Wrong in a very confusing way

There are lots of macro models out there: old monetarism, market monetarism, old Keynesianism, new Keynesianism, supply-side economics, Fiscal Theory of the Price Level, NeoFisherism, Austrian, Real Business Cycle, etc., etc. People who believe in one tend to view the others as being at least partly wrong. But where they disagree, it’s usually possible to pin down some specific points of disagreement.

MMT is not like that.

In his Twitter account, Paul Krugman again tries to show what’s wrong with MMT, by pointing to a specific example of how very little of the national debt is financed by printing money.

I’ve made similar arguments on a number of occasions, as has Nick Rowe and many other people. But I’m increasingly coming to the view that none of this will work. MMT has constructed such a bizarre, illogical, convoluted way of thinking about macro that it’s almost impervious to attack. Krugman’s right that a reasonable person would view his evidence as demolishing their claims about fiscal policy—but it won’t be seen that way.

As far as I can tell, MMT created this monster by combining the following:

  1. Bizarre (and unconventional) definitions of terms.
  2. The tendency to confuse accounting relationships with causal relationships.
  3. Being wrong about basic questions of causality.

If it was just one problem, it would be easy to figure out how to attack the model. Thus Krugman is trying to present evidence that they are wrong about certain causal relationships. But because they define terms differently than the rest of us, this evidence will have no effect on their views.

For instance, normal economists would think about government spending being financed by a mixture of taxes, debt and money creation. AFAIK, MMTers think spending is paid for with money creation. When they describe their views in detail, however, it looks like they believe that spending is paid for with taxes, debt and money creation, not just money creation. They simply characterize that fact differently. So how to attack this view?

If you say, “You’re wrong, spending is paid for with some mix of money creation, debt and taxes,” they’ll respond, “no, it’s just paid for by money creation.”

If you bring to bear all sorts of evidence that implies that spending is paid for by all three, they’ll respond, “We know all that, it’s in our model. Taxes are used to drain money from the system to prevent inflation.”

I’m struggling to think of an analogy from everyday life—perhaps someone can help me. But try this:

I ask my friend, “Did you pay for that new car out of your savings, or did you have to borrow the money? And your friend responds, “Neither, I paid for it with a check”. You say, “I get that, but where did the money for the check come from?” And the conversation keeps going around in circles.

So one problem is their weird definitions, insisting that government spending creates money that pays for the spending, which is based (AFAIK) on a misinterpretation of the implications of an accounting relationship involving the Treasury account on the Fed’s balance sheet.

But there are substantive problems too. They seem to not understand that when nominal rates are positive, high-powered money is several orders of magnitude more inflationary than T-securities. (High-powered money is zero interest base money in a positive interest rate environment). They don’t seem to understand the Fisher effect, and instead assume that flooding the economy with base money drives interest rates to zero. While it’s true that you can flood the economy with high-powered money when the equilibrium nominal rate is zero, if it isn’t zero then you’ll create lots of inflation and thus much higher interest rates—as the UK discovered in the 1970s. Thus here is Stephanie Kelton, ignoring the Fisher effect:

It helps to break the argument into a two-part thought experiment. First, think about what happens if the government is running huge budget deficits. As I explained, these deficits would result in a massive injection of reserves into the banking system. Unless something is done to prevent it, banks will scramble to offload the excess funds in the overnight market. But with massive supply and no demand for these balances, the overnight bid heads toward zero.

If you foolishly follow the “As I explained” link, you will find no explanation at all, merely a repetition of the bizarre claim that deficits lead to a massive injection of new reserves. (I think she is assuming a money financed deficit, but who knows?) And here is Kelton misrepresenting the views of Krugman:

He called our nation’s finances “a fiscal train wreck” and confessed, “I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.”

He insisted that the U.S. faces, “a looming fiscal crisis,” adding, “the only question now is when foreign investors, who have financed our deficits so far, will decide to pull the plug.”

He mused about the potential for accelerating inflation under quantitative easing, writing that the Fed is, “printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so!”

He asked, “couldn’t America still end up like Greece?” answering, “Yes, of course. If investors decide we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.”

And he puzzled over the different interest rate environments in Japan and Italy, asking, “Why are the interest rates on Italian and Japanese debt so different?” confessing, “I actually don’t have a firm view. But it seems to be an important puzzle to solve.”

No economist is going to get everything right. But the odds of getting things right improve dramatically when you’re working with a macro framework that doesn’t lead you astray. 

I have often criticized Krugman, but I don’t think I have ever misrepresented his views so egregiously. Look how the QE quotation is taken out of context. Implying that Krugman was a QE/inflation scaremonger doesn’t even pass the laugh test. He’s probably the world’s most famous QE skeptic. He was merely pointing out that inflation was the goal of QE. Perhaps he thought it would produce a tiny amount of inflation, but it did!

So don’t tell me she’s just quoting Krugman. Her snarky “No economist is going to get everything right” tips her hand. She’s accusing Krugman of making lots of false predictions, in areas where MMT is “correct”.

MMTers would say that Krugman doesn’t understand the distinction between Italy using the euro and Japan having its own currency (with zero default risk.) In fact, it’s the MMTers that don’t understand that having your own currency doesn’t guarantee low rates if investors believe that the only way you’ll be able to handle your debt is via inflation.

FWIW, I suspect one difference is that Japan has far lower government spending than Italy, and thus more room (fiscal space) to raise taxes before relying on money creation. And Japan has less to worry about in terms of their best people moving to better run eurozone countries. But having fiat money is no cure-all. The UK discovered this in the late 1970s, when the IMF bailed them out. So Krugman’s puzzlement was not completely unjustified.

The quotes provided by Kelton don’t provide specific dates, and thus one can’t really say that Krugman was “wrong”. In fairness to Kelton, Krugman probably did think the day of reckoning was coming sooner than it has, but then during the 1990s very few people predicted the super low interest rates of the post-2008 period. That sort of mistake is hardly indicative of a flawed model.

PS. In the US, I expect the day of reckoning to take the form of higher taxes, not high interest rates/high inflation.


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81 Responses to “Wrong in a very confusing way”

  1. Gravatar of Michael Sandifer Michael Sandifer
    4. March 2019 at 21:10

    Unfortunately, as many have pointed out, the MMT’ers like Kelton are just the left-wing version of Austrians like Robert Murphy. It’s not that they’re not nice people. The point is not to insult, but to point out that discussing economics with them is a complete waste of time.

    Also, many of the non-economist cultists of both ilks are as rude, condescending, and uncivil as they are ignorant and closed off from reality. Life’s too short to engage them.

    I think I understand that Krugman would like to resist MMT from gaining a foothold in the Democratic establishment, but that might be an uphill battle. After decades of economic insecurity, many Americans are very nihilistic and don’t trust experts at all. The crazies are being given their opportunities to rise.

    More stable monetary policy would certainly help, but I think more needs to be done to address wide-spread economic and political dissatisfaction. I think most men in the US, especially, hate their jobs and don’t feel they have comfortable places in the world. I think income is only secondary in many cases. Yet, many are ashamed to openly call for government programs to help.

    I favor a small UBI, wage subsidies, and a shortened work week to address some of the dissatisfaction. Kill other welfare programs to help pay for these programs.

