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Feb 7, 2022·edited Feb 7, 2022Liked by Noah Smith

One thing internet MMT people are strangely into is job guarantees, which seems to be a right-wing workfare idea rebranded as left-wing using some New Deal language. Some things I've noticed are:

- the adherents are from older demographics (judging by writing style), possibly converts from alt-right or resistance lib-ism, but no idea where they're learning about this…

- they have a rhetorical trick where they call it "giving everyone well-paying $15/hr jobs" - but this assumes the $15/hr minimum wage world, so of course it actually means "giving everyone minimum-wage jobs".

- they get really mad at you if you propose UBI/CTC instead (so people can do childcare or search for better jobs) and say you're going to cause mass unemployment. This seems to come from believing that unemployment is caused by resume gaps and not knowing how to behave on the job, so needing practice at it first. Guess that's common folk wisdom though.

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Feb 7, 2022·edited Feb 7, 2022Liked by Noah Smith

It is important to distinguish between what is trivially right about MMT, which is that, in a fiat currency system with a floating exchange rate, the real constraint on deficit spending is inflation, and what is speculative and probably wrong, which is that inflation can be controlled by a job guarantee setting a wage anchor. As Martin Wolf said, what is right about MMT is not new (it is functional finance) and what is new about MMT is probably wrong. I do not understand why so many critiques ignore this critical distinction. Is it because they genuinely do not understand how fiat currency systems work? Is it because they are trying to maintain the myth that governments really have to raise money by tax or borrowing BEFORE they spend it? The latter is a self-imposed legal obligation. Laws can be changed.

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Feb 7, 2022·edited Feb 7, 2022Liked by Noah Smith

MMT is right about one critical thing or maybe actually two. The amazing irony is that these points don't justify left-wing agenda. They justify Donald Trump's agenda and it explains why Trumponomics worked so well

1) Taxes should be aimed at stopping inflation. Taxes with little anti-inflationary effect make no sense and you cannot balance your budget with them. It means that the whole fantasy of taxing the rich makes no sense, because rich people's money is used for saving and investment which are anti-inflationary. So taxing it doesn't curb inflation.

2)There is no problem with deficits when there is little inflation. MMT has no model but it is not such a disadvantage because saying "don't trust models, just measure inflation empirically and stop printing money only when it becomes too much" is a valid guideline which could help guide policymakers in the overcapacity era which we had until recently.

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I took a graduate macroeconomics course at what I suppose is an elite institution (I don't remember his name but he mentioned being considered for the Fed a couple times, so important?). The professor spent a day talking about the merits of free trade via a dialogue between 2 characters (either he wrote it or pulled it from somewhere). It made absolutely zero sense and didn't give me any level of understanding of free trade (that I already had) or the arguments behind it. I do remember it alluded to Bangladeshi works and this wasn't too long after that fire that killed several people in a garment factory. I remember that point (combined with looking around and seeing a ton of inequality, rural poverty, etc in a what I'm told is the greatest country in the history of the world) being when I started thinking that economists don't really know what they're talking about beyond a few graphs and some models with multiple last names. Their work, while obviously considered hugely important by many, _felt_ disconnected enough from both reality and moral consideration.

I mention this because that was the draw for Kelton's book for me. The simple idea that we seemed to have unlimited budget for some things (military or more generously, parts of medicare) and extremely limited budgets for other things (improved health care and just about any part of the safety net) is very compelling. I read it quickly and didn't understand it all. But like most things, I don't lean in heavily to the mechanics of things (unless I need to because they're a part of my profession or other interest) and keep to the bigger ideas. And on that on, MMT still satisfies on the broad strokes. That there are other variables beyond debt calculation and a more sophisticated analysis of what our financial capacity is to do good things makes sense. The current inflation crisis doesn't seem to deter since it's global and seems to be hitting countries that hasn't put money into their systems (or so I believe).

But whether MMT is right or wrong is over lesser importance. I think the takeaway for you (or you all) is that it offers an approachable idea in an area of study in which most economists have little talent for explaining their field to lay. people. Quite frankly, most of you sound like a bunch of nerds quibbling over nonsense. My advice is if you find the proliferation of ideas like MMT dangerous is to find the Neil DeGrasse Tyson(s) of your field and send them out in the world.

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This is what happens when a newspaper of record decides it wants to become a "collection of juicy narratives"

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Feb 7, 2022Liked by Noah Smith

For me as a non-economist, this is the simplest and most logical explanation of MMT and its problems; very helpful thanks!

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Feb 7, 2022Liked by Noah Smith

Stephanie Kelton reminds me of Stephen Moore

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The NY Times piece didn't really get into the nub of the debates, especially not on the political economy side. And including snide comments from Jason Furman didn't add anything either. It just made the piece sound like a "he said/she said" bit of gossip.

I think the causes of inflation question is still very much in the air, and it's by no means settled that this is just a problem of supply chain snafus. In fact, I happen to think that's wrong. At this point, it's labour market tightness. A lot of evidence to suggest that the supply chain shortages are abating (certainly, it's much easier to get semiconductors now). Omicron was a factor as well (people unable to work didn't help), but the labour market remains exceptionally tight (and the Fed is belatedly coming to recognise that).

