Your bit about it being policy advocacy aligns with what I’ve seen from my friends who subscribe to the MMT ideas.
I’m all for getting medlock-pilled. But the idea that we can have everything we could ever want simply with “money printer go brrr” (a gross simplification) always struck me as, ridiculous.
This was a helpful explanation of MMT and a confirmation of my understanding of it without reading a book on the subject. Can you please do a part 2 and tell us why they support a federal job guarantee as the extension of their theory? Or is that pushed by just some of the MMT proponents? I never understood the connection.
Great piece, this is the type of econ writing that I'm looking for! First time I've been able to grasp MMT at all. Is it also true that MMT proponents want to "print money" to such an extreme extent that it could actually devalue the dollar?
As someone whose background is entirely micro-oriented finance (corporate and asset pricing, no banking, institutions, or macro-related stuff), I really appreciate quick explainers about witchcraft aka macroeconomics.
Great article! To me personally, the MMT description of the way monetary policy works is enlightening. The moral arguments they make for a federal job guarantee or a green new deal are also hard to argue against. However, there does seem to be a missing piece: I feel like they don't pay enough attention to "expectations" or "incentives". For instance, arguing that the government is not like a household and its ability to spend is only limited by real economic constraints sounds reasonable and not too far left of centre. However, if the market and consumers "expect" that higher deficits/higher debt will lead to inflation or crowding out, then that will likely happen either through the interest rate channel or exchange rate channel or both. Arguing rationally that it shouldn't doesn't change the outcome.
When I was starting my career I always tried to classify the econ "theories" as a "right-wing" or a "left-wing" one. Now I don't look at "theories" but at models in journals, and I try to identify what's the story that they tell me about the world, what variables are interacting with each other and how, and what variables they're missing out. Part of that has been thanks to your blogs and tweets.
Something that I do resent about econ education is that they teach the IS-LM model even if everyone says that it's "dated". It gives me the idea that debates in real macroeconomics are esoteric and intimidating, and that the only real policy advice that the public needs to know is that countercyclical policy (fiscal and/or monetary) is good.
The thing is that you don't need an expansionary fiscal policy to justify government intervention, especially government investment. There are a lot of market failures and externalities justification for government investment, and a recession only diminishes the cost of that investment.
I'm loath to defend MMT (and loath to reprise my role as a Noahpinion comment section troll), but I actually prefer this MMT definition of saving to the textbook definition of saving simply because it makes more sense to me on a conceptual level. Is investment saving? Well, why would it be? If I build a factory using money I saved, the money I saved is gone. I now have a productive asset, which is going to be a lot more stimulatory to the economy than sitting on a certificate of deposit or whatever. If two actions are fundamentally different, we can't just bundle them up into one thing and say they are the same thing.
In my opinion you are conflating deficit spending with borrowing, which isn't how my view of MMT views it. MMT has the government just creating money and spending it, which is inflationary but isn't reliant on hoping some private sector multitrillionaire decides to lend. That most of our debt is held by the private sector is only true to my understanding if you count the FED system(and possibly Social Security) as private sector. I don't exactly understand how banks multiply the money supply these days, but it seems clear that they do, I guess because an FDIC insured deposit dollar is about as good as a dollar with no physical dollar needed.
So handwaving that mess, if the government wants to balance the inflationary nature of its spending, it has to either tax, which is roughly spending in reverse, or borrow, selling bonds and trading the relatively high velocity dollar for a relatively low velocity bond(which I think is why bond selling is deflationary, I'm a little vague on the real difference between a three month zero interest bond and cash). But the bond will be paid off eventually, so selling bonds to the private sector only chases current inflation into the future. And the government selling bonds to itself seems like basically an accounting gimmick, possibly useful for interdepartmental accounting, but writing yourself IOUs isn't terribly meaningful.
I agree that capital investment is a form of savings, and there should be another term for financial investment in cash and government bonds. And I think that jobs guarantees and the green new deal and a single payer heath program should be viewed as separate from what I will call core MMT. I like UBIs better than job guarantees, for example, and other than that they are just what people think that the government should be spending on. And I agree with the wisdom of socialized medicine, as our current per capita spending is more than adequate to fund a more efficient system, and a green new deal, which may avert catastrophic outcomes and pollution is bad anyway (I favor a Carbon tax to fund the UBI and replace income and some real estate taxes). But tacking good government policies onto the Monetary Theory seems to lump already complex issues into an unnecessarily unmanageable mess, where people can get bogged down in job guarantee logistics, when a narrower MMT practitioner wants a Keynsian stimulus, and can discuss the form separately. Job guarantees aren't IMO ideal, but they can help in deflationary crashes, giving the desperate some money and accomplishing some state goals with otherwise wasted human potential.
