Everybody Loves to Hate Modern Monetary Theory

(Bloomberg Businessweek) -- In 1853 the French writer Gustave Flaubert wrote, “You can calculate the worth of a man by the number of his enemies, and the importance of a work of art by the harm that is spoken of it.” By that standard, Modern Monetary Theory must be both worthy and important; it’s the economic school of thought that everybody loves to hate.

A new book by one of MMT’s leading proponents, Stony Brook University economist Stephanie Kelton, attempts to take back MMT from its critics and present it in simple language to a general audience. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy is a work of persuasion, not formal scholarship. There’s fun stuff like comparing the federal government to the banker in a game of Monopoly, who by design can never run out of money. She even quotes from the official Monopoly rules: “The Bank never ‘goes broke.’ If the Bank runs out of money, the Banker may issue as much more money as may be needed by writing on any ordinary paper.” That’s a brilliant analogy.

If you want to learn about MMT from an MMTer, buy Kelton’s book or perhaps Macroeconomics, a textbook published last year, written by William Mitchell, Randall Wray, and Martin Watts. If you prefer a quick précis, there are plenty of journalistic attempts, including this one last year by me, Katia Dmitrieva, and Matthew Boesler of Bloomberg.

But for this column, in the spirit of Flaubert, I thought it would be interesting to string together some quotes from Modern Monetary Theory’s critics. Any school of thought that’s trashed by so many people can’t be all bad, can it?

Marxists

There’s a slight influence of Karl Marx in MMT, along with bits from economists George Knapp, John Maynard Keynes, Thorstein Veblen, Joan Robinson, Hyman Minsky, and others. But true Marxists aren’t happy with the theory. Michael Roberts, a Marxist economist working in the City of London, reviewed Kelton’s book on his blog and concluded that MMT’s focus on the printing and spending of money by government is misplaced.

“Indeed, why are there regular and recurring slumps in capitalist economies? These questions are not dealt with or answered by MMT,” Roberts writes. Later he continues, “Printing more money so that governments can spend more money will not produce more value unless labour power is exploited more by capital as a result.” He concludes that “the structural causes of the crises and under-capacity lie not in the financial or monetary sector or the fiscal sector, but in the system of globalized capitalist production.”

Austrians

The Austrian school of economics focuses on how too-easy lending leads to malinvestment and boom-bust cycles. Mises Institute Senior Fellow Robert Murphy, a member of the Austrian school, dislikes Nobel laureate economist Paul Krugman so much that he hosted a podcast, Contra Krugman, that critiqued his New York Times columns. Krugman happens not to like Modern Monetary Theory, but Murphy doesn’t operate on the principle that the enemy of my enemy is my friend—he also dislikes MMT.

“Kelton’s concrete policy proposals would be an absolute disaster,” Murphy writes in a review of The Deficit Myth. He challenges several of MMT’s precepts, including the idea that government spending precedes taxation and that money is essentially the same thing as government debt. He concludes: “The fact that since 1971 we have had an unfettered printing press doesn’t give us more options, it merely gives the Fed greater license to cause boom/bust cycles and redistribute wealth to politically connected insiders.”

Keynesians

Keynesians, of whom Krugman is a leading voice, believe that recessions are usually marked by a shortfall in demand for goods and services, and that government should make up for the shortfall by raising spending or cutting taxes. Although Krugman shares Kelton’s openness to deficit spending, he showed his exasperation with her in an interchange on the websites of the New York Times and Bloomberg Opinion. He said that debating MMTers is like playing Calvinball, a game with constantly changing rules: “Every time you think you’ve pinned them down on some proposition, they insist that you haven’t grasped their meaning.” Kelton answered four questions from Krugman here, but Krugman wrote on Twitter that he wasn’t satisfied with her responses.

“I feel a sense of despair,” Krugman wrote. He claimed that Kelton and other MMTers underappreciate the ability to steer the economy with monetary policy—i.e., interest rates and the money supply—and mistakenly rely only on fiscal policy, which is spending and taxation. He added, “Kelton’s response misrepresents standard macroeconomics, my own views, the effects of interest rates, and the process of money creation,” before concluding: “See what I mean about Calvinball?”

Post-Keynesians

Post-Keynesians, most of whom lean left politically, are close cousins of the MMTers. They argue that they’re the true inheritors of John Maynard Keynes. Cullen Roche, the founder of Orcam Financial Group LLC, who says he leans toward post-Keynesianism, argues that Modern Monetary Theory is too blithe in its dismissal of inflation fears.

Roche picked up on the Krugman-Kelton debate last year, mentioning a letter to the editor of the Financial Times by some MMTers that, in his eyes, “basically said MMT’s theory for controlling a government induced surge in inflation would be a massive increase in government intervention via price controls, regulations and a Job Guarantee.” Wrote Roche: “This smells a heckuvalot like the playbook of many South American countries during the last 20 years.” He agreed with Krugman that MMTers “overreach” by dismissing monetary policy as a tool.

Anti-Keynesians

OK, “anti-Keynesian” isn’t really a name for a school of economic thought, but it does describe conservative economists—such as John Cochrane, a senior fellow at the Hoover Institution—who are suspicious of efforts to end recessions with fiscal stimulus. (In 2014 he wrote a piece for Hoover called “An Autopsy for the Keynesians.”) In a review of Kelton’s book for the Wall Street Journal, Cochrane says the stagflation of the 1970s—a combination of weak growth and high inflation—undermines MMT’s proposition that inflation is unlikely when there’s plenty of slack in the economy.

One of MMT’s most surprising predictions is that the federal government could pay off its entire debt instantly, and that doing so would cause inflation to go down. As Kelton sees it, bondholders would be paid with newly created reserves—essentially, big checking accounts at the Fed. If the Fed stopped paying interest on those new reserves, the MMT story goes, the reserve holders’ income would fall, so they would spend less and inflation would fall. “The mistake is easy to spot,” Cochrane writes. “If the government stops paying interest, people try to dump the debt [or reserves] in favor of assets that pay a return and to buy goods and services, driving up prices.” So inflation goes up, not down.

Kelton and her fellow MMTers have responses to these critiques, of course. If they’re right, MMT is a big deal. At the very least, The Deficit Myth and other arguments of MMTers are forcing economists of all stripes to go back to basics and rethink the assumptions that underlie their policy prescriptions. That’s a useful exercise.

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