Sunday, 16 August 2020

David Smith’s incompetent criticisms of MMT in the Sunday Times.


David Smith is economics editor of the Sunday Times. His recent article entitled “Worried about debt? Not in a world running on MMT” is largely nonsense. But then if you seriously expect competence or proficiency from a journalist, then you’re a bit naïve.

As the Ipsos Mori poll illustrated above shows, journalists are about the least trusted profession in the country. (Sorry about the names of different professions being possibly too small to read on the above illustration, but if you go to the latter "Ipsos Mori poll" link and scroll down, you'll be able to see more clearly.)

Smith does actually get one point half right, which is early on in the article. He criticises Stephanie Kelton (leading MMTer) for saying governments borrow “to offer people a different kind of government money, one that pays a bit of interest”. Well governments certainly don’t offer interest out of the kindness of their hearts, as Kelton seems to suggest.

But a few paras later Kelton says (in the book of hers to which Smith refers) that governments pay interest so as to “support interest rates”. Well that’s a bit nearer the mark, if by that one means that government having spent a billion which is not covered by tax and which looks likely to cause excess inflation will then have to impose some sort of deflationary measure, and raising interest rates is one way of doing that. (Though of course it’s actually the central bank which raises rates rather than government.)

But that’s not the same as saying governments raise rates “to offer people a different kind of government money, one that pays a bit of interest”. So it’s fair to say that both Kelton and Smith need to re-think their ideas or phraseology on that point.


Is MMT monetary or fiscal?

Next, Smith says “MMT is misnamed because it is not monetary at all but almost entirely fiscal.” Wrong: it’s both. It is certainly monetary in that MMT advocates that where stimulus is needed, the state should simply create new money and spend it. That means the private sector’s stock of central bank issued money will rise. What’s that if it’s not monetary?

However, according to Smith, Kelton says on that point that “MMT requires us to demote monetary policy and elevate fiscal policy as the primary tool for macroeconomic stabilization.” That’s debatable. As I just said, MMT is part monetary and part fiscal. It’s not really on to claim it’s more one than the other without giving some detailed reasons.


Rogoff and Summers.

Smith then cites Ken Rogoff and Larry Summers in support of his argument. Well that’s a joke, as I’ve explained a dozen times on this blog and as have other MMTers on their blogs. Rogoff has long claimed that a debt / GDP ratio of more than 90% is some sort of disaster despite the UK having a ratio of almost three times that much just after WWII. Plus Rogoff’s calculations in that regard have since been shown to be mistaken. As for Summers, he was promoting more lax bank regulation just before the 2007/8 bank crisis.

Re Summers’s claim that MMT equals “the ability of the government to spend more without imposing any burden on anyone”, that’s nonsense. MMT says that, yes, you can do that given excess unemployment, but not if inflation looks like getting out of hand.

MMT just reinvents the wheel?

Next, Smith quotes Julian Jessop as saying “MMT is simply a repackaging of some old ideas to appeal to a new audience. There really is no such thing as a free lunch – even from a magic money tree.” Well first, MMT is very much Keynes “repackaged” in that Keynes famously said “Look after unemployment and the budget looks after itself”. That’s MMT in a nutshell. So yes: it is fair enough to say that MMT is re-presenting Keynes.

However MMT has been quite right to do that because it is quite clear that many leading economists forgot what Keynes said, or never understood Keynes in the first place. That is, Rogoff (along with two or three other Harvard economists) have been screaming the message for the last ten years that the size of the debt as such is important.

MMT’s answer is that the size of the debt as such is irrelevant: the only important question is whether the deficit and debt are causing excess inflation. Ergo MMT has been right to say what it has been saying.

Moreover, Keynes is near incomprehensible: try reading his most famous book, his “General Theory” if you don’t believe that. In contrast, MMT is much more clear on what its central message is, though clearly the David Smiths and Rogoffs and Summers of this world do not understand it. 


Will MMT be adopted?

Next, Smith says (referring to MMT): “There is, however, little chance of it being adopted as real-world policy.” Well that’s a joke: given the unprecedented deficit and rising debt as a result of Covid, MMT has to all intents and purposes been adopted lock stock and barrel, as several people apart from me have pointed out. For example there’s a recent Bloomberg article entitled “Like It or Not, a Modern Monetary Theory Experiment Is Underway”. 


The Congressional Budget Office.

Then in his final couple of paragraphs, Smith says MMTers claim that it’s the Congressional Budget Office that should estimate the likely amount of inflation and hence determine the size of the deficit. But that idea is flawed, according to Smith, given the record of the CBO in predicting inflation, which according to Smith, is poor.

Well actually MMTers do not specify exactly who should take the decision as to how large the deficit should be: and arguably that’s a deficiency in MMT.

But the real flaw in Smith’s argument there is that one could perfectly well have the central bank try to forecast inflation, and hence what a suitable amount of stimulus would be for the next six months or so. Indeed, that’s the position at the moment in that independent central banks can overrule what they see as excessive or deficient deficits via interest rate hikes or cuts!

I.e. under the latter set up, the extent of disasters resulting from excess or deficient stimulus under MMT would be no worse and not better than they currently are! Indeed, Positive Money and co-authors advocated a system where the central bank decided the size of the deficit in their submission to the UK’s Vicker’s commission.

Put another way, the decision as to exactly who decides on the amount of stimulus is entirely independent of whether MMT or the existing conventional set up is the best.

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