    Also, we are a good bit more productive/capita than when the 40 hour work week was established in the 30s. Requiring overtime for working more than 35 hours would be a nice way, along with the UBI and wage subsidies, to allow Americans to enjoy life a bit more, if they’re inclined to do so.

    We can also stand to reform campaign financing, massively deregulate the healthcare sector, banking, investment products/services, ISPs, housing development, etc. Need to stop subsidizing industries and subsidize incomes for those at the bottom, generally.

  2. Gravatar of Matthew Waters Matthew Waters
    5. March 2019 at 01:45

    MMT misunderstands two phenomenon and extrapolates the phenomenon to all circumstances:

    1. Depressed zero-bound economies can run seemingly endless deficits. However, good monetary policy will never depress the private sector to the extent of 90’s Japan or 2008 US. 1940s US show a country can leave the zero-bound and fiscal constraints return. The Fed had to lift the peg on Treasury rates in 1951. Such low rates did not return until 2008.

    2. MMT refuses to ackownledge how dramatically IOR changed the dynamics of reserves. 2% IOR seems low in abstract. But JP Morgan alone has $200bn in excess reserves. So they get $4 billion a year from IOR. If JP Morgan earned 0% on that $200bn and T-bills earned 2%, they would immediately reduce reserves. Even 0.25% was $200 million in income annually.

    In theory, the $2 trillion in high-powered money would create $100+ trillion in new bank deposits without IOR. Before IOR, the banking system only had $10 billion in reserves to support $5 trillion in FedWire payments daily. Since most checking accounts did not spend down their balance, the banks moved most checking account balances to savings accounts. The sweep was unknown to the customer. The money multiplier was theoretically more than 50 or 100. Only the banks’ operational need for vault cash limited the money multiplier.

    MMT has all sorts of contradictory responses to IOR. Many MMTers resolutely believe either interest rates don’t matter or interest rates stimulate the economy. But once the central bank pays IOR to reduce inflation, the government is at the “inflation constraint” of money-printing.

  3. Gravatar of Matthew Waters Matthew Waters
    5. March 2019 at 01:53

    $200 million for 0.25% should be $500 million.

  4. Gravatar of dtoh dtoh
    5. March 2019 at 01:54

    Scott,
    I’m surprised you even spend time responding. The woman is an imbecile and MMT is just a lot of hocus pocus to obfuscate the fact that it’s still the same old tired big government high tax agenda.

    (PK must be s***ting himself watching the lunatics destroy the Democratic Party.)

  5. Gravatar of Benjamin Cole Benjamin Cole
    5. March 2019 at 04:15

    It is too bad the Temple of Macroeconomics is presently consumed with MMT.

    I think the MMT’ers are raising some interesting issues, such as who gets to create money.

    Sober individuals such as George Selgin and Ben Bernanke have suggested money-financed fiscal programs for soggy, low-interest rate, low-inflation economies, such as Japan, and probably the US in the next recession.

    In his heart of hearts, Bernanke probably wanted money-financed fiscal programs in 2008, but by then he had a political position, and was not an academic visiting Japan.

    Although if we believe Michael Woodford, QE+deficits=money-financed fiscal programs.

    Was US policy in 2008-2013 a cousin of MMT in action?

    Given that QE and lower interest rates, or even negative interest rates, might be slow-acting (or not effective), any arguments that advance the idea of US government money-printing to finance deficits in a recession are welcome.

  6. Gravatar of Brian Donohue Brian Donohue
    5. March 2019 at 05:46

    Politics is too much for Krugman, which led to his hysterical 2003 call on interest rates in particular. Reread the article: he was breathtakingly wrong in a way that strongly suggests he really didn’t understand what was going on (similar to his stock market call in November 2016, again politically-infused).

    Krugman’s documented stupidity gives no succor in my mind to MMT stupidity. Again, who is Stephanie Kelton and why does anyone take her seriously? Is the answer because she tells people they can have their heart’s content without trade-offs? Is it that simple?

    Thomas Sowell comes to mind: “Much of the social history of the Western world over the past three decades has involved replacing what worked with what sounded good.”

  7. Gravatar of rayward rayward
    5. March 2019 at 06:35

    The vitriol directed at Ms. Kelton is proof that she threatens orthodoxy. Whether printing money rather than borrowing money to implement fiscal stimulus is a good idea is debatable, but like Medicare for all, it’s a political non-starter.

    What’s upsetting to Krugman et al. about MMT is that it raises questions about the current state of economics. Politically, we have one party decrying deficits when out of power and exploding deficits when in power. When in Rome, do as the Romans do. Economically, reliance on monetary stimulus during times of financial and economic crisis just preserves the status quo, the status quo that helped create the crisis. What status quo? A high level of inequality.

    Monetary stimulus is meant to stop and reverse falling asset prices during a crisis, thereby preserving inequality – the wealthy own most of the assets. Preserve inequality, preserve the conditions for a repeat of the crisis. But what’s so bad about it if it avoids collapsing asset prices and economic calamity? I suppose the answer is that it’s not so bad if one enjoys self-flagellation.

    Besides, what’s the alternative? Fiscal stimulus of the MMT kind. And fiscal stimulus has the added benefit of redistributing downward, as compared to monetary stimulus which redistributes upward. Of course, that depends on the meaning of “benefit”.

    In the end, Ms. Kelton will have had her day and we can all go back to orthodoxy. Unless and until another financial crisis comes along, as it inevitably will, and the Fed can’t or won’t implement aggressive monetary stimulus, asset prices collapse, and economic calamity follows. That’s the Austrian’s solution. I think I might prefer the MMT solution. But that’s just me.

  8. Gravatar of Bob Bob
    5. March 2019 at 07:16

    Scott,
    I think it is important that you continue to write MMT posts. MMT is clearly flawed but you are correct that it is so bizarre that it is hard to construct an argument against it. Politicians becoming enamored with MMT is a legitimate concern, so the arguments against it will be needed.This post significantly helped my understanding of why MMT is wrong. And as a frequent Krugman reader, I found ever one of those quotes to be a misrepresentation of his views. Great post. Keep up the good work.

  9. Gravatar of Benjamin Cole Benjamin Cole
    5. March 2019 at 07:41

    You know, after the Great Recession of 2008, the federal government borrowed money, then the federal government bought bonds with money that it printed. (QE)

    The US did recover from the 2008 recession, although much more slowly than anybody would’ve liked.

    There was no inflationary outbreak.

    Was MMT already tried?

    What if the federal government runs deficits but then buys back the bonds through the Federal Reserve Board, and allows the Federal Reserve to just keep the bonds. In other words the Japan model.

    Would that be MMT?

    What is the advantage of having new money created through the commercial bank system, that is endogenous money creation, versus having the Federal Reserve create new money by buying bonds?

    Is endogenous money creation superior to having the Federal Reserve print money and buy bonds? Is the reliance on endogenous money creation a terrible shortcoming of present monetary policy?

  10. Gravatar of Brian Donohue Brian Donohue
    5. March 2019 at 07:51

    Bob,

    From Krugman’s March 11, 2003 column linked above by Stephanie:

    “I’m terrified about what will happen to interest rates…”

    “we’re looking at a fiscal crisis that will drive interest rates sky-high.”