This is a real problem because inequality is a far more serious problem than it was in the 1970s, so the inflationary impact is disproportionately hitting more and more people (and probably helping the top tier as they often hold hard assets, such as land). But it's unclear to me that monetary policy tightening is the best way to prevent this problem. You might need a fiscal response, but then the politics come into play.

Not in favour of price controls is absolutely insane and unsure that the analogy to post WW2 is appropriate given the changed structure of the economy today (and they didn't work in the 1970s). I'm thinking a Henry George style tax (which Noah has, to his credit, discussed in this blog) would constitute a good policy solution (both in terms of equity and also in terms of taxing the less productive parts of the economy), but good luck getting that through Congress.

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Feb 7, 2022Liked by Noah Smith

At best, a confused mishmash of wishful thinking. At worst, just another grift. As far as I can tell, MMT is not taken seriously by any serious person. Baffling why the NYT would legitimise this.

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As a scientist a system of pure MMT is of course completely logical in comparison to the irrational system we live with. So Noah's disparagement of MMT, along with the majority of economists, only shows that economics is not populated by people with scientific abilities. The simplest model of MMT, required for a scientific approach (you always start with the simplest system you think captures the important measurable quantities) is this: the government is the single source and sink of money. That is all. To a scientist this direct control over a single independent variable is paramount. The presence of two dependent variables is problematic without a robust coupling mechanism but we could, to first order, use a weighted "misery index". The limits are all straightforward and it is reasonable to assume the function is continuous so traditional control techniques like a PID algorithm are applicable. Most scientists would have no problem understanding such a system and conclude it is likely a better system than we currently have. Only relatively small changes in the source/sink term dependent upon the "misery index" (or other related measure) would be required. The present system where money is created by banks, indirectly impacted by monetary policy, and distribution/spending/taxing are in general disconnected temporally from the economy in aggregate, are unlikely to ever work to maintain a stable economic system, and history provides ample data. Again, if you asked a physicist to design an optimum system the pure MMT would be near the top of the list and our current system would be considered highly flawed.

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Feb 7, 2022Liked by Noah Smith

Great stuff! do you know if the unexpected inflation has reduced real govt. debt at all? Or Is it still growing?

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Feb 7, 2022Liked by Noah Smith

"Sorry, just to expand that further.....the currency would appreciate, but as there would be no market for government debt the govt would be forced to monetize. The increase in currency in circulation would offset the appreciation due to Acme share price increase. Assuming that the rise in Acme share price was due to the vast increase in demand for those shares as a consequence of the total rejection of govt debt as a savings vehicle, it is possible that the effect on the currency would be neutral..."

EXTERMINATE....EXTERMINATE!!!!!!!!!!!!

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Feb 8, 2022·edited Feb 8, 2022

IMO, the NYT article was a very poor characterization of MMT. To me, the best part of MMT is that it has been crucial in pointing out how a government with its own sovereign currency (“fiat money”) is not like a household (especially in a country whose currency is the world’s reserve currency). Regarding the assertion that MMT has no mathematical models, I disagree. The economist Steve Keen, one of the very few who rightly predicted the 2008 financial crisis, has done the modeling: https://www.patreon.com/posts/minsky-models-of-40112870 (He also has more discussions for his patreon subscribers.) Keen has also included the role of energy in his models, e.g. https://www.youtube.com/watch?v=sOjrTQZBmMM, as well as showing that private banks create money each time they make a loan, e.g. https://evonomics.com/economists-ignore-one-of-capitalisms-biggest-problems/. Keen is the economist whose ideas I most trust. Here is another reason I like him: https://newmoneyreview.com/index.php/2021/09/14/we-need-sustainable-money/

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Feb 7, 2022·edited Feb 7, 2022

We also had a disastrous experiment with price controls under the Nixon administration.

Surprised to not see Krugman mentioned in here, he has come to similar conclusions about MMT -- that to the extent that it claims to say anything different from traditional IS-LM models (i.e. New Old Keynesian macro: https://crookedtimber.org/2014/01/22/new-old-keynesianism/ ), it doesn't say that thing in a way that's testable.

https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html

"So let’s be clear here: Are MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers and why the straightforward framework I laid out above is wrong. No more Calvinball."

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The 10-year UST is a proxy for NGDP growth, so, starting from today's "depression level" rates, rising interest rates will not necessarily make the federal debt unsustainable. The economy would perform best with a USD whose real value was defined (the CRB Index is "good enough" for this purpose) at an appropriate level (I would put it at 300) and then kept constant forever. The CRB Index was very close to constant during our "golden age" of growth and middle-class prosperity, 1955 - 1970.

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If fiscal dominance constrains the central bank from raising interest rates to combat inflation, why can't the central bank buy up a bunch of the outstanding debt, so that the higher interest payments the government is making is just to itself, in effect. And then the central bank can raise interest rates to kill inflation.

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