Friday, 1 February 2019

Jonathan Portes’s criticisms of MMT aren’t too bad.

That’s in a Prospect Magazine article by him published a few days ago and entitled “Nonsense economics: the rise of modern monetary theory.”

Portes’s first criticism of MMT, in his first para, is: “…for some proponents of “Modern Monetary Theory” (MMT), Labour’s adoption of a “fiscal credibility rule” (based in part on academic work by Simon Wren-Lewis and me), means that “Labour is committed to the thinking which will deliver more austerity.”

Well actually there’s a good reason for thinking Labour’s fiscal rule  would deliver austerity: it’s in the first three sentences, which are in bold, and thus (according to Labour) presumably of particular significance. The sentences are pure Margaret Thatcher / Angela Merkel “handbag economics”: i.e. the idea that government budgets should balance in the long term.

However, and to be charitable to Labour, I suspect those sentences are just there for show: i.e. every political party must be seen to be concerned about the deficit,  since nine out of ten voters think that’s an important issue.

Thus both MMTers and Portes are part right and part wrong there.

Richard Murphy.

Next, Portes makes the odd assumption that since he is writing in the UK, he needs to turn to the individual who he claims is the leading UK authority on MMT, namely Richard Murphy. If Portes was living on one of the smaller Shetland Isles, would he seek out the views of the leading islander on this subject, namely fisherman Jock McTaggart who once tried to get to grips with an introductory economics text book and didn’t get very far?

In fact Murphy’s views on economics are questionable, which is why Tim Worstall has often referred to Murphy as “Murpha-loon”. Plus Murphy only cottoned onto MMT two or three years ago: given that MMT was started by Warren Mosler about twenty years ago, Murphy could be described as a bit of a Johnny come lately.

Government money creation.

Portes’s next criticism is that MMT’s claim that governments create money out of thin air is not new (Portes’s two paras starting “First it says…”.) Well my answer to that is that at the start of the 2007/8 recession, Ben Bernanke was very evasive on the question as to whether governments and their central banks create money out of thin air. Thus MMT had good reason to affirm that they do actually create money.   (See first two paras of this article of mine for more on that.)

Spending  comes before tax.

Next, Portes devotes about a third of his article to an idea popular in MMT circles, namely that government and central bank must logically spend money into the private sector before such money can be taxed out again. As Portes rightly says, that has led some MMTers to claim we can do more public spending and impose less tax than conventional economics claims.

The reality, as Portes rightly argues, is that whether $X is spent a few months before or after $X is taxed out of the private sector is thoroughly unimportant.

There’s more to MMT.

A weakness in Portes’s article is that it does not cover the full range of MMT ideas. For example there’s the “permanent zero interest rate” idea. Warren Mosler (founder of MMT) and Matthew Forstater published an article on that entitled “The Natural Rate of Interest is Zero”. Also I published an article on that topic entitled “The Arguments for a Permanent Zero Interest Rate”.

The above permanent zero interest rate idea is not actually a hundred miles from the basic idea in the above mentioned Labour Party fiscal rule. That is, according to the latter rule, interest rate cuts should be used to impart stimulus when interest rates are significantly above zero, while fiscal kicks in when rates are near zero. The result would be interest rates bumping along only slightly above zero most of the time, which of course is not far from a permanent zero interest rate policy.

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