    “I think that the main thing keeping long-term interest rates low right now is cognitive dissonance.”

    “I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.”

    When he wrote this, the 30-year Treasury yield was 4.64%. 16 years later, the yield is 3.09%. The yield has been below 4% since 2011.

    Paul, who ya crappin’?

  11. Gravatar of ssumner ssumner
    5. March 2019 at 08:55

    Rayward, You said:

    “What’s upsetting to Krugman et al. about MMT is that it raises questions about the current state of economics.”

    This is insulting, childish and stupid. Krugman is often critical of the current state of economics. More importantly, Krugman offers very specific arguments that MMT is an absurd theory, and its defenders are not able to respond with substantive arguments so they respond with insults.

    It’s like saying accusing a Cal Tech physicist of being “defensive” about the current field of orthodox physics if he criticizes a whacky theory like cold fusion. Please get serious if you want anyone to pay attention to your comments.

  12. Gravatar of rayward rayward
    5. March 2019 at 09:31

    Well, Neil Irwin seems to believe economic orthodoxy may be collapsing from its own considerable girth: https://www.nytimes.com/2019/03/05/upshot/what-if-all-the-worlds-economic-woes-are-part-of-the-same-problem.html

  13. Gravatar of Tuesday assorted links – Marginal REVOLUTION Tuesday assorted links - Marginal REVOLUTION
    5. March 2019 at 09:39

    […] 4. Summers on MMT.  And Scott Sumner on MMT. […]

  14. Gravatar of rayward rayward
    5. March 2019 at 09:39

    Tomorrow being the beginning of Lent, I’m reminded that it took almost 300 years of heresy for Christians to finally agree on who Jesus was. But I digress.

  15. Gravatar of Julius Probst Julius Probst
    5. March 2019 at 10:48

    Good post ! The problem with MMT is that it has some grains of truth combined with a lot of problematic assumptions and simply false claims, so it’s very hard to argue with that crowd.
    Of course, we can also just look at empirical evidence.
    The Trump election almost serves as a natural experiment since it was definitely not priced in by financial markets. The entire yield curve shifted up in response to the election and the following massive tax cuts, thus providing some direct evidence against the claim that “expansionary fiscal policy” can lower rates. It has led to the exact opposite because the economy was not constrained by the ZLB anymore, so most of the stimulative effect was simply offset by the Fed, as expected.

    Unrelated:

    I wrote this a long time ago but only finished and published in January.
    It’s a short essay based on my experience at Cato (AMU) from last year.
    I advertised this year’s AMU on social media a few times before the deadline.
    Maybe you want to have a look my post because I also mention you and NGDP targeting in the end.

    https://macrothoughts.weebly.com/blog/nominal-stability-and-free-banking-lessons-learned-at-cato

  16. Gravatar of Deficit Owls Deficit Owls
    5. March 2019 at 11:17

    “… instead assume that flooding the economy with base money drives interest rates to zero. While it’s true that you can flood the economy with high-powered money when the equilibrium nominal rate is zero, if it isn’t zero then you’ll create lots of inflation and thus much higher interest rates”

    You’ve got the timescales wrong here.

    If the Treasury runs a deficit on Tuesday afternoon, then that will add reserves to the banking system. The banks will take their excess reserves, and try to lend them to each other in order to earn a higher return than that paid on reserves (which is often zero). Because there is a system-wide excess, the bidding will drive the inter-bank overnight interest rate down to whatever the rate they would earn from just holding the reserves is (often zero).

    In other words, a deficit Tuesday afternoon leads to a zero interest rate for Tuesday night, unless the central bank does something about it. This is very very short term.

    Your point about inflation is much longer term. Obviously a deficit on Tuesday afternoon isn’t going to cause a jump in inflation on Tuesday night.

  17. Gravatar of PeterP PeterP
    5. March 2019 at 11:33

    “bizarre, illogical, convoluted way of thinking about macro” = understanding the accounting of money creation, by banks and the government 🙂

  18. Gravatar of Justin Justin
    5. March 2019 at 11:33

    MMTers are akin to Austrians, Marxists or what I’ve long called “the Financial Times School” we all had to endure in the press between 2009 and 2013. It’s at heart an unfalisfiable position, because MMT is sufficient unclear in its claims.

    You can talk to New Keneysians, because they have the three equation model and other elaborations of their position, that you can actually look at an ponder. NKs are close enough to being right to be useful. Market Monetarism, similarly, is tractable model, where you can imagine data which would be inconsistent with its claims.

    What differentiates MMT from the Austrians, and makes it like first wave Marxism (i.e. before Stalin got a real world system out of it) is that it’s worryingly popular. Different types of lunatics, both on the radical right and left, seem to think there’s something to it. Zero Hedge for example seems to be replacing ABCT with MMT as the go-to crackpot non-theory. The difference between them and the DSA types is the rightwing lunatics want to use MMT to raise the fed funds rate recklessly, while AOC et al seek to use MMT as an excuse to spend money rewarding political allies.

    I suppose, as with the poor, disastrous macroeconomic ideas shall always be with us.

  19. Gravatar of PeterP PeterP
    5. March 2019 at 11:38

    “high-powered money is several orders of magnitude more inflationary than T-securities”

    How does this happen? Can you explain using accounting and causal relationships and data, no hand-waving?

  20. Gravatar of kav kav
    5. March 2019 at 11:44

    “You’re wrong, spending is paid for with some mix of money creation, debt and taxes,”

    Taxes? Dear Prof. Sumner, what does the govy do when they receive the envelopes filled with tax money? Is there someone at the IRS that pulls the bills out of the envelopes, irons them and sends them back to the teachers, policeman and nurses?

    My understanding is the money contained in the tax return envelopes are shredded and teachers and policeman and nurses are paid out of newly emitted bills.

    Why would the government need to wait a year for tax returns to be provided with paper bills that it can print whenever it needs to?

  21. Gravatar of PeterP PeterP
    5. March 2019 at 11:53

    “FWIW, I suspect one difference is that Japan has far lower government spending than Italy, and thus more room (fiscal space) to raise taxes before relying on money creation.”

    The cruel irony here is that even Krugman has since adopted the MMT argument… Oooops…

    https://krugman.blogs.nytimes.com/2013/02/24/debt-spreads-and-mysterious-omissions/

  22. Gravatar of Matthew Waters Matthew Waters
    5. March 2019 at 12:07

    MMT either gets defined down to regular old Keynesianism or defined up to endless free lunches. What’s scary is the endless free lunches is what makes MMT popular on the left. Then the tax/inflation constraint is downplayed.

    MMT is like a billboard which says “FREE LUNCHES” in huge letters and “taxes may be necessary to control inflation” in fine print.

    Taxes, in fact, have almost always been necessary in the US to control inflation. From 1951-2019, the government could have only used outright seigniorage perhaps in 2008-09. Reserves are now overnight T-bills and currency in circulation is at $1.5 trillion. The $1.5 trillion is what was printed for ALL years and the federal government spends $3.8 trillion PER year.

    Paper currency has funded less than 5% of federal government spending. The government has to pay interest or collect taxes for all other spending.

