Is MMT too monetarist?

Frances Coppola claimed recently on Twitter that Warren Mosler (founder of Modern Monetary Theory) is too monetarist. I beg to differ: i.e. I think the extent to which MMT accepts monetarism is about right. Reasons are as follows.

MMTers certainly tend to claim that given inadequate demand, the private sector’s attempts to save money must be higher than usual, thus the solution is to create more money (base money in particular) and spend it into the private sector. And clearly that claim is not a million miles from the monetarist claim that GDP varies with the size of the stock of money (base money in particular), and the even more extreme version of monetarism, namely that the best way of controlling demand is simply to control the size of the stock of money.

First, there is nothing basically wrong with monetarism (on the dictionary definition of the word, i.e. the idea that GDP tends to vary with the size of the stock of money, base money in particular). To illustrate, when people win a lottery, or come by some other windfall, their weekly spending rises. Ergo if the central bank were to print tons of new money and distribute wads of it to everyone, total spending, i.e. aggregate demand would rise, and assuming the economy had spare capacity, GDP would rise. Alternatively, if there was no spare capacity, the only effect would be to raise inflation.

However, clearly monetarism can be taken too far: e.g. the idea that demand can be accurately controlled simply by adjusting the money supply is over-simple. But MMTers do not advocate the latter over-simple idea.

What they do argue (speaking as a self-appointed spokesman for MMT, ho ho) is that come a recession, the best solution is for the state (i.e. government and central bank) to create money and spend it, and/or cut taxes. Keynes advocated much the same. And that will have two effects.

First there is what might be called a fiscal effect: e.g. if the extra spending comes in the form of extra spending on education, then an immediate effect will be more jobs for teachers.

A second and more delayed effect is that the stock of money (base money in particular) rises, which will itself also raise demand.

Thus it can be said that not even extreme monetarists are extreme monetarists – in the sense that there is an inevitable fiscal element involved in feeding more money into the private sector.


Who controls the printing press.

Of course there is an obvious problem with creating money and spending it, namely that if POLITICIANS are in control of the money printing press, they may well be tempted to engineer pre-election booms. 

But the solution to that little problem was set out by Positive Money several years ago: have some sort of independent committee of economists, perhaps based at the central bank, decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP goes to public spending, and how that is split between education, health, infrastructure, etc. Ben Bernanke incidentally gave an approving nod to that sort of system.


Definitions.

Another point in favour of the MMT stance here is that while MMTers do not claim adjusting the stock of money should the SOLE method of adjusting demand, their claim that inadequate demand proves there’s an inadequate stock of money is nevertheless true by definition – at least in the following sense.

If the private sector is spending an inadequate amount, that ipso facto means they are trying to save too much, or trying to save an amount that results in Keynes’s “paradox of thrift” unemployment. Put another way, if people are saving too much, those people must in their own estimation, have an inadequate stock of liquid savings (in the form of base money – or government debt, which as MMTers have often pointed out, is pretty much the same thing as base money). Ergo the claim by MMT, Keynes and others namely that given unemployment, there must be an inadequate stock of savings is true by definition.  And that is an argument in favour of at least a partial acceptance of monetarism.

Conclusion: the extent to which MMT accepts monetarism is about right.