Friday, 26 April 2019
Two idiots from Harvard express views on MMT.
Chris Giles recently had an article in the Financial Times entitled “The Fiscal Turn: America learns to love deficits.” Giles quotes two of the World’s leading economic illiterates on the subject of MMT towards the end of the article, Kenneth Rogoff and Lawrence Summers. So I’ll run through the relevant paragraphs just for a laugh.
Incidentally (and speaking as an MMT supporter) I describe Rogoff and Summers as “idiots” among other reasons because in the case of Rogoff, he was advocating austerity or limits to stimulus at the height of the recent recession, while Summers was advocating a relaxation of bank regulations just before the 2008 bank crisis.
Anyway, Giles starts his consideration of MMT with the following paragraph (quotes from Giles’s article are in green italics).
“At the extreme end of the rethink is so-called Modern Monetary Theory, which argues that policymakers in countries that print their own currency can take on as much debt as is necessary to keep the economy purring away at full employment. These arguments, propounded by the likes of Prof Kelton, an adviser to Mr Sanders’s presidential 2016 and 2020 campaigns, go beyond standard Keynesian orthodoxy, which advocates deficit spending during recessions and when monetary policy has lost its power to stimulate spending.”
Well now running whatever deficit is needed to maintain full employment is hardly “extreme”, is it? Far from going “beyond standard Keynsian orthodoxy”, running whatever deficit is needed to ensure full employment was what Keynes advocated far as I’m aware.
I suggest that what’s actually happened over the last twenty or thirty years is that many economists (e.g. Rogoff and Summers) have retreated from Keynes’s ideas towards the sort of Neanderthal pre-Keynsian ideas that dominated in the 1920s and earlier: that is, the idea that governments can be viewed like households which have to balance their budgets.
That sort of Neanderthal thinking is still very much in evidence: for example the UK’s former finance minister, George Osborne made a fool of himself over and over a few years ago by announcing deficit and debt reduction targets year after year, only to discover he couldn’t meet those targets.
Chris Giles next para reads: “Instead, MMT advocates say that in normal times governments do not need to counter every spending decision with either higher tax or an expenditure cut elsewhere. Inflation, if it becomes a menace, can be offset by higher taxes to counter excess government-created liquidity.”
Well there’s a very good reason for the latter idea, as follows. It is reasonable to assume that over the very long term, that the national debt as a proportion of GDP will remain constant. In fact the debt/GDP ratio for the UK in 2012 was about the same as three hundred years earlier in 1712, i.e. around 50%.
However, inflation is constantly eroding the REAL VALUE of the debt. Thus to keep that ratio constant it is necessary to run a constant deficit (amounting to roughly 2%) of GDP.
The latter point will be a mile above the heads of Rogoff and Summers. But I haven’t actually seen the point made by any other so called “professional economists”. Thus you have to wonder how many other economists are all that much better than Rogoff and Summers.
Chris Giles’s next two paras read, “Those advocating budgetary prudence have by no means thrown in the towel. In a recent lecture to central bankers in Washington, Kenneth Rogoff of Harvard University questioned the assumption that interest rates and inflation would stay low for a long time, making public debt much less expensive and a MMT policy almost free to finance.
“It is probably true — you can have much more debt — interest rates are low. But in MMT, the debt is all very, very short term, so [the debt] is cheap, but it’s risky,” he said. “It’s very cheap until it’s not.”
Well the flaw in that argument is Rogoff’s assumption that a country is FORCED to pay higher rates of interest when interest rates rise. As MMTers keep pointing out, the truth is that a country which issues its own currency can pay any rate of interest on its debt that it likes. I’ll explain.
Suppose interest rates do rise, what’s the problem? All a country has to do is to print money and pay off “low interest yielding debt” as it matures and then tell would be creditors who want that debt rolled over to go away: in short, do some QE.
Of course that QE might cause excess demand and inflation, but that’s easily dealt with by raising taxes (or cutting public spending) and “unprinting” the money that flows into government / central bank coffers as a result of that QE. Non-problem solved.
Next, Giles quotes Summers as saying MMT is “voodoo economics”. Well OK if insults are the order of day, I can do that too: Summers is mentally retarded, low IQ, pig ignorant, economically illiterate, big mouthed jerk.
Chris Giles then quotes John Llewellyn, a former chief economist of the OECD.
Now it’s a bit of a mystery as to why the OECD should be regarded as any sort of an authority on anything to do with economics given that the OECD (like the IMF and Rogoff) were advocating austerity (aka “fiscal consolidation”) at the height of the recent recession.
Chris Giles’s paragraph on Llewellyn actually reads, “John Llewellyn, a former chief economist of the OECD, says MMT activists were “often near-messianic in tone, while somewhat vague in exposition”. He adds: “MMT is appropriate only in exceptional situations, where economies are far from full employment, deflationary pressures are in evidence, and interest rates are at the zero bound.”
So what’s that supposed to mean?
One interpretation of what Llewellyn is saying is that he is saying much the same as Chris Giles’s odd interpretation of Keynes mentioned at the outset above, namely that we should only have deficits during bad recessions. As explained above, that idea is nonsense.
The conclusion is that if you think MMT is defective, you should have a look at some of the senior members of the economics profession: they make George Bush and Tony Blair’s invasion of Iraq designed to find weapons of mass destruction which didn’t exist look almost logical by comparison.
Or put another way, if advocates of MMT were all chimpanzees, they could probably do better than Rogoff, Summers and so on.