  23. Gravatar of Scott H. Scott H.
    5. March 2019 at 12:40

    I agree with Mathew Waters. MMT isn’t wrong per se. I’d add that just because printing money has only funded 5% of government spending doesn’t mean it couldn’t fund more in the future.

    It seems the hypothesized implications of MMT are where people go wrong. There’s no free lunch; but there are different ways to pay for that lunch.

  24. Gravatar of Laurent Karim Beland Laurent Karim Beland
    5. March 2019 at 13:45

    Brian Donohue

    W.r.t. to post-2003 tax cut: the economy did overheat, with inflation at a level that made the Fed uncomfortable, and eventually led them to catastrophically misjudge the 2008 situation.

    That said, that 2008 inflation was most likely driven by real factors (oil/gas shortage; this was just before fracking became a thing!), rather than by post-2003 fiscal stimulus.

    Still, without the tax cut and war spending, the 2000s boom-and-bust cycle might have been less severe.

  25. Gravatar of ssumner ssumner
    5. March 2019 at 13:55

    Peter, You said; “bizarre, illogical, convoluted way of thinking about macro” = understanding the accounting of money creation, by banks and the government”

    That’s right, understanding the accounting without understanding the economics.

    Why is the creation of high-powered money inflationary? Ever heard of the theory of supply and demand? Increase the supply of high-powered money and it’s value will fall.

    kav, You said:

    “My understanding is the money contained in the tax return envelopes are shredded and teachers and policeman and nurses are paid out of newly emitted bills”

    Your understanding is wrong. Very people pay taxes with currency. And even if they do, replacing old currency with new bills is a process with zero economic implications. Talk about being lost in the weeds. Bills are replaced when they wear out. An old bill is swapped for a newer bill. That’s utterly unimportant.

    Scott, If you don’t think MMT is wrong, then you simply don’t understand their model. It’s flat out wrong. Yes, it also exaggerates the share of spending financed by printing money (it’s not even 5%), but there are much greater problems. It treats debt and money as being equally inflationary. That’s wrong. It argues that tax increases can be used to control inflation. That’s wrong. It wrongly denies that spending is paid for with a mixture of taxes, debt and money creation.

  26. Gravatar of Kevin Adolph Kevin Adolph
    5. March 2019 at 14:15

    Is there a mathematical model of how MMT is supposed to work?

    If so, it would be a source of them concretely articulating how their economics is supposed to work.

  27. Gravatar of Tim Hammond Tim Hammond
    5. March 2019 at 14:23

    The proof that MMT doesn’t work is that it will end up with a 100% tax rate to contain inflation. Once you start to raise taxes to contain inflation, you can never lower them as long as you keep doing the thing that is causing inflation – printing money. So if you increase the printing, you have to raise taxes again. And again. And again. And then you have raised taxes to 100%. And since you cannot do that, at some point you will have runaway inflation.

    It fails, clearly and obviously, because unlike interests rate brakes, taxes do not get cut.

  28. Gravatar of Robert Barrett Robert Barrett
    5. March 2019 at 14:24

    Brian,
    I agree that Krugman’s 2003 article was problematic. I’ll admit that I was not a consistent reader of Krugman prior to 2008. The quote from the 2011 article was cherry picked and presented out of context. The truth is that Krugman posted to his blog daily for ten years and she had to go back to 2003 to find an example of when he was wrong. A better example would have been his predictions surrounding sequestration, but she would have been wrong in the same direction. I’ve heard her talk before and her standard practice is to misrepresent the views held by other schools of thought. For instance, according to Kelton, MMTers were the only school to predict that the Eurozone was a bad idea. You are correct about the 2003 article. He occasionally allows his policy preferences to cloud his understanding of economics.

  29. Gravatar of Kevin Adolph Kevin Adolph
    5. March 2019 at 14:35

    Does MMT have a mathematical model?

    Math seems like it would be advantageous way to communicate here, it would communicate, in solid terms, how MMT is supposed to work

  30. Gravatar of Brian Donohue Brian Donohue
    5. March 2019 at 15:08

    @Robert,

    If you are looking for someone who has been basically correct about everything macro-economically for the past decade, you’ve come to the right place.

  31. Gravatar of marris marris
    5. March 2019 at 15:14

    Thank you for the great explanation. You are absolutely correct that MMT discussions are so difficult because there are *multiple (related) problems* with the framework that need to be addressed. For example, what is the central bank even doing under MMT? Does it set an interest rate target? An NGDP target? None of the above?

    In a simple model with no central bank, where the Treasury spent whatever the politicians wanted each and taxes were used to hit an inflation target, my understanding is that we see 1800s-style boom-bust (since there is no nominal anchor) and 1930s-style low private-sector RGDP growth (as government’s share of the economy grows).

    You and I may make these arguments using technical reasons (e.g. a failure to use the best tools for the job), but an MMTer would write off these bad scenarios as failures of “political will.” I think this is the scariest part of the whole theory… a willingness to put all eggs in the collective action bucket.

    At the end of the day, the average MMTer is so confident that the government would do a better job than the private sector in making investments (even above the zero bound), that they don’t really care what theoretical framework will get them there.

  32. Gravatar of Dan Culley Dan Culley
    5. March 2019 at 15:34

    This is why, for all people criticize economics for being too reliant on mathematical models, they are enormously helpful. At least you can look at them and know that assumptions are being made and how the variables relate to one another.

  33. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    5. March 2019 at 15:40

    I like this place

  34. Gravatar of dtoh dtoh
    5. March 2019 at 16:00

    @Benjamin Cole

    “Is endogenous money creation superior to having the Federal Reserve print money and buy bonds? Is the reliance on endogenous money creation a terrible shortcoming of present monetary policy?”

    Interesting question. I think there is a actually a false and arbitrary distinction between endogenous money and fiat money.

    Many people (monetary economists included) assume an economic model where the CB is in a separate box or included in the same box as government. That’s a big mistake. The Fed and commercial banks are really in the same box. It doesn’t really matter who issues money. The only thing that matters (for monetary policy) is whether they money gets distributed outside of the banking system. (If Chase exchanges Treasuries for a deposit with the NY Fed, it has zero effect on the real economy.)

    There is no reason why the activities of the Fed could not be carried out by one or more commercial banks simply through regulation. The Bank of Japan is in fact partially privately owned. There’s no reason it couldn’t be 100% private. It used to be possible to have a checking account with the BoJ. Checks written on the BoJ had the same status as bank notes (cash), so anyone with a checking account could issue fiat money.

  35. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    5. March 2019 at 16:01

    Still I see their perspective of JGP is interesting.
    like emerging Social democracy in 2019?

    I recommend some left side learn first from Léon_Walras. https://en.wikipedia.org/wiki/Léon_Walras

  36. Gravatar of Benjamin Cole Benjamin Cole
    5. March 2019 at 16:14

    Dtoh-

    Thanks for your comment.
    I think we are on different wavelengths.

    The experience of core Korekiyo Takahashi in the Great Depression in Japan was positive, and he relied on money financed fiscal programs.

    Perhaps I should’ve spoken more bluntly.

    We can try to encourage commercial banks to engage in endogenous money creation, or we could have the government print money and buy goods and services, meet payrolls etc.

