CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Modern Monetary Theory: What's Modern About It?

Modern Monetary Theory: What's Modern About It?

Sunday, 19 February 2012 15:43

In a newspaper that relies on the same old crew of reliably wrong experts for the vast majority of its economic reporting, it's good to see this piece by Dylan Matthews on Modern Monetary Theory (MMT). I've had many people ask me my assessment of MMT.

I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.

My reading of Keynes is that economies will often be constrained by demand, absent intervention from the government. That means that expansionary fiscal and/or monetary policy will often be in order to keep an economy running near full employment.

I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.

I don't think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits than we would see if we also aggressively used channels two and three.

I think most of the conventional arguments over the deficit are very much wrongheaded, but on the other hand, a large deficit is not an end in itself. I suppose my preference for also pushing channel two and especially channel three is what separates me from the MMT crew.



There a lot of good comments here. I don't have time to respond to all of them, but I will just grab a couple.


You're not disputing that Keynes thought we could affect aggregate demand by the lowering the value of the currency, you seem to be arguing that he didn't think it was appropriate to do so. I would certainly agree that under some circumstances it would be inappropriate, but the idea that it would be at all times inappropriate seems absurd.

If a slow growing country had a current account deficit equal to 20 percent of GDP, should it do nothing to try to correct it by lowering the value of the currency? I have not read everything that Keynes wrote, so maybe somewhere he says that, but if he did, then I would have to disagree.

There is a clear logic to try to keeping trade imbalances in check. Resources will be very poorly used if they are diverted from countries where investment gives high returns to countries where investment gives low returns. Also, paths of growth are not easily reversed. If the U.S. has a path of growth that is based on other countries giving us 20 percent of what we consume and then for whatever they opt to change this practice (e.g. they start using this money domestically) then it can lead to very serious disruptions to the U.S. economy.

So, I don't think Keynes had the view that any level of current account deficit/surplus was just fine, but if he did, then he was mistaken.

There is no disagreement on the point on the monetary channel:

"If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case."

Of course, I was not advocating using the monetary channel alone, so I'm in complete agreement with Keynes here.



I've read both Godley and Lerner's work (not all of it). I like much of what I've read, but i'm afraid that I don't really see where it differs from Keynes. 



Good meeting you also. Channel 2 is indirect, but can be strong and certainly has been a help in this downturn. Channel 3 only in a vague sense requires the rest of the world to go along. The Fed can buy vast quantities of foreign currencies (e.g. trillions of dollars) just as they buy vast quantities of dollars. This can force them to hold enormous of dollars purchased at an over-valued price in order to maintain the value of their own currency. They might opt to keep buying dollars, but they could at the end of the day pay an enormous price for doing so.

Comments (46)Add Comment
The Beautiful and Useful Legacy of Channel #1
written by Union Member, February 19, 2012 4:25
Will Americans be able to say they admire - or, much less, find useful - the handiwork of Alan Greenspan 75 years from now?;


Is it possible that channel 3 would not even be necessary were it not for deceptively titled "free-trade" agreements and human exploitation entrepreneurs like Foxconn and Apple? (note: Apple even stole its image from the Beatles)
written by Dan Metzger, February 19, 2012 4:35
MMTers apparent bias towards deficits for the US, not always big ones, stems from their understanding of financial flows between sectors. That is, countries that have foreign exchange deficits (imports greater than exports) must run a deficit in at least one of the domestic sectors, government or private.

The WaPo article gave the last word to a guy, who apparently did not understand this. So, he cited Australia and Canada as counter examples, apparently not knowing that both run trade surpluses which allow a net domestic surplus.

Regarding the channels; the first can be done right now, the second is currently inoperable, and the third might result from the first after a long time.
The Reason to Prefer the Fiscal Channel
written by Dan Kervick, February 19, 2012 4:56
I'm a strong MMT sympathizer and fellow traveler, but not an economist. I believe the deficit-driven fiscal channel promoted by MMT is by far the best of the three alternatives. But I speak only for myself in defending this position.

First, the interest rate channel seems to be somewhat effective for modulating demand in normal times, but limited in times like the present. Who honestly thinks we can effectively boost demand and economic activity just by more interest rate tweaks? That channel is exhausted.

Also, the interest rate channel works by expanding credit. That's fine for business investment, but the foundation of production is consumption demand, and I don't see why we should be at all eager to expand consumer credit again, especially following the terrible catastrophe of the credit bubble that we have just recently lived through. Progressives should prefer to find ways to generate economic activity that do not depend on further indenturing consumers to society's feudal landlords, but that instead put secure income boots directly in consumers's bank accounts.