It seems to me, from a policy point of view, the main thing pushed by MMT is true. A government that borrows in its own currency has spending constrained by inflation and not by any willingness of the private sector to lend. The majority of the political and policy community is driven (or claims to be when the opposing party is in power) by deficit concerns that, at some point, the government will not be able to borrow. How is this fallacy so widespread or even still existent.
It feels like there is a substantive difference between "saving" by building a factory vs putting cash under a mattress. Both are delayed consumption in a sense, but the former consumes economic resources in order to build the factory - that bit happens right now with no delay.
I could hire workers to build a factory or I could hire them to build a yacht, both of these consume resources and bid up the price of labor even though the factory is a productive asset and the yacht is not. Given that MMT Is interested in what spending causes inflation and what doesn't, it makes sense to try and lump together both consumption and investment, when the investment also involves bidding up prices. Whereas cash under the mattress (or maybe buying stocks/bonds - which will bid up the price of them but not of actual goods or services) is meaningfully different.
Where MMT began to interest me was when it clicked for me what they meant when they say, "Anything we can do, we can afford to do." Meaning, productive capacity is the limiting factor, not tax revenues. The idea is that spending does not become a problem at the point at which it exceeds revenues, but at the point at which is exceeds productivity. That makes sense to me and so far has been the key insight for me in becoming interested in this idea that "deficits don't matter" in the way that most of us tend to think they do.
I found the MMT idea of using tax policy to kill inflation very interesting. My classes with Marvin Goodfriend at CMU were all about using interest rates to kill inflation - the great 'Volcker disinflation'. But this would imply that Volcker's killing inflation is what allowed Reagan to cut taxes like he did in the 80s. Has anyone explored the interplay of these two methods to counter recessions and inflation - cut-rates/raise-rates vs cut-taxes/raise-taxes ?
Your bit about it being policy advocacy aligns with what I’ve seen from my friends who subscribe to the MMT ideas.
I’m all for getting medlock-pilled. But the idea that we can have everything we could ever want simply with “money printer go brrr” (a gross simplification) always struck me as, ridiculous.
This was a helpful explanation of MMT and a confirmation of my understanding of it without reading a book on the subject. Can you please do a part 2 and tell us why they support a federal job guarantee as the extension of their theory? Or is that pushed by just some of the MMT proponents? I never understood the connection.
Great piece, this is the type of econ writing that I'm looking for! First time I've been able to grasp MMT at all. Is it also true that MMT proponents want to "print money" to such an extreme extent that it could actually devalue the dollar?
As someone whose background is entirely micro-oriented finance (corporate and asset pricing, no banking, institutions, or macro-related stuff), I really appreciate quick explainers about witchcraft aka macroeconomics.
Great article! To me personally, the MMT description of the way monetary policy works is enlightening. The moral arguments they make for a federal job guarantee or a green new deal are also hard to argue against. However, there does seem to be a missing piece: I feel like they don't pay enough attention to "expectations" or "incentives". For instance, arguing that the government is not like a household and its ability to spend is only limited by real economic constraints sounds reasonable and not too far left of centre. However, if the market and consumers "expect" that higher deficits/higher debt will lead to inflation or crowding out, then that will likely happen either through the interest rate channel or exchange rate channel or both. Arguing rationally that it shouldn't doesn't change the outcome.
Feeling called out
You're absolutely right.
When I was starting my career I always tried to classify the econ "theories" as a "right-wing" or a "left-wing" one. Now I don't look at "theories" but at models in journals, and I try to identify what's the story that they tell me about the world, what variables are interacting with each other and how, and what variables they're missing out. Part of that has been thanks to your blogs and tweets.
Something that I do resent about econ education is that they teach the IS-LM model even if everyone says that it's "dated". It gives me the idea that debates in real macroeconomics are esoteric and intimidating, and that the only real policy advice that the public needs to know is that countercyclical policy (fiscal and/or monetary) is good.
The thing is that you don't need an expansionary fiscal policy to justify government intervention, especially government investment. There are a lot of market failures and externalities justification for government investment, and a recession only diminishes the cost of that investment.