    In times of recession, I think the option of having the government print money and buy goods and services etc. looks very appealing. We saw how long it took to recover from the Great Recession, and the attendant political polarization. The Fed’s ability to stimulate the economy is rather flimsy. I prefer effective government actions.

    One more recession in the United States, and I see AOC in the White House.

  37. Gravatar of Matthew Waters Matthew Waters
    5. March 2019 at 16:30

    I took some liberties with 5% or less.

    Currency in Circulation is not true seignorage since 100% is backed by a bond the Fed holds. The Fed can forcibly take currency back out of circulation with a bond sale or maturation. The currency holder can convert the paper currency to excess reserves (i.e. overnight T-bills). Importantly, neither step requires Congress.

    In practice, Currency in Circulation never goes down. Even in the early 80’s currency did not go down. Total Currency in Circulation is $1.7 trillion and total federal spending in history is $83.1 trillion. At most, 2% of federal spending has been monetized.

  38. Gravatar of dtoh dtoh
    5. March 2019 at 16:44

    Benjamin

    The basic problem is that with sticky wages/prices, you can have a drop in demand after a financial shock. This can be fixed (easily IMHO) in one of two ways. Either through monetary policy where the Fed gets the private sector to buy more goods and services either by lowering rates or raising NGDP expectations. Or through fiscal policy, where the government just goes and buys stuff or gives money away so people can spend it individually.

    Either way, money needs to be “printed.” But IMHO, “printing” is a misnomer. Money is never just printed (at least under current monetary policy in the US.) It is always exchanged for financial assets (usually Treasuries.)

    If the Fed does not issue money to support government borrowing for increased fiscal spending, then essentially they are offsetting the effect of the fiscal stimulus. For fiscal stimulus to be effective, it always needs to be “money financed” to use your nomenclature.

    IMHO, monetary policy should in theory be better because a) it’s simple, b) the government doesn’t allocate resources very efficiently through fiscal policy, and c) elected officials are slightly more incompetent than the appointed officials at the Fed.

  39. Gravatar of Matthew Waters Matthew Waters
    5. March 2019 at 17:21

    “The Fed’s ability to stimulate the economy is rather flimsy.”

    How so? If T-bills yield 2% and bank reserves yield 0%, the Treasury seller has a big incentive to spend new reserves printed.

    In 2008, most money printed was in discount window programs or the Maiden Lane LLCs. The Fed made clear the reserves from these programs were temporary. Even worse, the new reserves were mostly sterilized. In September, reverse repos went up by $50 billion. In Oct-Dec, the Fed paid 0.7% to 1% in IOR even as Treasuries yielded near-zero.

    At the zero-bound, QE can be effective even if the bank spends 0% of the additional excess reserves. A private Treasury seller had a Treasury yielding 3% and now had a bank account yielding 0%. If the deposit-holder buys something, this deposit is merely transferred. The QE still looks like 100% excess reserves, but QE still generated private activity.

  40. Gravatar of Christian List Christian List
    5. March 2019 at 18:15

    Kelton reminds me of Marx. Their theories are incredibly stupid but loved by many people anyway, because they fit into their agenda.

  41. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. March 2019 at 18:24

    I have actually read the ur-text of MMT, Knapp’s The State Theory of Money.
    https://en.wikipedia.org/wiki/Georg_Friedrich_Knapp

    My advice: just don’t go there, it is hours of your life you will not get back.

  42. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. March 2019 at 18:26

    Off topic, I have a somewhat “economistic” analysis of PC at Areo Magazine. I take are rather less benign view of it than you generally do Scott.
    https://areomagazine.com/2019/03/05/virtue-signal-or-piety-display-the-search-for-cognitive-identity-and-the-attack-on-social-bargaining/

  43. Gravatar of Matthew McOsker Matthew McOsker
    5. March 2019 at 20:20

    I’ll just add some fodder:

    Reconciling Krugman vs Kelton
    https://www.pragcap.com/reconciling-krugman-vs-kelton/

    There is no right time for the Fed to raise rates!
    http://moslereconomics.com/2014/10/13/there-is-no-right-time-for-the-fed-to-raise-rates/

  44. Gravatar of ssumner ssumner
    5. March 2019 at 21:13

    Owl, It’s expected inflation that influences interest rates, not actual inflation. Look at interest rates in a Latin American country about to embark on hyperinflation. I.e., about to embark on MMT, without the tax increases (supposedly) required to soak up the inflation. Monetized deficits most definitely can boost interest rates quite quickly, via the Fisher effect.

    Lorenzo, I’m no fan of PC.

  45. Gravatar of Patrick Carter Patrick Carter
    6. March 2019 at 02:48

    you might like my take on the taxes don’t finance spending thing:

    https://medium.com/@CarterPaddy/governments-dont-need-taxes-to-finance-public-expenditure-they-just-really-want-them-8b5366f81aff

  46. Gravatar of Yoav Yoav
    6. March 2019 at 04:29

    I think MMTers have an interesting concept, even if not fully expanded.
    Let’s say The Government can create money.
    Ok, you basically, you can say the Government has infinite money.
    Any spending it has won’t change the balance – Infinite minus 10 is still infinite.
    Of course infinite money doesn’t mean infinite resources, but the amount of MONEY the government has is irrelevant. What is relevant is the amount of money in the economy – as decided by the government. The Government adds money to the economy by spending. It takes money out of the economy by Taxes and borrowing (You can’t spend bonds), and injects money into the economy by spending – wages, contracts, subsidies, etc.

    Of course, if the Government spending is too high compared to resources available, it would create inflation, and that would be bad. But the issue is the amount of money in the economy compared to the resources available, and it doesn’t matter for the government balance sheet.
    In a growing economy, the Government can spend more, even without more taxes, without creating inflation.

  47. Gravatar of Ralph Musgrave Ralph Musgrave
    6. March 2019 at 05:12

    Scott,

    You say Krugman again tries to “show what’s wrong with MMT, by pointing to a specific example of how very little of the national debt is financed by printing money”. He actually he tries to show how little of the DEFICIT is funded by printing money. Plus Krugman does not actually cite any specific MMTers as making the latter claim.

    Having supported MMT for about ten years and having read about a thousand articles by MMTers, their views on how much of the deficit is funded via new money are entirely conventional, far as I know. That is they claim the proportion so funded during a particular period can be anything between 0% and 100%. E.g. if a deficit is initially funded via more debt, but thanks to QE, the central bank buys back all of that debt, which is pretty much what happened for several years recently, then about 100% of the deficit is funded via new money.

    Re the claim by MMTers that “MMTers think (public) spending is paid for with money creation”, that strikes me as a bit of trite point: it’s a quirky new way of looking at the things. It’s not a wholly invalid idea, but it’s not important. Economics students should be made to write ONE essay on that idea. That’s all.

  48. Gravatar of Michael Sandifer Michael Sandifer
    6. March 2019 at 07:41

    Scott,

    This post might help you understand Kelton’s perspective better:

    https://criticalfinance.org/2019/03/06/kelton-and-krugman-on-is-lm-and-mmt/

    The author argues that Kelton’s mistake is in not making her assumptions explicit. And, the author reveals that at the bottom of everything MMT is saying is that fiscal policy can control NGDP if the monetary authority is simply willing to print the money to facilitate spending. In that case, tax increases and/or spending cuts would mean less inflation.

