Wednesday, 11 April 2018

Feeble criticisms of MMT by Thomas Palley.

Palley tries to criticize MMT in an article entitled “Modern Money Theory (MMT) vs. Structural Keynesianism”.

His first criticism (his section 1A) is actually valid or at least part valid. That’s the idea that MMT is just Keynes writ large. Others (e.g. Simon Wren-Lewis) have made the same criticism. That criticism is fair enough, but have you ever tried reading Keynes General Theory (his most famous book)? It’s near incomprehensible. In contrast, MMT takes the basic Keynsian ideas and sets them out in a relatively clear manner.

Next (section 1B) Palley says “First, MMT economists used to say it is easy to have full employment without inflation. I don’t think that is true. As you edge toward full employment, inflation will increase.”

In fact MMTers have never denied that inflation puts a limit on the amount of stimulus that can be implemented, i.e. that inflation tends to rise as full employment is approached.

But I agree with Palley’s point that some MMTers appear to play fast and loose with deficits and appear to suggest that governments can simply print money willy nilly.

Next, Palley says, “MMT economists tend to say the central bank should park the interest rate at zero and forget about it. I think that is crazy. It is throwing away an important economic policy tool, and it would likely promote dangerous asset price inflation..”.

Wrong. Warren Mosler (and indeed Milton Friedman) backed a zero interest regime, and it’s an idea I agree with, but it’s not an idea widely promoted in by MMTers.

Re “asset price inflation”, the first flaw in that idea is that asset bubbles are not exactly unknown given more normal rates of interest: it was an asset price bubble while interest rates were at normal levels that was largely responsible for the bank crisis ten years ago!

Second, if we had a permanent zero rate, any amount of deflation (i.e. cut in AD) can be implemented via fiscal means: to be exact, the state can in principle always raise taxes and “unprint” the money collected. Of course that is difficult to do in a scenario where a bunch of economic illiterates known as “politicians” are determined to have a say in how large the deficit / surplus should be, but IN PRINCIPLE, the zero rate idea is doable.

Moreover, a permanent zero rate does not mean we would have to stick to and EXACTLY zero rate of interest all the time: that is, if a sudden dose of deflation were needed, a temporary rise in interest rates could easily be implemented, with the objective being to return to zero as soon as possible.

But the real killer argument for a permanent zero rate is that it brings about a genuine free market rate of interest: the rate of interest which maximises GDP. That’s on the grounds that, as is widely accepted in economics, the GDP maximising price for anything is the free market price, unless there is a clear social case for a non free market price (e.g. kids’ education is available for free because of the obvious social benefits).

So why does a zero rate give us a genuine free market rate of interest?

Well clearly the state or central bank performs a useful service is issuing enough money to induce the private sector to spend at a rate that brings full employment. (The more money people have, the more they tend to spend.) But is there any point in the state issuing so much money that it then has to offer interest to holders of that money interest in order to persuade them not to spend away their excess stock of money? Absolutely none!

That process, i.e. upping the rate of interest just to persuade people with large wads of $100 bills not to spend those bills, so to speak, clearly results in an artificially high rate of interest. Indeed that artificially high rate is absurd in that it results in forcing every mortgagor to pay an artificially high rate of interest on their mortgage most of the time just to enable the state us use interest rate cuts to adjust demand.

Exchange rates.

Next Palley says “MMT economists say all a country needs is a floating exchange rate, and then it can use money financed budget deficits that push the economy to full employment.”

Well what’s wrong with floating exchange rates!!!! The US, UK and Eurozone have a floating rate. It’s news to me that that’s some kind of disaster.

And MMTers do not (to repeat) say “Let’s print money willy nilly with inflation going thru the roof, and with the exchange rate constantly depreciating.”. Their basic claim (as Pally himself points out) is that demand should be as high as is consistent with acceptable inflation. As to the exchange rate, that can be left to find its free market level at that “acceptable” level of inflation.

And finally, in his section 2A, Palley says “MMT is best understood as political polemic…”. Well there’s some truth in that: i.e. campaigning for something substantially different to the existing order (e.g. a permanent zero rate) is “political” by definition. But what’s wrong with arguing for a system which is substantially different from the existing and clearly flawed system? The first people to advocate central banks were “political polemicists”. Now they’re part of the establishment.

On the other hand Palley says MMT is simply Keynes writ large. Well to the extent that that’s true, MMT is advocating nothing new, so it’s not political!!!


  1. The MMT speaker in Spain said recently that the government should print money to increase wages of public employees and pensioners. In fact the government should employ everybody so that there are no more jobless people. They would build infrastructure (whatever), environment tasks, take care of elder, anything you can think of, paid with just printed Euros. Not a word about competitive companies, just printing money. It's a complete nonsense for me.

    1. Sounds like someone from the lunatic fringe of the MMT movement...:-)

    2. In fact he is an economist, author of several books, looks intelligent. But for me he sounds crazy. Do you know if in the MMT theory there is a limit in the amount of money created by the government? And, does the MMT support that the banks create additional money through lending?

    3. MMT has always made it clear that money creation has limits posed by inflation. Re commercial banks, MMTers are well aware that they create money as well as central banks. Strangely, MMTers often refer to central bank money has "vertical money" and commercial bank money as "horizontal money". If you Google those two phrase and "Billyblog" (the name of the blog of Bill Mitchell, who is an MMT supporter) you'll find a few articles by him on that topic.

    4. OK. Thanks.


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