I'm loath to defend MMT (and loath to reprise my role as a Noahpinion comment section troll), but I actually prefer this MMT definition of saving to the textbook definition of saving simply because it makes more sense to me on a conceptual level. Is investment saving? Well, why would it be? If I build a factory using money I saved, the money I saved is gone. I now have a productive asset, which is going to be a lot more stimulatory to the economy than sitting on a certificate of deposit or whatever. If two actions are fundamentally different, we can't just bundle them up into one thing and say they are the same thing.
In my opinion you are conflating deficit spending with borrowing, which isn't how my view of MMT views it. MMT has the government just creating money and spending it, which is inflationary but isn't reliant on hoping some private sector multitrillionaire decides to lend. That most of our debt is held by the private sector is only true to my understanding if you count the FED system(and possibly Social Security) as private sector. I don't exactly understand how banks multiply the money supply these days, but it seems clear that they do, I guess because an FDIC insured deposit dollar is about as good as a dollar with no physical dollar needed.
So handwaving that mess, if the government wants to balance the inflationary nature of its spending, it has to either tax, which is roughly spending in reverse, or borrow, selling bonds and trading the relatively high velocity dollar for a relatively low velocity bond(which I think is why bond selling is deflationary, I'm a little vague on the real difference between a three month zero interest bond and cash). But the bond will be paid off eventually, so selling bonds to the private sector only chases current inflation into the future. And the government selling bonds to itself seems like basically an accounting gimmick, possibly useful for interdepartmental accounting, but writing yourself IOUs isn't terribly meaningful.
I agree that capital investment is a form of savings, and there should be another term for financial investment in cash and government bonds. And I think that jobs guarantees and the green new deal and a single payer heath program should be viewed as separate from what I will call core MMT. I like UBIs better than job guarantees, for example, and other than that they are just what people think that the government should be spending on. And I agree with the wisdom of socialized medicine, as our current per capita spending is more than adequate to fund a more efficient system, and a green new deal, which may avert catastrophic outcomes and pollution is bad anyway (I favor a Carbon tax to fund the UBI and replace income and some real estate taxes). But tacking good government policies onto the Monetary Theory seems to lump already complex issues into an unnecessarily unmanageable mess, where people can get bogged down in job guarantee logistics, when a narrower MMT practitioner wants a Keynsian stimulus, and can discuss the form separately. Job guarantees aren't IMO ideal, but they can help in deflationary crashes, giving the desperate some money and accomplishing some state goals with otherwise wasted human potential.
It seems to me, from a policy point of view, the main thing pushed by MMT is true. A government that borrows in its own currency has spending constrained by inflation and not by any willingness of the private sector to lend. The majority of the political and policy community is driven (or claims to be when the opposing party is in power) by deficit concerns that, at some point, the government will not be able to borrow. How is this fallacy so widespread or even still existent.
It feels like there is a substantive difference between "saving" by building a factory vs putting cash under a mattress. Both are delayed consumption in a sense, but the former consumes economic resources in order to build the factory - that bit happens right now with no delay.
I could hire workers to build a factory or I could hire them to build a yacht, both of these consume resources and bid up the price of labor even though the factory is a productive asset and the yacht is not. Given that MMT Is interested in what spending causes inflation and what doesn't, it makes sense to try and lump together both consumption and investment, when the investment also involves bidding up prices. Whereas cash under the mattress (or maybe buying stocks/bonds - which will bid up the price of them but not of actual goods or services) is meaningfully different.
Where MMT began to interest me was when it clicked for me what they meant when they say, "Anything we can do, we can afford to do." Meaning, productive capacity is the limiting factor, not tax revenues. The idea is that spending does not become a problem at the point at which it exceeds revenues, but at the point at which is exceeds productivity. That makes sense to me and so far has been the key insight for me in becoming interested in this idea that "deficits don't matter" in the way that most of us tend to think they do.
Wait, people are getting their policy ideas from Twitch streams?
Okay, JB Say. Savings is not by definition investment. If it were, there would be no such thing as inadequate aggregate demand.
Good lord!
Hi Noah. You mentioned that borrowing doesn't make a country poorer unless it's borrowing from foreigners. Why is that?
I found the MMT idea of using tax policy to kill inflation very interesting. My classes with Marvin Goodfriend at CMU were all about using interest rates to kill inflation - the great 'Volcker disinflation'. But this would imply that Volcker's killing inflation is what allowed Reagan to cut taxes like he did in the 80s. Has anyone explored the interplay of these two methods to counter recessions and inflation - cut-rates/raise-rates vs cut-taxes/raise-taxes ?