorical exercise. Indeed, it is the core of MMT that appears as merely a rhetorical exercise. As such it is interesting, but not a theory in any meaningful sense I can make of the word. The T in MMT is more like a collection of interrelated statements floating in fluid arguments. Never is its logical structure expressed in a direct, clear way, from head to toe.
In particular,
Some of these statements are literally correct but used for incorrect or misleading implica- tions—plays on words, effectively. They seem taken directly from the book of tricks of the Greek sophists (the ones Aristophanes makes fun of). For instance, statements to the effect that any monetary sovereign cannot default on its debt because it can always monetize it are of course literally correct. This does not imply that the consequences of monetizing the debt, in real terms for bondholders, are much different from those of a literally defaulted-upon debt.
Later,
These general components of the rhetorical exercise of MMT are sprinkled with a flurry of more standard tricks:
(i) Straw men arguments: mainstream economists are presented as thinking that deficit spending is, in and of itself, overspending; that deficits necessarily crowd out private assets, that is, that the economy’s savings are exogenously given, etc.
(ii) Identities used as behavioral relationships: government deficit = nongovernment surplus, current account deficit = capital account surplus, etc.
(iii) Irrelevant details playing with the imagination of the reader: how can the monetization of the debt be so damaging if it can simply be “accomplished using nothing more than a keyboard at the New York Federal Reserve Bank” (p. 83)?...
Alberto has some nice things to say about one rhetorical trick:
I also find the rhetorical innovation of using the word “deficit” to stress lack of social insurance in the US political economy (“the good-jobs deficit,” “the education deficit,” “the health-care deficit,” and so on, in contrast to government deficit) intelligent and witty.
contains provisions for infrastructure, education, health care, job guarantees, etc. These are large but generally worthwhile public-spending objectives.
low interest rates and low inflation might really be calling for more debt in the United States at the present time. These are all issues currently studied and debated in (mainstream) academic and policy circles.
Circles that Kelton seems completely unaware of, and they completely unaffected by MMT.
Bottom line, well expressed:
MMT, as exposed in the book, appears to be a very poor attempt at supporting this political [spending] agenda, with no coherent theoretical support.
(Of course Alberto also notices logical contradictions as well as rhetoric; that Kelton acknowledges inflation as a "limitation," but never talks about when or how inflation might happen,
Inflation is never built in the structure of the arguments; it is mentioned and quickly for- gotten. ... never is the inflation of the 1970s in the United States discussed...
But the review is most distinctive for analyzing the rhetoric.)
Bisin’s first para is nonsense. In it he says MMT advocates “…a theoretical structure showing that the government budget constraint essentially does not matter, that monetary financing can support any public spending the government sets its mind to: if Congress wants to accomplish something, the money can always be made available”.
ReplyDeleteActually MMTers have repeated over and over till they are blue in the face that inflation places a limit on the size of the deficit.
And Bisin is nowhere near the only so called "professional" economist to take that cheap shot at MMT. That incompetence of "professional" economists helps explain why MMT has run rings round "professional" economists. Raghuram Rajan (former governor of India's central bank makes the same cheap criticism at the link below.
https://www.project-syndicate.org/commentary/borrowing-and-spending-limits-in-ultra-low-interest-rate-environment-by-raghuram-rajan-2020-11
That's not quite fair. Given his very short space allocation Alberto does treat inflation, and quite fairly. (I've read the book closely, so at least this is an informed opinion, though nonetheless an opinion) From p. 4,
Deletea statement to the effect that monetization is not without limits is repeated a few times in the book, for example, “MMT is not a free lunch” (p. 37), and “MMT is not about removing all limits” (p. 40). But these statements leave no dent on the core message of MMT—that a sovereign government has no need to finance its spending. It is said that inflation is what limits monetization. But the role of inflation is left dangling, seemingly unrelated to fiscal policy or to agents’ expectations. Inflation is never built in the structure of the arguments; it is mentioned and quickly forgotten. For instance, there is no discussion of inflation after arguing that it is “relatively easy to peg interest rates on short-term government debt instruments by standing ready to purchase it at fixed price in unlimited quantities” (p. 122). And never is the inflation of the 1970s in the United States discussed, not even to argue that things are/would be different now.
Kelton was fairly clear that inflation was easily managed through fiscal policy. The Pup fleshes it out in his blurb:
Delete"A Job Guarantee law should include automatic across-the-board tax increases that kick in automatically when certain monthly wage inflation targets are hit – say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales / VAT Taxes
c) Asset Value Taxes (or Wealth Taxes)
That’ll cool things off pronto.
