MMT is a heterodox economic theory that recommends a new approach to fiscal policy (government spending). What is it, and why does it matter -- or does it?
One thing that I've been confused about when reading about MMT in the past is how, exactly, it differs in predictions from "standard" Keynesian macro models (e.g. IS-LM). Have you seen a satisfying answer to this? Both theories prescribe basically unlimited spending to fight demand-side shortfalls (e.g. with the "natural interest rate" is below 0). It seems like any differences between the theories basically stem from the question of whether fiscal and monetary policy are completely independent variables in "normal" (e.g. non demand-constrained times), with MMT'ers basically saying that they can be arbitrarily set completely independently of each other, and "conventional" Keynesian economics saying that there's at least some trade-off between the two (which may well be a worthwhile trade-off to make, for societal good!).
One of the things muddying the waters of this debate is, I think the fact that the actual fiscal (and, to a lesser extent monetary) policy pursued by the government has NOT followed the advice of so-called "mainstream macro"; the fiscal policy in particular has been contractionary exactly when you'd want it to be expansionary, and even the Fed has consistently and predictably shown a heavy bias toward the "controlling inflation" side of their so-called "dual mandate".
In a lot of ways then, I feel like MMT is more a rebranding exercise than anything else - it kinda seems like it's basically trying to pose as a "fresh new theory" in order to get people to take seriously the actual insights about how a country SHOULD respond to demand shortfalls and rising deficits. But that part doesn't seem "new" to me - it's EXACTLY what a Keynesian analysis of the world would tell you what to do. The real problem here seems to be that there are irrational deficit fears and the economists running the show within the government don't seem to really believe their own stated models when it comes to policy implications (not to mention the fact that government fiscal policy is mostly set by non-economists in Congress, at least half of whom are openly disdainful to the very idea of expertise). I guess from a tactics perspective, if MMT can break through some of that by virtue of being "new," that's worthwhile?
I think my main problem with it stems from the fact that MMTers generally position themselves as being so hostile to "mainstream" economics, but then argue against a straw man that seems like it's straight out of the University of Chicago econ department. The actual point of disagreement (whether or not fiscal and monetary policy are completely independent of each other or only weakly coupled/exchangeable during periods of robust economic growth) seems fairly esoteric, and, to be honest, not very applicable to recent economic conditions (we've basically been in some form of a liquidity trap/below inflation targets situation for decades now, and that doesn't show any signs of slowing with increased technological unemployment). I'd love the chance to actually "test" that proposition (since that'd basically mean the economy was doing great and we had smart governance!), but it seems like in the meantime the whole "mainstream vs MMT" debate is basically same-team squabbling, and the real issues are how to get actual government policy (both the Fed and Congress) to take the implications that deficits don't matter in low interest rate situations seriously...
This paper may also she some light on these questions: "Central Bank Independence: Myth and Misunderstanding," L. Randall Wray (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407707). The "notes" chapter at the end of The Deficit Myth has a lot of interesting looking references from the various MMT folks.
A few thoughts on this, mostly just agreeing and also noting in advance that I have not given *that* much thought to macro between doing the Fed Challenge in high school and now...
Perhaps first and foremost, I think you're right that MMTers (Stephanie Kelton in particular, who is probably the most public-facing MMTer around) emphasize a point that is very much *not* MMT-specific and is largely "macroeconomic consensus" -- just not DC consensus. I don't think that's because Kelton mistakes that issue for a distinction that MMT makes. I think it's because she -- in my opinion rightly, and as you hint at "from a tactics perspective" -- sees the increasing discussion around MMT as an opportunity to take on the flawed economic theory (if you can even call it that) behind government policy and political and public rhetoric. So, while MMT's *actual* distinctions from Keynesian macro analysis may be more esoteric, its rising prominence is an opportunity to attack something entirely different. I believe this is why, for example, Kelton's book is called "The Deficit Myth." It's in some ways a book about MMT. But it's really focused on making the public recognize how fucked our approach to fiscal policy is and has been for some time, which does not require an MMT lens to see. I don't feel like I know enough, at this point, to definitively say whether or not MMT is new or a rebranding exercise, though I know this is a question that comes up a lot and various MMT theorists have written about it. I'm not sure it matters, though -- if a popular "new" theory is an opportunity to drive political change...isn't that enough? What is "acceptance" of theory if it's not accepted by the people doing the actual governing, or more importantly, by the public that has the power to force the governors to do things?