    If this author’s right, there’s no new insight, but very bad mistakes being made with regard to policy implications.

  49. Gravatar of What’s Radical about MMT? An Attempt to Pin Down MMT on Public Finance What’s Radical about MMT? An Attempt to Pin Down MMT on Public Finance
    6. March 2019 at 07:47

    […] from Scott Sumner to Paul Krugman have complained that MMT is hard to argue against because it’s hard to say […]

  50. Gravatar of Conor Conor
    6. March 2019 at 07:53

    MMT is catnip to politicians. Politicians look at the Fed increasing the money supply and ask “Why can’t I do that? Imagine how much I can help my friends.” MMT says “go for it and no need for any unpopular tax increases”

    Who needs logic or reason when the candy is sitting there on the table waiting to be eaten?

  51. Gravatar of ssumner ssumner
    6. March 2019 at 10:03

    Thanks Julius, That’s a very nice article.

    Yoav, You said:

    “The Government adds money to the economy by spending.”

    This is a very misleading sentence. The Fed determines the amount of money in the economy, not the fiscal authorities. Don’t confuse accounting issues with economic policies. if the Treasury adds $100 to the economy and the Fed immediately removes $100 via an open market sale, then the base is unchanged. Fiscal and monetary policy are separate in the US

    Ralph, It would take me a while to explain all of the errors in your comment, so I’ll just focus on one. QE is not the same as financing deficits with money creation, as QE involves interest-bearing reserves. That’s public debt. For money financed deficits, you need the creation of high powered money (zero interest), which since 2008 is currency, not bank reserves.

  52. Gravatar of Tracy W Tracy W
    6. March 2019 at 13:00

    Quite simply, when government spends money, it’s spending real resources. Eg. when the government funds education, it needs to hire teachers, and teachers demand real resources like food and shelter. For teachers to get those real resources like food and housing, someone has to grow said food or build said housing, and maintain it.

    If the government taxes and then pays teachers money raised by taxes, the transfer is obvious: people working in the private sector on net give up a bit of the food and housing and etc they could have consumed, and teachers consume that, the transfer in money is a transfer in claims on society’s resources.

    If the government instead prints money to pay for teachers, that in itself doesn’t produce any more food or buildings, and teachers can’t eat money. So that transfer from the private sector to teachers of real resources such as food and buildings still has to happen. So, the private sector still must make do with a bit less, like it does in the taxes situation. If the government spends heaps and heaps, all funded by printing money, then the private sector has to do with heaps less.

    I find focusing on the real resources, not the money, cuts out a lot of nonsense.

    A couple of notes:

    1. Of course one can argue that any particular government programme generates a bigger economy overall and thus more wealth for everyone. That does not alter the argument that there has to be a transfer of resources in the short-term.

    2. One can have arguments about spare capacity in the economy, and that there are times that government spending might be able to shock the private sector economy out of a bad equilibrium. But neither of these arguments can support vast, on-going government spending programmes without any impacts on private sector resources.

  53. Gravatar of Dtoh Dtoh
    6. March 2019 at 13:52

    Tracy W
    Totally agree. Always look first at what’s happening to the allocation of real resources and output.

  54. Gravatar of TheNumeraire TheNumeraire
    6. March 2019 at 14:58

    If taxes could control inflation as effectively as MMTers seem to suggest, I fail to understand why the Great Inflation of the 1970’s occurred at all.

    From 1969-81, there were not only a great deal of legislated tax increases (LBJ surtaxes, highest cap. gains in history, FICA/payroll hikes) but there was an unindexed tax code with many more brackets than exist today.

    Inflationary bracket creep was such a real phenomenon that at the 1980 cyclical economic peak, the U.S. federal government was collecting a record level of revenue/GDP. The average FICA tax for a median income four-person family increased from 3.52 percent to 6.65 percent between 1969 and 1981. The individual income tax in 1980 brought in a level of revenue/GDP only ever exceeded by the late 1990’s internet/telecom/Y2K boom.

  55. Gravatar of Yoav Yoav
    7. March 2019 at 01:00

    “This is a very misleading sentence. The Fed determines the amount of money in the economy, not the fiscal authorities.”

    I referred to “The Government” as the agglomeration of all government entities, the Fed included. You are right of course that the different parts of the Government do contradictory things to the money supply.

    What do you think about the argument that in a continuously growing economy (and only then), the Government can create money and fund itself (relative to the growth, and only in part) without causing inflation?

  56. Gravatar of Ralph Musgrave Ralph Musgrave
    7. March 2019 at 09:07

    Scott,

    I’m very grateful to you for trying to explain one of my many errors, namely that I claim QE consists of “money creation”. I just looked at online dictionary definitions of the term and the first two I came across define QE just as I do. As for the fact that a deposit at a bank (central or commercial) involves interest, that has nothing to do with whether the deposit is classified as money.

    Perhaps you could now explain my other “errors” to me.

  57. Gravatar of ssumner ssumner
    7. March 2019 at 09:28

    Yoav, Non-inflationary seignorage does exist, but it’s also a tiny amount of money.

    Ralph. The term ‘money’ is defined in many different ways, and I’m fine with that. But when people talk about financing government spending by creating money, they are talking about non-interest bearing money. QE was mostly about the creation of interest bearing reserves. You can’t pay for government spending by swapping one type of debt for another.

    Read my response again, it is 100% accurate. I never said that reserves did not have some money-like aspects, just that they could not be used to monetize debt or pay for spending.

  58. Gravatar of Ralph Musgrave Ralph Musgrave
    7. March 2019 at 12:54

    My original statement above, which I still stand by was, “…if a deficit is initially funded via more debt, but thanks to QE, the central bank buys back all of that debt, which is pretty much what happened for several years recently, then about 100% of the deficit is funded via new money.”

    Let’s run thru that. Govt borrows $X and spends $X plus it gives $X of bonds to those who loaned the $X. Then the Fed creates $X out of thin air and buys back the $X of bonds. That all nets out to, i.e. comes to the same thing as “the state as a whole (i.e. govt and Fed) creates $X and spends it.”

    The end result is that the private non-bank sector has an extra $X in deposits at commercial banks and those commercial banks have extra reserves at the Fed worth $X.

    Whether the above extra reserves or the extra deposits at commercial banks produce interest is irrelevant, because the presence or absence of interest has nothing to do with whether a deposit is classified as money: the normal dividing line between money and non-money adopted by most countries (an entirely arbitrary dividing line) is that if so called money deposited at a bank is available within about two months, then it’s money, and if it’s longer than two months, it’s not money.

  59. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. March 2019 at 14:48

    Scott: never thought you were a fan of PC.

    On MMT, this post by Cameron Harwick makes more sense of it than anything else I have read.
    https://cameronharwick.com/blog/whats-radical-about-mmt/

  60. Gravatar of Bob Murphy Bob Murphy
    7. March 2019 at 17:13

    Michael Sandifer wrote (in the very first comment on this post):

    “Unfortunately, as many have pointed out, the MMT’ers like Kelton are just the left-wing version of Austrians like Robert Murphy. It’s not that they’re not nice people. The point is not to insult, but to point out that discussing economics with them is a complete waste of time.”

