Monday, 29 April 2019
What MMT is up against.
Modern Monetary Theory (MMT) has been criticised for being nothing more than Keynes writ large. That’s a criticism with some validity.
But the flaw in that criticism is that much of the economics establishment and many orthodox economists are so abysmally ignorant that they don’t even understand Keynes. Thus MMTers are right to re-present Keynes in a simplified form that hopefully even the latter ignormuses can understand.
A classic example of the latter ignorance is a recent article in The Times by David Smith, economics editor of the Sunday Times. (Article title: “This might be as good as it gets for the budget deficit.”)
The basic message of the article is: deficits and national debts are bad. Of course the latter ultra-simple message is disguised with a snow-storm of long words, long sentences, pseudo technical jargon and statistics. But that’s the basic message.
Well of course the flaw in that idea is that, as Keynes explained, deficits are in fact beneficial if unemployment is higher than it should be. However, David Smith does not so much as mention that point.
In short, the idea that any reduction in the debt and/or deficit is automatically desirable is nonsense.
Another leading member of the ignorant economics establishment is Olivier Blanchard, former chief economist at the IMF, an organisation which promoted a limit to stimulus (i.e. promoted austerity) at the height of the recent recession. (See also the second sentence here.)
However Blanchard seems to have recently tumbled to the point (which MMTers having been making for years and which Keynes was making almost a century ago) that deficits are beneficial.
Not only does Blanchard seem to have tumbled to the point that deficits are beneficial given inadequate demand, but has also tumbled to the point that they are especially beneficial given low rates of interest on government debt.
Well MMT has been advocating a permanent zero rate of interest on government debt for about twenty years. So on that basis, MMT is about twenty years ahead of the IMF.
Another prime example of a simpleton in high places is Kenneth Rogoff, who for some bizarre reason is a professor of economics at Harvard.
He clearly thinks governments can be treated in the same way as households: that is, he thinks that government debt is like a household debt in that the process of paying off the debt is painful, or involves real costs. The latter “real cost” point certainly applies to households when paying down their debts. But that “cost” point certainly cannot be applied directly to countries as a whole, in particular countries which issue their own currency.
Rogoff (like David Smith) uses pseudo technical jargon to hide his ignorance: in fact Rogoff has invented a fancy new phrase to describe the allegedly painful process of paying down national debts. He calls the process “financial repression”. If you Google the phrase, you’ll find numerous articles by Rogoff which weep and wail about the horrors of “financial repression”.
I’ve explained the flaw in the financial repression idea a dozen times on this blog over the years, e.g. here. (Article title: “Kenneth Rogoff’s “financial repression”.)