MMT Myth and Misconception

Modern Monetary Theory recognises that the government has infinite capacity to spend and that the constraint on spending is always inflation never insolvency.  One of the many myths that crop up about MMT  is that it allows an infinite size deficit.  This is false.  MMT has always stated that the limit to spending are the real resources available.  This is just another way of saying spending can be inflationary.  The inflation constraint has been dealt with elsewhere by all and sundry in the MMT community.  Perhaps it is a question of solvency instead?  The answer is simple how can a currency issuer go involuntarily broke?  It can’t.

Many think it can because of the Government Budget Constraint (GBC).  In the current orthodox economic view is that the budget must be financed either by printing money and/or borrowing money from the public.

Bill Mitchell explains the current orthodox view of the GBC this way:

Fiscal deficit = Government spending + Government interest payments – Tax receipts must equal (be “financed” by) a change in Bonds (B) and/or a change in high powered money (H)

He continues:

However, this is merely an accounting statement. In a stock-flow consistent macroeconomics, this statement will always hold. That is, it has to be true if all the transactions between the government and non-government sector have been corrected added and subtracted.

So in terms of MMT, the previous equation is just an ex post accounting identity that has to be true by definition and has not real economic importance.

But for the mainstream economist, the equation represents an ex ante (before the fact) financial constraint that the government is bound by. The difference between these two conceptions is very significant and the second (mainstream) interpretation cannot be correct if governments issue fiat currency (unless they place voluntary constraints on themselves to act as if it is).

So you can see the difference is that the current orthodox view is that the GBC must be financed by printing money and/or borrowing money from the public and that the Modern Monetary Theory view is that a currency issuer can issue currency & bonds and the GBC is just an accounting identity.  It is nothing to worry about.

Advertisements

Richard Holden’s challenge to MMT

It is always good to see Modern Monetary Theory get some publicity.  I get to add another post to the Critic Engagement section. 🙂

Richard Holden, a professor at UNSW has a go at critiquing MMT on The Conversation.  He is schooled by those that are MMT advocates, sympathisers and those with a better understanding of MMT in the Comments section.

So here’s my challenge to the modern monetary theory crowd. Please state a formal, precise, economic model in which a monetary authority can extract an infinite amount of real resources through seigniorage. Or be quiet.

To Professor Holden’s credit, he does somewhat engage in conversation in the comments though not to a great extent.  In a response he writes:

Here’s Mitchell in his own words: “the Federal government is not financially constrained and can spend as much as it chooses up to the limit of what is offered for sale. There is not inevitability that this spending will be inflationary and it does not necessarily require any increase in government debt”.

Later on I comment:

‘limit of what is offered for sale’ – does not equate to infinite resources. Do you disagree?

Until Professor Holden engages with that very question, he has nothing substantive to say about Modern Monetary Theory.

I am delighted to see more Australian economists engaging in a Conversation about  MMT including Warwick Smith from the University of Melbourne.  This economist examines things closely and contextual with a line by line analysis in part:

OK, part one is presumably OK. The federal government can create money with keystrokes on a computer. They can, in theory, buy anything that is offered for sale in Australian dollars. Do you dispute that? He’s not claiming they can buy anything with no limit. That’s a very different claim and appears to be WHAT YOU THINK HE’S SAYING. (Emphasis mine)

The economist from the University of Melbourne and myself are in complete agreement.  So Professor Holden’s challenge has zero bearing on MMT as he insists that it says something it does not.

As for questions of whether MMT has been modelled – Professor Holden can start here:

1. Sectoral Financial Balances Model of Effective Demand

2. Mathematical Model: Analyzing the Implications of the State as a Single Supplier of that Which it Demands for Payment of Taxes

Stock-Flow Consistency Confusion

Do you suffer confusion over Stock Flow Consistency?  Are you a mainstream economist certain that your model is Stock Flow Consistent but you confused by the new economic school on the scene Modern Monetary Theory that claims it is Stock Flow Consistent?

If so I highly recommend a thorough detailed read of Cameron Murray’s Fresh Economic Thinking!  Don’t forget to jump in with the Mud Maps!!

Open Discussion on MMT III

Post comments on any MMT related topic. Civil discussion and no coarse language.  Keep all discussions threaded (use the reply button on the comment you are replying to) where possible please.

HAPPY NEW YEAR!

Open Discussion on MMT II

Post comments on any MMT related topic. Civil discussion and no coarse language.  Keep all discussions threaded (use the reply button on the comment you are replying to) where possible please.

Open Discussion on MMT

Post comments on any MMT related topic. Civil discussion and no coarse language.  Keep all discussions threaded (use the reply button on the comment you are replying to) where possible please.

I have left comments open as I’m afraid that if I now disallow comments we shall lose the existing comments.

Please head over to Open Discussion on MMT II.