    Hey Mike, this is for you

    On a more serious note, what in the world are you talking about? Did Krugman ever complain that I was really slippery in my views, so he couldn’t pin down what my argument was?

    No, Krugman actually said this about me:

    “Someone, I don’t know who at this point, sent me to this post by Robert Murphy, which is the best exposition I’ve seen yet of the Austrian view that’s sweeping the GOP — and I mean that sincerely, never mind the puerile insults aimed at yours truly. As regular readers know, I’m a stylized-example kind of guy, and Austrians tend to prefer lots of words instead; but in this case Murphy does offer a little story that is, in a way, a counterpart to my story about the baby-sitting coop (although my story was based on an actual real-world example).”

    The one go-to complaint Krugman and Brad DeLong have about me, is that I still cling to my austerian views even after I lost inflation bets (to two other austerians, not to Keynesians, incidentally).

    So even my sin, in their eyes, is only noticeable because I codified my views in a specific way with Bryan Caplan so we could have a wager about them. I.e. the exact opposite of what you are accusing me of.

  61. Gravatar of Potpourri Potpourri
    7. March 2019 at 22:14

    […] ==> Oh man I had to lay the smack-down. […]

  62. Gravatar of Joe Joe
    8. March 2019 at 04:15

    MMT and market monetarism are quite alike. They both argue for a constant NGDP growth to counter any economic cycles. The key difference is the institutional construct for you the implementation is via the fed / monetary offset for fiscal policy. for MMT it’s the other way around with implementation via the gov deficit / job guarantee. Same goal, different instruments and different economic inequality implications but also larger danger of falling prone to power hungry / incompetent politicians.

  63. Gravatar of David R. Henderson David R. Henderson
    8. March 2019 at 05:53

    I second what Bob Murphy said above. I don’t agree with Bob about Austrian business cycle theory, but I’ve never found discussing economics with him a waste of time. Bob has keen insights, which helps explain why I’ve commissioned more articles for Econlib from him than from anyone else.
    I do agree with Michael Sandifer on one thing, though: he’s a nice guy.

  64. Gravatar of ssumner ssumner
    8. March 2019 at 10:29

    Ralph, If you are talking about “monetizing a debt” then you are talking about buying interest bearing debt with non-interest bearing money. That’s what economists mean by monetizing a debt. Otherwise you are just talking about maturity management, which is a trivial issue.

    You are obviously free to define things any way you want. If you want to talk about the government replacing green colored T-bonds with blue colored T-bonds, go right ahead. But don’t think that anyone will care about what you say. I was assuming that you were trying to say something meaningful.

    Joe, That’s like saying the theories are quite alike because they both assume the US dollar is the medium of exchange, or that the earth goes around the sun. Sorry, but the theories are almost complete opposites, despite both favoring NGDP targeting.

    David, I agree.

  65. Gravatar of Ralph Musgrave Ralph Musgrave
    9. March 2019 at 03:52

    Scott,

    Yes: I’m saying that monetizing the debt involves “buying interest bearing debt with non-interest bearing money” (to quote you). (Or more accurately, those selling govt debt to the Fed MAY put their newly acquired money into interest bearing accounts, but that’s a side issue.)

    And that means that Krugman (supported by you) are wrong to say MMTers are mistaken in claiming a significant % of the deficit is funded via new money (especially in recent years when QE has been implemented big time).

    Moreover, Krugman’s claim that MMTers are unaware that deficits can be funded entirely by bonds rather than new money is totally absurd. That’s like claiming Einstein didn’t know the two times table.

  66. Gravatar of Scott H. Scott H.
    9. March 2019 at 06:35

    Sumner — Thanks for the reply. I guess I don’t really understand MMT yet. I’m looking around for a good explanation.

  67. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2019 at 10:17

    Robert Murphy,

    As stated above, you’re a nice guy and I think also an intelligent one, but I think you ignore basic facts due to ideology. A prime example is in your debates with George Selgin over fractional reserve banking. I see Selgin bump his head against the wall of your ideology and would want no part of it.

    Also, I find your anarcho-capitalist ideas extreme beyond the point of obvious absurdity, and I also don’t understand how any rational person could hold a candle for Austrian Business Cycle Theory, at least nearly a century after almost the entire rest of the field moved on. I agree with many points made in the take downs by Bryan Caplan and Krugman.

    I’ve listened to a podcast or two you did with the Thomas Woods in which you discuss sticky wages and the discussions seemed to go nowhere. I never hear you talk about why wages might be sticky on the upside, which is what makes inflation have short-run real effects.

    I could go on, but perhaps I’ve made my point. You always conduct yourself as a gentleman and are at least open to discussion, so I give you that.

    By the way, I don’t have a low opinion of anarcho-capitalism in general. I find David Friedman extremely interesting and think he has a much more realistic grasp on the topic. But, I think his father was ultimately correct.

  68. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2019 at 10:19

    By the way, I rarely read Krugman. He too often lets ideology get the best of him.

  69. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2019 at 10:25

    David Henderson,

    You’re an example of someone more libertarian than me, but I find it hard to find ideology coloring your arguments. You strike me as a very good economist and I’m completely with you on open borders. I’m much more hawkish on foreign policy, being a neo-realist who thinks it important that the US practice great power geopolitics.

    I consider myself a supply-side liberal, liberal in the sense of liberal Democrat, but am much more hawkish on foreign policy than most of the party.

  70. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2019 at 17:54

    Scott,

    Here’s a nice Twitter thread where Krugman, Delong, Noah Smith, Olivier Blanchard, etc. give MMT the Nick Rowe treatment:

    https://mobile.twitter.com/TimDuy/status/1104533768642035713

    The implicit assumptions in Kelton’s Bloomberg piece are that a central bank is both willing and legally able to monetize debt. So, she’s saying nothing new in a very confusing way, and also nothing useful.

    To paraphrase George Selgin, who does an excellent takedown of MMT from a legal perspective on his blog, “To the degree MMT is correct, it’s not unique. To the degree it’s unique, it’s not correct.”

  71. Gravatar of Michael Sandifer Michael Sandifer
    10. March 2019 at 06:50

    Here’s some more of that thread:

    https://mobile.twitter.com/dandolfa/status/1104571832970158082

  72. Gravatar of ssumner ssumner
    11. March 2019 at 11:40

    Ralph, You are just totally missing the point. Don’t know what more I can say if you think swapping blue bonds for green bonds is a way of “funding” something.

  73. Gravatar of ssumner ssumner
    11. March 2019 at 11:45

    Ralph, You are just totally missing the point. Don’t know what more I can say if you think swapping blue bonds for green bonds is a way of “funding” something.

    Scott, Don’t feel bad, I’m not sure any of us understand it.

    Thanks Michael.

  74. Gravatar of Francisco J Flores Francisco J Flores
    23. March 2019 at 20:03

    You and Krugman are fundamentally mistaken on how the monetary/fiscal system works. I will give you this: MMT does a very poor job of communicating its principals. So let me help you both out: these are 4 FACTS:
    1) The US government is unlike a:
    a. state,
    b. municipality,
    c. business, or
    d. household,
    in that it can issue its own currency.

