My brief summary is that MMT pretty much coincides with traditional Keynesian views in the context of a liquidity trap, but that I reject the claim commonly made in popular presentations of MMT, that increased government spending doesn’t imply increased taxation.
SOURCE: Market Monetarism: A First Look
It is unfortunate and disappointing that this is the clearest exposition by Professor Quiggin and his thoughts on MMT after previous discussions on MMT by his own admission was a “misreading of MMT” by others and confining the topic to the sandpits after having had his say on the subject.
Quiggin and MMT’s dispute over increased government spending seems to be an intertemporal one. The disagreement seems to be more about WHEN the increased taxation occurs. NOR IS IT CLEAR what is meant by “increased taxation”. Is it an increase in tax rates? Is it an increase in tax collected as done by the existing effective tax rates? If the latter there is no disagreement, that is just the function of automatic stabilisers.
MMT rejects the liquidity trap (and IS-LM) & consequently rejects that MMT only applies in a liquidity trap. DeLong seems willing to see if MMT applies beyond the Zero Lower Bound (ZLB) but only as a look towards the future.
As previously noted in this blog – The real point of departure for MMTers and traditional Keynesians appears to be bound up in the loanable funds theory of the interest rate (the former rejecting and the latter accepting it). From that follow all sorts of differences re: fiscal sustainability. Thankfully Philip Pilkington has a reasonably clear take-down of it and acknowledges the reason it persists is that it works in theory, if not practice. And MMT economist Scott Fullwiler explains fiscal sustainability from an MMT perspective.
Modern Money - Macroeconomics 
I didn’t admit to a misreading, I pointed out that many MMT fans are misreading their own theory. I suggest you go back to the linked post, and respond to that.
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It was seriously considered to respond to the Money for Nothing post but rather than respond to the ‘misreading’ this is a reply to what appears to be your conclusion after recognising it as a response to others misreading.
For the Money for Nothing post, to my recollection all misconceptions were made clear. However what is unclear for you since the consignment to the sandpits is unclear.
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JQ sets the record straight in the comments to “Money for nothing?”
October 19th, 2011 at 08:37 | #15 Reply | Quote
“I don’t think you are getting MMT right. Taxation plays a very important role in MMT, none of the MMTers would argue that taxes are unnecessary.”
I’m not saying they do, if by MMTers you mean Bill Mitchell, Randall Wray and so on. I’m saying, from personal experience, that people who have read, and misinterpreted MMT say this all the time.
http://johnquiggin.com/2011/10/18/money-for-nothing/comment-page-1/#comment-159989
MMT economists hold that the fiscal balance is endogenously determined and is different from what is budgeted exogenously. The fiscal balance is determined in part by the fiscal stance of the budget and in part by changing economic conditions that affect key variables like tax revenue and automatic stabilizers. The budget is determined by political choices affecting appropriations and tax policy, as well as other factors that are off-budget such as interest rate payments, which are also variable based on changing monetary policy.
The fiscal stance and the degree of involvement in the economy are political choices, as we see argued in Congress as we speak, with many arguing for a tighter stance and others for a looser stance, and some for leaning more toward a welfare state and others toward a market state. Those choices will affect the fiscal balance based on economic conditions in the US and also the rest of the world.
It is not the case that “more expenditure necessitates higher taxes,” but that beyond a certain point greater expenditure can require raising taxes to control inflation per functional finance. But recent inflations have arguably been more influenced by supply shortages and rising prices of vital materials affecting the price level continuously than demand driven inflation resulting from too much money chasing too few goods when the economy reaches full capacity and cannot adequately respond to increased demand.
With respect to policy MMT economic analysis is neutral; however, most MMT proponents are lefties. MMT economic analysis lays out the contingencies of various policy options. Those on the right would choose policy based on different criteria than those on the left. Moreover, MMT economic analysis shows how to resolve the trifecta of growth, employment and price stability using functional finance and a job guarantee that serves as a price anchor. So MMT offers a fiscal alternative to the prevailing monetarism.
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I think Professor Quiggin may have misinterpreted the context of the answers given by these people. I think it is more likely their intent has been hit on the head with your 3rd paragraph beneath the quote.
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I think John Quiggin may have a point when he questions what some MMT proponents do say about the theory they claim to support. So its perhaps a pity that he’s consigned the discussion to the sandpit – if indeed he has done that.
True, MM theory is that governments don’t need to tax to be able to spend. MM theory is that they do need to tax to able establish the value of the currency. It is also that they need to tax to provide the space for their own spending without causing high inflation.
So if a government, which has successfully used MMT to escape from recession, decides to spends more then extra taxation will likely be necessary too.
Yes, we do know that technically Governments can never run out of money, they can never miss a payment etc . But MMT isn’t just spending wildly regardless of the resource constraints in an economy which would lead to inflationary problems. That side of the argument does need to be emphasised too. And, just as much the the ‘government cheques never bounce’ side.
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The only purposes for taxation are for driving base-value for the currency, for controlling inflation via aggregate demand and for limiting inequality.
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Taxation is a behavioral disincentive and tax credits are an incentive. Motivational effect is also a practical purpose of taxation in formulating tax policy. Economists and policy makers recognize this in general but fiscal policy does not always use this lever appropriately owing to politics. But it operates anyway.
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It’s good to see that economists like John Quiggin, who I have the greatest respect for is beginning to see that MMT should be given some serious consideration. I hope that the MMTers and progressives like John can have a serious discussion of all issues surrounding monetary and fiscal matters. I believe ALL progressive economists have to put aside their personal biases or antagonisms and start to work together to develop a new paradigm in Economics, that reflects reality.
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