The devaluation channel works by reducing the real wages of working people, particularly those who have the least workplace bargaining power and can least afford to have their real wages reduced. Yes, this makes those poorer workers more "competitive" with the serfs who live abroad. Surely we should avoid this path if there are alternatives. In a society in which CEO to worker pay ratios are now measured in the hundreds, while incomes in the bottom deciles have stagnated and dropped for years, it is absurd to conclude that the problem with the American economy is overpaid workers buying too much stuff from Walmart.

My own view is that the excess of consumer credit and the general decline in economic health is a result of growing income imbalances and growing economic insecurity, and so we should prefer policies that boost demand and economic activity by promoting greater income equality, and especially by boosting incomes and security in the bottom portions of our population.

Government spending works by redistributing purchasing power. If it's spending of the classic, deficit-neutral tax-and-spend variety, then the redistribution is obvious. Purchasing power is directly removed from those who have it in abundance and bestowed on those who do not have as much of it. Because the shift can often go from those who have a higher propensity to hoard and toward those who have a higher propensity to consume and produce, the redistribution can be a large net plus for society.

If the additional government spending is instead accomplished by expanding the deficit in the manner proposed by MMT, the re-distributive effect is more subtle and less disruptive, both economically and politically. One adds to the purchasing power of some without taking money directly from others. This boosts the demand for goods and services, and eventually the economy reaches a higher equilibrium state where those at the bottom are enjoying a significantly better standard of living while the rest enjoy more or less the standard they had before. Relative purchasing power has been redistributed.

The other great thing about the fiscal channel is that we can decide how to to spend the money, and can use it for big projects of long-deferred public investment, instead of relying solely on the frequently wasteful whims of the private sector, and it's endless flim-flam rackets and artificially induced desires.

Economists seem to love to stick with aggregates, and avoid uncomfortable discussions of distribution. But apart from the important social questions of justice and power in a democratic society, the dynamics of the aggregates and dynamics of distribution are entangled. It is impossible to avoid the distribution question.
Keynes Opposed Channel 3
written by Paul, February 19, 2012 6:14
But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.
The General Theory, p.382-83.

And he didn't think Channel 2 was effective either.

If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case . . .
Id. pp.316-17.
What distinguishes MMT from Keynesianism?
written by PeterP, February 19, 2012 7:04
MMT is basically Keynesianism minus the loanable funds doctrine (inoperative in a fiat monetary system, so the IS-LM is out) and plus:

*Knapp's and Mitchell Innes' state money theory
*Abba Lerner's functional finance (deficits big enough to prevent unemployment and small enough to prevent inflation as opposed to being driven by the "financing constraint" which cannot apply to the issuer of money.)
*Godley's sectoral balances, full consistency of any macro theory with accounting of stocks and flows.
*Proper description of banking (horizontal money is endogenous and not driven by reserves) and state monetary operations (vertical fiat money)
* Minsky's financial instability

written by Daniel A, February 19, 2012 7:58
Before you can understand MMT, you need to understand certain conditions. First, there needs to be a perfect balance between the three sectors we see in our economy:
•Domestic Private Balance + Government Balance+ Foreign sector balance= 0
•(S – I) + (T – G) +(M - X) =0, where X= exports, and M-imports.
This is not a theory, this is an accounting condition. It is as inviolable as gravity. If you jump off a building, you will fall. As such, if every account here carries a surplus, our economy will also fall, into a deep recession. Currently, here is what we see in the US domestic economy, in regards to the private domestic sector, and foreign sector; S>I, and M>X. Our private sector is net saving. They’re not spending any cash. Second, we are currently importing more than we are exporting, as has been the case for a while. Thus, we have a greater outflow of wealth than inflow. As such, we are carrying surpluses in two of the 3 accounts above. Thus, the government needs to pick up the difference, and carry a sufficient deficit that allows this condition listed above to be equal to 0. Without this balance, we enter into extreme recessions as the Keynesian money multiplier slows down. Simply put, who in this scenario is doing the spending necessary to keep our economy going? If the private sector is net saving, the government is taxing more than it is spending, and we are importing more foreign made products than exporting domestically made ones, where is the fuel for the income multiplier? The reason Clinton was able to run a budget surplus was because the private sector was net spending (I>S), and they were able to sustain the economy.
Second, MMT stipulates that the most important thing a government needs is monetary sovereignty. Without this freedom, a country can very easily lose control of their economy. Greece gave up their monetary sovereignty when they joined the Eurozone and as such, forfeited their control over monetary policy to the Eurobank. Thus, for a country such as Greece, they do have unsustainable debt levels simply because they cannot print more currency. They do not control their own printing press, whereas the US Fed does. Thus, the US does not have an “unsustainable debt level.” Every debt level is sustainable. The US has a perfect capacity to pay back every loan it makes. (Even Alan Greenspan has said this http://www.youtube.com/watch?v=eEKhxdeadk0). Greece, on the other hand, cannot utilize this monetary policy, and as such, is relying on haircuts and bailouts. And this policy only results in inflation if people take these excess currency reserves, and spend them. However, there are two reasons why this is not the case. Simply put, the private domestic sector is net saving, and not net spending. This money is being hoarded in bank accounts around the country, and is not being spent. You cannot have inflation without expenditure, and we are simply not seeing the expenditure at this point. Second, we are currently at roughly 8% unemployment, nowhere near full capacity. Inflation does not kick in UNTIL we have reached full capacity in the work force. Thus, the US is in no danger of runaway inflation in the near future.

