Ann Pettifor claim’s she’s found a flaw in MMT.

Summary.      Ann Pettifor claims MMTers ignore the fact that after a period of larger than normal deficits, the recovery often becomes self-sustaining, which in turn means more tax dollars flowing into government coffers, which in turn cuts the deficit. In fact MMTers are aware of the latter point, thus MMTers and Ann Pettifor actually agree on that issue.

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Ann Pettifor makes that above point in this article of hers entitled “‘Deficit Financing’ or Deficit-Reduction Financing?”.
 
She points out (rightly) that advocates of Modern Monetary Theory are keen on sectoral balances, in particular the point that every dollar of public sector deficit must be matched by a dollar increase in the private sector’s surplus. But she then says that clashes with her own research which shows that an increase in the government / public sector deficit, far from leading to a rise in the national debt, can actually CUT IT, because the latter initial deficit boosts economic activity, which in turn raises tax revenues flowing into government coffers a year or two later.

Well actually MMTers in my experience are well aware of the latter possible delayed and counter-intuitive effect of a rise in the deficit. Put another way, the latter “government deficit equals private sector surplus” point made by MMTers is simply the INITIAL effect. Delayed effects a year or two later are another matter.

Indeed Ann Pettifor quotes at length from an article by Bill Mitchell (co-founder of MMT) which makes the above “public deficit equals private sector surplus” point, and Bill in turn quotes with approval several passages from a Guardian article by Paul Segal which very much hints at the latter delayed effect. Title of Mitchell’s article is “Deficits are our saving”, and the title of Segal’s is “The national debt is money the government owes us”.

 Segal says, “And when the economy starts to recover, the deficit will decline in any case, as investment and tax receipts rise. Household saving will also decline with time from its current high rate: saving rose because we became so indebted during the boom years, running down our savings and buying goods on credit. Having built up so much debt we now want to pay some of it off. But once we have paid off enough of that debt, our saving rate can decline and private spending pick up, further helping reduce the deficit.”

Certainly Bill Mitchell does not CRITICISE that point of Segal’s.

As to EXACTLY WHY the above counter-intuitive effect is likely to occur, neither Mitchell nor Segal spell that out (though I’m sure Mitchell does somewhere in EXTREMELY LARGE amount of stuff he has written over the last ten years or so. The explanation is actually as follows.

The INITIAL effect of a deficit, assuming the extra public spending goes on say education, is that more teachers are hired. But that has an additional or delayed effect which is that the bank balances of teachers rises, as do the bank balances of the shop keepers and shopkeepers’ employees where teachers spend their new found wealth. Now what do people do when they see their bank balances are larger than normal? They’re quite likely to spend a bit more (all else equal). Hey presto, after a few months or a year or two of a larger than normal deficits, the recovery becomes self sustaining! More tax dollars flow into government coffers, just as Ann Pettifor claims.

Conclusion.  There is actually no clash between Ann Pettifor’s views and the views of MMTers in this area.