Inflation should not be an issue since newly issued money is offset by both public sector and private sector goods and services produced."
1970s inflation was caused by an externality: Yom Kippur War and the resulting quadrupling of oil prices as a result of the embargo. This is common knowledge and probably didn't need explaining in The Deficit Myth.
actually wouldn't a jobs guarantee at a set wage and floating quantity of workers provide maximum employment and stable prices? People would go on and off the JG depending on conditions in the economy, whether its shedding jobs or gaining, it would automatically adjust Fed govt deficits to be the right size so as to do what the Fed reserve is supposed to do but can't.
DeleteI think there might be a missing word in this sentence:
ReplyDelete"Circles that Kelton seems completely unaware of, and they ARE completely unaffected by MMT."
I have tried to talk with a proponent of MMT months ago and I was puzzled by his beliefs. It sounded to me as a long series of excuses to support arbitrary amounts of government spending.
As for the remarks made here regarding the structure of the rhetoric, I think a lot of bad ideas are couched in purposefully vague terms. You're allowed not to love what we generally do in economics, yet much of it is conductive to a discussion: our assumptions are explicit, the empirical implications can be derived as theorems no one can deny, and the statistical analysis allows us to look at problems with different degrees of ontological commitment (think about structural and reduce-form models). Even if we cannot always pick a single best, though still imperfect description of a social phenomenon, we can at least talk about the limitations of what we do in clear terms.
While I'm on the issue of economic theory and empirical relevance, I would be very curious to know your thoughts on heterogeneous agent models at the intersection of macroeconomics and finance. I think it might help us put meaningful restrictions on DSGE models by incorporating the cross-section of individuals and/or firms, among other things.
Just a suggestion for a future blog post, perhaps.
A fascinating post. Cochrane is concerned that Kelton's book "has eschewed all the traditional [scholarly methodology] of economics" to speak directly to the public.
ReplyDeleteBut I worry that the conflation of scholarship and populism has happened much more broadly, with unfortunate consequences for society, and has only accelerated in recent decades. It is why I complain about some of Cochrane's own blog posts (but not this post, which was written by Cochrane the scholar).
• Bisin’s issue with MMT is that he hasn’t quite learned it’s precepts. In his conclusion:
ReplyDeleteRE: "In fact, low interest rates and low inflation might really be calling for more debt in the United States at the present time.... But MMT, as exposed in the book, appears to be a very poor attempt at supporting this political agenda, with no coherent theoretical support. ...."
• Right there. After writing and plowing through his article he exhibits a lack of understanding of the fiscal/monetary system. A sovereign does NOT need to BORROW or TAX in order to spend. So why would he frame his conclusion like that. Because he doesn’t understand.
RE: "“the tax is there to create a demand for the government’s currency”... large monetized debt will need to result in a lot of our time to the government— ..."
• Bisin needs to be able to hold several thought in his head at the same time:
• Taxes are a tool to:
a) modulate inflation if spending surpasses productive capacity of the economy,
b) modulate income and wealth inequality,
c) establish and maintain the demand for the currency.
d) Allow the govt to provision.
It’s not that hard. 4 thoughts at the same time.
RE: "Inflation discussion... ... ..."
• Kelton and MMT are very clear that government spending is constrained by the resource limitations in the economy. But if Bisin and others need it spelled out, the Pup does so over and over again:
• Inflation is easily managed in these circumstances. For example, the Job Gty/Green New Deal 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.
• Other tools are minimum real estate mortgage down payment requirements and security margin account percentages.
RE: "Confutations... ... ..."
• You mean refudiations right?
RE: " debt because it can always monetize it are of course literally correct. This does not imply that the consequences of monetizing the debt, in real terms for bondholders... . It does not break, however, the conclusion that “the government must tax more to spend more” (p. 20), unless we play with the word tax ...."
• The truth is the vast majority of the public and economists constantly wring their underwear about the possibility of defaulting on the payment of principal and interest. So it is important that the improbability of this be made clear.
• The possibility of reducing the value of the debt through inflation can also be minimized through the steps outlined to manage inflation.
• The govt does NOT need to tax or borrow in order to spend, and it can tax in order to control inflation IFFFFF it becomes an issue; And it’s unlikely to be an issue as long as there are underutilized resources in the economy.
Delete"And it’s unlikely to be an issue as long as there are underutilized resources in the economy."
How do we know this statement is true? And so underutilized to support the full mmt Stephanie kelton doctrine of spending? Maybe but I'd like to see something quantitative to suggest it's true.
