Friday, 19 April 2019
Joseph Huber tries to criticise MMT.
That’s in an article entitled “Modern Monetary Theory revisited – still the same false promise.”
On reading the article I came across so many errors in the first quarter or so, that I came to the conclusion that Huber does not have much of a clue about MMT, and gave up reading any further. The errors in the first quarter are as follows.
In his first paragraph, Huber says, “MMTers tend to speak of” their ideas “as if it were all their own invention”. Actually MMTers have repeated over and over that they owe a bid debt Abba Lerner (a contemporary of Keynes’s). Plus (speaking as someone who has supported MMT for about ten years) I’m happy to admit that MMT is very much Keyes writ large.
Then in his third paragraph Huber says MMTers do not “see any need for monetary and banking reform.” Well it’s certainly true that MMTers do not concentrate to any big extent on bank reform, but that is not a brilliant criticism of MMT: the fact that a group of people who specialise in one set of ideas do not consider another set is not a good criticism of their ideas on the first set. The fact that a group of biologists concentrate on vertebrate animals and ignore invertebrates is not a brilliant criticism of their ideas on vertebrates.
Moreover it is not entirely true to say that MMTers have ignored bank reform: it would be pretty amazing if Warren Mosler, who founded MMT and runs a bank, had nothing to say on the subject. He actually published an article in Huffington on the subject. (Article title: "Proposals for the banking system.")
In addition, there has been plenty of debate in the comments section of Mike Norman’s MMT blog on the merits of full reserve banking, which is the system that Huber wants.
Central and commercial bank created money.
The next bizarre claim by Huber is where he says “Equally, they (MMTers) were confronted with the question why – if what we have is supposed to be a sovereign currency system – there is that strange ban on the government to create money….”. So who are these MMTers who claim we have a Sovereign Money system (aka full reserve banking). Huber doesn’t tell us who they are and quotes no relevant works by MMTers.
In fact there are articles by Bill Mitchell (co-founder of MMT) which are perfectly clear the existence of commercial bank created money. E.g. see Mitchell’s article “Deficit spending 101 – Part 3.” (Mitchell actually refers to central and commercial bank money respectively as “vertical” and “horizontal” money.)
Speaking as someone who has written a book advocating a sovereign money system and who has read about a thousand articles by MMTers over the last ten years, I think I’d have come across any MMTers who claim we actually have a sovereign money system at present. I know of no such claims!
No difference between endogenous and exogenous money?
Next Huber produces a novel idea, which got me thinking. That’s in his para starting, “The distinction between endogenous bankmoney and exogenous central-bank money . . . . is arbitrary and overstated.”
He argues that exogenous money (aka central bank created money) and endogenous money (aka commercial bank money) are the same in that each is produced in response to demand. Well that’s an interesting idea, but when it comes to exo and endo money, MMTers simply go along with the conventional wisdom, so if as per Huber’s claim there is in fact little distinction between the two forms of money, that is not a criticism specific to MMT.
But returning to his claim that there is little distinction between the two forms of money, it is true that in a very broad sense of the phrase, they are both produced “in response to demand”. But the motives for meeting that demand are very different.
In the case of commercial banks, the producers of endo money, they are motivated by profit: that is, they lend to any viable looking borrower who asks for a loan. In contrast, when a central bank issues exo money, it is motivated by what it sees as the needs of the country as a whole, and not profit.
Moreover, when a commercial bank supplies £X to a borrower, the latter is in debt to the bank: the borrower is expected to pay that money back at some stage. In contrast, if the state (i.e. central bank and government) created extra money and spent some of it employing me to decorate a government office, I would not be in debt to government or central bank to the tune of whatever they’d paid me.
It has been argued that central bank issued money (exo money) involves a debt in that government can demand that money back via increased taxes. But that’s a questionable argument: it does not invalidate my above point that when government pays me £X to decorate their office, I might at the same time owe them less than or more than £X in tax, but I most certainly do not owe them £X simply because they have supplied me with £X.
So I suggest the conventional distinction made between exo and endo money is in fact valid, contrary to Huber’s claims.
GDP increasing money creation.
Next (para starting “Most Postkeynsians…”) Huber criticises MMT for paying no attention to the distinction between money created for GDP increasing purposes and in contrast, for the finance sector, much of which, according to Huber, does not increase GDP.
Well the answer to that is that there are some apparently non-GDP increasing types of money creation (e.g. a loan to buy an existing house as opposed to a new house) which actually do increase GDP, as I explained here. (Article title: “Borrowing to build a house is no more productive….”)
However, that’s not to say there are no murky, clever-clever transactions done in financial centres like the City of London which are very suspect and non-productive. Adair Turner was doubtless right to say that much of what the City of London does is “socially useless”.
However, the fact that MMT ignores the latter “socially useless” problem is not actually a weakness in MMT. Reason is that it is perfectly reasonable to assume that if the economy is not at capacity, and the state creates and spends more money, that some of the extra activity will be socially useful and some will be useless.
Ergo one of MMT’s basic claims (also spelled out by Keynes) namely that creating and spending money (and/ or cutting taxes) is at least to some extent useful in a recession, is perfectly valid.
Only Huber (apparently) understands the difference between money and credit.
Next, in his para starting “Present day means of payment….”, Huber claims that not only MMTers, but also neoclassical and Postkeynsian economists do not understand the difference between money and credit.
Well I think just about every economist, MMTer or not, has tumbled to the fact that trade credit, i.e. a debt owed by one non-bank firm to another, is not a form of money.
I’ve only got about a quarter of the way thru Huber’s article. It is clearly riddled with errors. So I can’t be bothered with any more of it.