Friday, 18 December 2020

Mervyn King’s poor criticisms of MMT.

In this Spectator article, he tries to criticise MMT. Article title: "The Ideological Bankruptcy of Modern Monetary Theory."

His second paragraph contains the revelation that while there’s something to be said for money printing a la MMT, money printing is not a new idea and we need to be careful with money printing.

Well I think the average ten year old knows that money printing is not a new idea, plus the average ten year old knows there are dangers associated with money printing. That’s why MMTers have repeated till they are blue in the face that inflation places a limit to the amount that can be printed. Evidently Mervy King is not aware of the latter point.

Next, King trotts out the fiendishly clever play on words which hundreds of others have trotted out, namely that Modern Monetary Theory is neither modern, nor monetary, nor a theory.

There again, and as regards "modern", MMTers are streets ahead of Mervy King: they have always made it clear that their ideas owe a lot to economists from long ago: in particular Abba Lerner and Keynes.

Next, comes this para (which I’ve put in green italics):

“It is not monetary because the relevant questions concern fiscal policy: how should governments finance their deficits and what are the limits to those deficits? If deficits can always be financed by the printing of money by a compliant central bank, then we are in a world of ‘fiscal dominance’, to use the modern jargon. Inflation is then determined by government spending decisions. It was precisely to convince financial markets of the opposite that led to the independence of the Bank of England.”

Well now if it’s so fantastically important that a central bank be independent, how come the UK managed OK in the years PRIOR to when the BoE was made independent (in 1997)? I’m not saying I OPPOSE central bank independence. I actually BACK the idea. My point is simply that the difference between an independent and non independent bank is not Earth shattering.
However, the above quoted para from King’s article does contain a valid criticism of MMT, and it’s one that I’ve highlighted myself over the years. It’s that while there’s nothing wrong with MMT theory, MMTers have not thought through the practicalities. In particular, as King says, MMT seems to assume that politicians control the amount of money that is created and spent, and in view of Mugabe, the Weimar republic etc, that may not be desperately clever.
So, is there a way of implementing MMT while keeping politicians away from the printing press? Well yes there is. As pointed out by Positive Money and Ben Bernanke, it would be perfectly feasible to have the central bank (or some other independent committee of economists) decide how much money to print each year, while politicians retain the right to decide the NATURE of deficit spending, e.g. whether it goes towards education, health, tax cuts, etc etc.

But Mervyn King is evidently not aware of the latter Positive Money / Bernanke point, so he’s clearly is not up to speed on this subject.

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