One note of distinction that your last sentence brings up, not sure if it is core to your thinking on this: MMT goes further than saying deficits don't matter in low interest rate situations. It says deficits *only matter because of their impacts on inflation* -- bond issuing, despite currently being tied directly to government deficits, is actually an entirely different affair. MMT argues that we should assess spending and bond issuing as separate issues -- they may line up some or much of the time, but they don't have to, and the reasons for issuing bonds are entirely independent from "funding the deficits." When we issue bonds at the same time as running a deficit, we're kind of doing two things: 1) we're removing some of the money that we just put in, but we're also 2) providing a smaller, on-going stimulus payment into the economy (albeit a regressive one). MMT theorists probably come down on both sides of the "should we keep issuing bonds" debate, but the key insight is seeing bond issuing as its own tool, not as a necessary corollary to spending.
There are definitely Keynesian / Post Keynesian folks out there who know far more about this than I do who are making exactly your point. The middle paper here is a response from Kelton et al along these lines: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf. I think there are likely quite a few others as well. Nathan Tankus is another person to look at -- https://nathantankus.substack.com/ -- he brings a pretty deep understanding of how the monetary system actually works (and the Fed), which can perhaps elucidate some of how MMT theory departs from traditional Keynesian economics (if it does).
I just rambled, hahah, I think the questions you raise are open ones for the most part. From my perspective, I'm not sure it matters -- anything that helps bring public policy (and public rhetoric) back in line with sensible economic analysis is a good thing, whether it's truly new or a repackaging of a variety of older theories (I think MMTers like to point out that they synthesize Keynes with chartalism, functional finance, and an understanding of the modern, computerized financial system).
One thing that I've been confused about when reading about MMT in the past is how, exactly, it differs in predictions from "standard" Keynesian macro models (e.g. IS-LM). Have you seen a satisfying answer to this? Both theories prescribe basically unlimited spending to fight demand-side shortfalls (e.g. with the "natural interest rate" is below 0). It seems like any differences between the theories basically stem from the question of whether fiscal and monetary policy are completely independent variables in "normal" (e.g. non demand-constrained times), with MMT'ers basically saying that they can be arbitrarily set completely independently of each other, and "conventional" Keynesian economics saying that there's at least some trade-off between the two (which may well be a worthwhile trade-off to make, for societal good!).
One of the things muddying the waters of this debate is, I think the fact that the actual fiscal (and, to a lesser extent monetary) policy pursued by the government has NOT followed the advice of so-called "mainstream macro"; the fiscal policy in particular has been contractionary exactly when you'd want it to be expansionary, and even the Fed has consistently and predictably shown a heavy bias toward the "controlling inflation" side of their so-called "dual mandate".
In a lot of ways then, I feel like MMT is more a rebranding exercise than anything else - it kinda seems like it's basically trying to pose as a "fresh new theory" in order to get people to take seriously the actual insights about how a country SHOULD respond to demand shortfalls and rising deficits. But that part doesn't seem "new" to me - it's EXACTLY what a Keynesian analysis of the world would tell you what to do. The real problem here seems to be that there are irrational deficit fears and the economists running the show within the government don't seem to really believe their own stated models when it comes to policy implications (not to mention the fact that government fiscal policy is mostly set by non-economists in Congress, at least half of whom are openly disdainful to the very idea of expertise). I guess from a tactics perspective, if MMT can break through some of that by virtue of being "new," that's worthwhile?