You don't need anything "quantitative". You just need to think things through. (I know, I know, Austrians and thinking things through.) The problem with the economy for the last 40 years is that economists and policy makers have been measuring and managing the wrong things. (Quantity of money, gdp, rich folks income) So what should be managed? 2 things:
Deletea) Unemployment - as in keep it at ZERO at all times, and
b) Inflation - as in measure monthly and keep it at a low manageable and comfortable level at all times. (3% to 4%?)
If there are underutilized resources (unemployed folk) businessfolk will hire them to produce more goods and services, offsetting the issued currency. If inflation becomes an issue, taxation automatically increases every 3 months until things cool off. How is this hard to comprehend. Less money to spend, less purchasing. Think things through.
First off, is 0 unemployment a worthy goal? Surely there should be some unemployment with regards to job matching. And why not instead call for 100 percent labor participation instead.
DeleteOr rather, why not go the Soviet model and have everyone employed by the army if it's all about unemployment. Surely labor productivity is at some point beyond the ability of government's to manage at least in the short run.
Yes. 0% unemployment is an excellent goal. Job matching will indeed be a task and you do the best job possible. If someone can't do anything, then they should be eligible for disability benefits.
DeleteRE: 100% labor participation, I'm assuming you're being sarcastic. The Job Gty is an offer of employment to whoever wants and needs a job at a particular (minimum) wage.
RE: Productivity: What is less "productive" than having millions and sometimes tens of millions of people who want and need a job, sitting on their asses.
I'm skeptical the government can solve this goal with any kind of efficiency. Right now there are an army of prime aged males not working. Clearly their reservation wages are higher than a similar cohort in Bangladesh. This implies the government will need to pay them some equivalent of their reservation wage in order to get them to work. Do you think this will reflect their marginal productivity?
DeleteIn other words, is it an efficient trade-off from a tax and inflate point of view to spend 100k on unemployed workers to pick up trash? The 100k is meant as intended hyperbole to drive home the point.
What is the marginal productivity of having millions sitting on their *sses at 2:00 in the afternoon on a Thursday unshaven unshowered drinking a can of Schlitz when they are actually desperate for work.
DeleteMaybe there's a technical definition to "default" that I'm not aware of, but this sentence seems like it should be corrected:
ReplyDelete"statements to the effect that any monetary sovereign cannot default on its debt because it can always monetize it are of course literally correct."
He shouldn't write "cannot" but "need not". Monetary sovereign's certainly "can" default, they just need not do so because they can always print.
Bisin's concluding sentence is perhaps the key: "MMT, as exposed in the book, appears to be a very poor attempt at supporting this political agenda, with no coherent theoretical support."
ReplyDeleteMMT = vehicle to advance a 'political agenda'. Cast in that light, MMT need not be a coherent, internally consistent, economic theory per se. It succeeds to the extent that it gains adherents and thereby becomes an accepted view of government management. The combative and defensive stance of MMT adherents and advocates is merely an outward manifestation of a struggle for legitimacy.
Old Eagle Eye,
DeleteAgreed. The same can be said for democracy, imperialism or communism as a means of governing. All went through periods of "struggle for legitimacy." Imperialism was the de facto governing standard for a large part of human history and it was democracy that was the "new kid on the block" trying to find it's way.
MMT seems to be a backwards step in that it fails to acknowledge the benefits of having a central bank that operates independently of fiscal policy. The positive benefits of that operational independence extend beyond "controlling" inflation.
The U. S. central bank was born out of the Progressive movement that was seeking to level the economic playing field. It was a direct response to the "crony capitalism" that pervaded the early 20th century in the U. S.
Oooorrr.... MMT is: first i) an examination of how our monetary and fiscal economy works, and second, once that is understood, ii) the implications of policy prescriptions for solving our economic problems.
DeleteTo FRestly: Athens (Attica) in the period of the Peloponnesian Wars (431-405 BC) was a democracy (demos + kratos) and might be said to pre-date imperialism which pre-dates communism.
DeleteTo DoDeals: In other words, MMT is not an economic theory, per se. QED.