    2) A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
    a. issues,
    b. borrows in, and
    c. floats
    its own currency, can NEVER run out of cash.

    3) The sovereign, like the US, can:
    a. issue currency to spend and buy anything the economy produces,
    b. up to the productive capacity of the economy (adjusted for turnover/velocity),
    c. without creating inflation.

    In other words the US government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled by i) selling government securities, ii) raising interest paid on deposits at the fed, iii) raising taxes across the board (on income, sales/vat, and asset values), or iv) a cut in spending.

    4) The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

    Private Debt, by the way, can be a problem and is largely responsible for many of our recessions.

  75. Gravatar of Francisco J Flores Francisco J Flores
    23. March 2019 at 20:35

    RE: “…if it isn’t zero then you’ll create lots of inflation and thus much higher interest rates— … the bizarre claim that deficits lead to a massive injection of new reserves. …”
    • What YOU don’t understand is that the Fed is the Saudi Arabia of money (from 20 years ago). Interest rates are whatever THEY say they are. Short and long. The notion that monied investors determine interest rates is the fundamental flaw in your thinking.
    • It’s the law of supply and demand. If the supply of money increases, what do you think will happen to its price?

    RE: “… guarantee low rates if investors believe that the only way you’ll be able to handle your debt is via inflation. … …”
    • Issuing currency does NOT necessarily lead to inflation. The other fatal flaw in your (and Krugman’s) thinking. If there are excess resources in the economy, increased spending induces business people to go wakey wakey, hire the people, and produce MORE GOODS AND SERVICES. These g&s offset the added currency and therefore —> NO INFLATION.

    RE: “… The UK discovered this in the late 1970s … …”
    • The major problem with the UK was that it was trying to maintain the exchange level of the Pound. It had no need for the IMF loan. Inflation was the result of the Yom Kippur War and OPEC.

    RE: “… US, I expect the day of reckoning to take the form of higher taxes, not high interest rates/high inflation. … …”
    • What a preposterous statement. A sovereign does not need to tax or borrow in order to spend.
    • Both you and Krugman need to rethink your models. They are deeply flawed.

  76. Gravatar of ssumner ssumner
    24. March 2019 at 08:33

    Francisco, You said:

    “It’s the law of supply and demand. If the supply of money increases, what do you think will happen to its price?”

    The price of money will fall. The price of money is 1/P, the inverse of the price level. So when the price of money falls, the price level raises.

    Your claim that inflation only occurs at full employment is just silly. Like early 1960s Phillips Curve theory. Try studying monetary history.

    You said:

    “Issuing currency does NOT necessarily lead to inflation. The other fatal flaw in your (and Krugman’s) thinking.”

    Is this a joke? Try learning something about Krugman before commenting. You are one of the most uninformed commenters I’ve ever encountered.

    Why are the least informed always among the most confident in their views?

    You said:

    Inflation was the result of the Yom Kippur War and OPEC.”

    Wow. 25% inflation in the UK caused by an oil shock? We had a huge oil price shock in 2007-08, what was the rate of inflation then? Is this the official MMT position on the cause of the 1970s inflation? Have you looked at the UK’s NGDP growth rates? Do oil shocks cause fast NGDP growth?

  77. Gravatar of Neil Halliday Neil Halliday
    30. March 2019 at 01:18

    ssummer:”the price of money…”?

    Gimme a break!

    It’s simple: if there are sufficient resources in the world to house, clothe, feed and transport 7 billion of us, let’s do that first, and worry about the “price of money” later. (Obviously public housing would be vastly increased in this scenario).

    Will you deny there are sufficient resources to eradicate poverty and institute a jobs guarantee?

    Note: 1. If you want to ensure an economic system that most increases your own chances of owning your own palace, you likely won’t be interested in exploring the facts or otherwise in my above proposition. .

    2.Re education: Someone mentioned a resource transfer from food- growing to paying teachers, forgetting that these (real or potential) teachers are already (hopefully) consuming food!

    In fact teaching mostly ‘consumes’ the time and effort required from teacher and student; in MMT, the teacher is paid for his knowledge, which took time and effort to acquire – time and effort which are as free as the air we breathe (no circular arguments, please; we are talking about real resources actually available to the world, we are not talking about limits imposed by lack of money as stipulated in orthodox economics).

    As for the fossil fuel industry, much of it could quickly be phased out, compensated, and replaced by solar panels on the world’s deserts, allowing the supply of free electricity to the entire globe…

  78. Gravatar of Becky Hargrove Becky Hargrove
    30. March 2019 at 13:26

    Neil Halliday,

    re “in MMT, the teacher is paid for his knowledge.” Yes, but so long as the transaction includes the value of the teacher’s time, it is product which does not scale. Given today’s services dominance in the economy and the portion of this which does not scale, small wonder there’s little belief in the multiplier, any more. But the lack of the multiplier quickly runs into problems with non tradable sector price making in terms of actual resource capacity and aggregate output which can actually be drawn from. Product which does scale and multiply is buried in these equilibrium dimensions. Hence MMT is doubtless already aware of the limits by which today’s knowledge use can be compensated on its present terms.

    Here’s the problem. Given the recognition of these limits, the job guarantee can’t give the average participant, what has already been claimed for applied knowledge in economic terms, and government job leftovers would have little choice but to ignore the participant’s need for intellectual challenge, for those have already been apportioned to the meritocracy. MMT would understandably seek to preserve the present distribution of compensated knowledge and millions would consequently be born who can’t take part in this vital knowledge based economy on what would even be similar terms. Sure, knowledge may be free as the air we breath but there are bills to be paid that prevent the teacher in today’s general equilibrium from sharing their work on similar terms with those who get little more in life than a “job guarantee” – intellectual challenge for the left behind, be damned.

  79. Gravatar of A Beginner’s Guide to MMT | Capsight News A Beginner’s Guide to MMT | Capsight News
    24. May 2019 at 08:30

    […] almost impervious to attack,” Bentley University economist Scott Sumner claimed recently on his blog. MMT’s proponents say it’s the critics who are impervious to reason—“part of a degenerative […]

  80. Gravatar of Clint Ballinger Clint Ballinger
    17. June 2019 at 21:37

    “which is based (AFAIK) on a misinterpretation of the implications of an accounting relationship involving the Treasury account on the Fed’s balance sheet.”
    If you follow the accounting here you can see how all spending by a currency-issuer is the same when you net everything out. Regardless of whether bonds are issued, you use the Fed, Treasury, overdrafts, helicopters, dolphins – whatever – doesn’t matter. At the end of the day, taxes drive currency, bonds are merely savings and fund nothing, spending is always out of thin air, and not using bonds is not inflationary. “Treasury Debt Operations” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1825303

  81. Gravatar of Clint Ballinger Clint Ballinger
    17. June 2019 at 21:39

    “it’s the MMTers that don’t understand that having your own currency doesn’t guarantee low rates if..”
    A currency issuer can ALWAYS set rates on its tokens at ANY rate it wants. PZIRP (w OMF) makes most sense for a number of reasons.

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