I think my main problem with it stems from the fact that MMTers generally position themselves as being so hostile to "mainstream" economics, but then argue against a straw man that seems like it's straight out of the University of Chicago econ department. The actual point of disagreement (whether or not fiscal and monetary policy are completely independent of each other or only weakly coupled/exchangeable during periods of robust economic growth) seems fairly esoteric, and, to be honest, not very applicable to recent economic conditions (we've basically been in some form of a liquidity trap/below inflation targets situation for decades now, and that doesn't show any signs of slowing with increased technological unemployment). I'd love the chance to actually "test" that proposition (since that'd basically mean the economy was doing great and we had smart governance!), but it seems like in the meantime the whole "mainstream vs MMT" debate is basically same-team squabbling, and the real issues are how to get actual government policy (both the Fed and Congress) to take the implications that deficits don't matter in low interest rate situations seriously...
This paper may also she some light on these questions: "Central Bank Independence: Myth and Misunderstanding," L. Randall Wray (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407707). The "notes" chapter at the end of The Deficit Myth has a lot of interesting looking references from the various MMT folks.
A few thoughts on this, mostly just agreeing and also noting in advance that I have not given *that* much thought to macro between doing the Fed Challenge in high school and now...
Perhaps first and foremost, I think you're right that MMTers (Stephanie Kelton in particular, who is probably the most public-facing MMTer around) emphasize a point that is very much *not* MMT-specific and is largely "macroeconomic consensus" -- just not DC consensus. I don't think that's because Kelton mistakes that issue for a distinction that MMT makes. I think it's because she -- in my opinion rightly, and as you hint at "from a tactics perspective" -- sees the increasing discussion around MMT as an opportunity to take on the flawed economic theory (if you can even call it that) behind government policy and political and public rhetoric. So, while MMT's *actual* distinctions from Keynesian macro analysis may be more esoteric, its rising prominence is an opportunity to attack something entirely different. I believe this is why, for example, Kelton's book is called "The Deficit Myth." It's in some ways a book about MMT. But it's really focused on making the public recognize how fucked our approach to fiscal policy is and has been for some time, which does not require an MMT lens to see. I don't feel like I know enough, at this point, to definitively say whether or not MMT is new or a rebranding exercise, though I know this is a question that comes up a lot and various MMT theorists have written about it. I'm not sure it matters, though -- if a popular "new" theory is an opportunity to drive political change...isn't that enough? What is "acceptance" of theory if it's not accepted by the people doing the actual governing, or more importantly, by the public that has the power to force the governors to do things?
One note of distinction that your last sentence brings up, not sure if it is core to your thinking on this: MMT goes further than saying deficits don't matter in low interest rate situations. It says deficits *only matter because of their impacts on inflation* -- bond issuing, despite currently being tied directly to government deficits, is actually an entirely different affair. MMT argues that we should assess spending and bond issuing as separate issues -- they may line up some or much of the time, but they don't have to, and the reasons for issuing bonds are entirely independent from "funding the deficits." When we issue bonds at the same time as running a deficit, we're kind of doing two things: 1) we're removing some of the money that we just put in, but we're also 2) providing a smaller, on-going stimulus payment into the economy (albeit a regressive one). MMT theorists probably come down on both sides of the "should we keep issuing bonds" debate, but the key insight is seeing bond issuing as its own tool, not as a necessary corollary to spending.
There are definitely Keynesian / Post Keynesian folks out there who know far more about this than I do who are making exactly your point. The middle paper here is a response from Kelton et al along these lines: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf. I think there are likely quite a few others as well. Nathan Tankus is another person to look at -- https://nathantankus.substack.com/ -- he brings a pretty deep understanding of how the monetary system actually works (and the Fed), which can perhaps elucidate some of how MMT theory departs from traditional Keynesian economics (if it does).
I just rambled, hahah, I think the questions you raise are open ones for the most part. From my perspective, I'm not sure it matters -- anything that helps bring public policy (and public rhetoric) back in line with sensible economic analysis is a good thing, whether it's truly new or a repackaging of a variety of older theories (I think MMTers like to point out that they synthesize Keynes with chartalism, functional finance, and an understanding of the modern, computerized financial system).