To simplify: MMT holds that government spending (expenditures) bear no relationship to government revenues (taxation) in a period, therefore, government expenditure need not be constrained by precepts of balanced budgeting, etc.,--i.e., expenditures need not be constrained by rules of fiscal prudence where the ruler controls his own money supply, etc., up to the point of accelerating inflation. Upon the inception of accelerating inflation, the ruler steps in and levies taxes (sometimes punitively) to 'cool down' the rate of increase in inflation (howsoever defined). This is not an original idea. In earlier times, a king would borrow money from merchants to adorn his throne, pay his retainers, and make his life generally more interesting; merchants, for their own part, would lend money to the crown for the acquisiton of novelties and other pleasures until they could not lend any more prudently. When the king had exausted all of the credit merchants were likely to lend to him, he either curtailed his court and sought to repay the merchants from his own livings (doubtful), or he taxed his creditors, the merchants, heavily and forced them to declare bankruptcy or forgive their loans to him (likely). Although the stated goals lof MMT are apparently laudable, etc., the means and the outcome are the same as they were in olden times. Borrow and spend freely up until all credit is exhausted, then levy taxes heavily to repay the debts. Since sovereigns cannot be declared bankrupt, who will the lenders complain to? Not a theory, but a prescription. Like Oliver Wendell Holmes's "Parson's carriage"--it lasts a century and a day, then all falls to pieces of an instant. If you can't see it, you can't much.
Old: If you have to go back over 150 years to make a point, maybe your point is inapplicable.
DeleteOld Eagle Eye,
Delete"Athens (Attica) in the period of the Peloponnesian Wars (431-405 BC) was a democracy (demos + kratos) and might be said to pre-date imperialism which pre-dates communism."
We could go back and forth on this. China through much of it's history was imperialist beginning with Yu the Great in 2070 BC.
https://en.wikipedia.org/wiki/Dynasties_in_Chinese_history
Same thing with the Mycenaean civilization in early Europe:
https://en.wikipedia.org/wiki/History_of_Europe#Minoans_and_Mycenae_2000–1100_BC
"MMT holds that government spending (expenditures) bear no relationship to government revenues (taxation) in a period, therefore, government expenditure need not be constrained by precepts of balanced budgeting, etc.,--i.e., expenditures need not be constrained by rules of fiscal prudence where the ruler controls his own money supply, etc., up to the point of accelerating inflation."
MMT also holds the belief in the benevolent benefactor - that expenditures by the federal government always serve the common good rather than serving connected interests. From your example:
"In earlier times, a king would borrow money from merchants to adorn HIS throne, pay HIS retainers, and make HIS life generally more interesting..."
Hmmm, no mention of improving the daily life of the people under his rule.
I am genuinely curious if
ReplyDeleteA) Caplan is right and that only 20 schools comprise the body of interesting research in economics. I may be all wrong, but didnt Eichenbaum, Rebello, Evants et all come from NorthWestern? Maybe Northwestern is part of that group.
B) If it is true, is it true for other disciplines as well? Physics, Chemistry, Mathematics etc etc?
Economics is very, very concentrated at the top. Eichenbaum et. al. come from Minnnesota/Northwestern and they are "in the club" in what is known as the "freshwater" school of Macro (long story about how this came to be). My understanding is that economics is way more concentrated "at the top" than hard sciences like physics because in those disciplines it is easier (but not easy) to objectively judge quality. If a person from State U. finds the unified field theory everyone will agree its great. The model for economics is much, much closer to "the cool kids club". Quality is (nearly) impossible to objectively judge and so you get self-reinforcing "cliques" of small groups of schools/researchers who all agree they are the best. In addition, there is splintering at the top. Folks outside of Harvard\MIT, for example, commonly (and rightly) deride these folks for not doing any real theory and just publishing bad empirical work that is attention\headline getting. They are also commonly called out for allocating too much space in "their journal" - QJE - for the work of the students they produce. It really is a lot, and too much, like high school.
DeleteIf that's true, why bother getting a PHd at a non top 20 school? It can't be for the same reasons people seek out mba degrees. My brother, for ex, did it for prestige reasons( he is attending a non-top twenty PhD program in econ), now sees the Lost earnings as a ineffective trade-off.
DeleteIt seems like a serious market inefficiency in every sense to do it this way. I would really surprise if the quality of scholarship declines so rapidly after the top 20 that you really are short changed education Wise by selecting a non-top 20 school to do PhD in.
Definitely very weird
There often seems to be "no there there" when discussing MMT, apologies to Gertrude Stein.
ReplyDeleteYet the idea that monetary stimulus must be implemented only through a system of fractional-reserve commercial banks is becoming less and less appealing.
Ben,
Delete"Yet the idea that monetary stimulus must be implemented only through a system of fractional-reserve commercial banks is becoming less and less appealing."
Because?
Fractional reserve banking is a myth. Banks create money out of thin air when they make loans.
DeleteThere often seems to be "no there there" when discussing MMT, apologies to Gertrude Stein.
ReplyDeleteYet the idea that monetary stimulus must be implemented only through a system of fractional-reserve commercial banks is becoming less and less appealing.
"low interest rates and low inflation might really be calling for more debt in the United States at the present time."
ReplyDeleteWell, Congress has heard the call, and answered it.