Tuesday, 29 January 2019

American Enterprise Institute article by Stan Veuger criticises MMT.

Veuger says, in relation to the MMT claim that governments and their central banks create money, that “…it is not a controversial claim among economists that countries can create money…”. That’s in his article entitled “MMT’s central idea is neither new nor helpful.”

Well actually at the start of the 2007/8 crisis Bernanke was very evasive on the question as to whether the Fed created money. See article published by the American Monetary Association entitled “Are You or Aren’t You Printing Money, Mr. Bernanke?”

Thus MMTers were right to underline the fact that central banks can and do in fact create money from thin air.

Veuger tries to defend his position by citing a couple of economists who are obviously aware that central banks do in fact create money (one of them being Greenspan). Well my answer to that is that the fact that SOME individuals apart from Galileo five hundred years ago agreed with Galileo that the Earth revolves round the Sun does not prove that Galileo’s heliocentric idea was not then controversial. (It’s surprising what a poor grasp of basic logic many economists have.)

Moreover, Bernanke was not the only one apparently not clear on whether central banks create money: the IMF apparently does not understand this issue either. (Actually my guess is that Bernanke has always known perfectly well that central banks create money, whereas the IMF is genuinely clueless.)

My reason for saying that is that the IMF has long adhered to the barmy “fiscal space” idea: that’s the idea that if a country has too much debt, that constrains its ability implement stimulus, come a recession, because (according to the IMF) stimulus can only be implemented by having government borrow money and spend it. I.e. the IMF seems to be unaware that (as pointed out by Keynes almost a hundred years ago) that a government and its central bank can simply create new base money and spend it (and/or cut taxes).

For articles by two MMTers demolishing the IMF’s fiscal space idea  (me and Bill Mitchell), see here and here.

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