MMT is not some crackpot theory. It just challenges the traditional thinking of macroeconomics, and that is frightening for a lot of people. But what is more frightening to me is watching the US about to enter a Japanese style “lost generation”. I fear that the next decade will be spent alternating between recessions, and sluggish, almost sideways growth.
Modern Monetary Theory
written by Eric Tymoigne, February 19, 2012 8:14
Hello Dean,
It was good to see you last week.
Regarding channel 2 there are at least two issues. One is that the elasticity of spending relative to i tends to be low, especially so in period of recessions. Another is that this channel may not work the way expected. For example, if there are a large number of households relying on interest earning to consume, lowering the interest rate may depress economic activity. Also, declining interest rate may lower inflation by lowering cost of production (and rising interest rate increases inflation). Broadly, the economic impact of interest rate policy is uncertain and unreliable.
Channel 3 works only if the rest of world is willing to play along. In the case of the US, today the rest of the world want to net save dollars so it is impossible for the US to run a trade surplus.
Only channel 1 gives more direct influence on economic activity, that is why G (and T) is preferred. Now higher G does not necessarily require going in deficit, a lower surplus may work fine as Sweden recently showed. But Sweden is able to run a surplus only because it has a large current account surplus. Unfortunately not all countries can do that because for every net exporter there must be a net importer.
Leaving aside the channels, I think there are at least three main contributions of MMT. One is the recognition of the importance of national income accounting and the three sector balance approach (gov, private, foreign). Not all sectors can be in surplus at the same time, at least one must deficit spend. Leaving aside the foreign sector, If US gov wants to run a surplus, gov must be willing to accept that the private sector run a deficit.
A second contribution is the recognition that monetary sovereign countries cannot go broke so the focus on "fixing the deficit", "putting money in the trust fund", etc. is really the wrong way to solve economic problems. Let the deficit go wherever it needs to be, ultimately it is an endogenous variable determined by the net saving desire of the private sector and the rest of the world. This may mean a large deficit or not.
MMT spends a lot of time going into the institutional aspect of government funding to draw a theoretical conclusion. MMT has an intimate knowledge of central banking and treasury financial transactions that help to show that government finance is really just a bunch of accounting gimmicks for monetarily sovereign government.

written by Daniel A, February 19, 2012 8:55
Just a quick amendment to my post above. I misspoke when I said "the private sector is not spending." They obviously are spending, like when I buy my groceries. What I mean however, is that they are spending less than their income. They are in a private sector surplus, and are not providing growth to the economy.
What MMTers won't tell you
written by FDO15, February 19, 2012 9:20
I am surprised that no one in these MMT articles mentions the MMT job guarantee. That's their end game. It is the crux of the entire theory's policy proposals. They don't just want to deficit spend, they want to offer every waking American a government job paying $16/hr with full benefits. They try to portray MMT as not being political, but the truth is that the job guarantee is their primary goal.
For FDO 15
written by Eric Tymoigne, February 19, 2012 10:58
You are right that MMT goes further and proposes specific policies to promote full employment, and financial and price stability (JG, regulate underwriting, wage setting, etc.) but that is an addition to the basic insights of MMT. These basic insights can be used by anybody (and there are more than the three I presented above).
Put another way, MMT does not tell you what government ought to do, but MMT people indeed use the theory to propose specific government policies.
For Eric
written by FDO15, February 20, 2012 1:09

This is a disingenuous ploy MMTers use in trying to claim that they're just describing the monetary system when the reality is that the job guarantee is the focal point of MMT policy. Warren Mosler calls the job guarantee the "base case" for MMT. Bill Mitchell calls it "central" to MMT. Pavlina Tchnerva says "The JG is not just an afterthought to MMT but a crucial component." Please don't try to claim that the JG is just an option for MMT. It is not an option at all. It is the "base case" and the most important policy MMT proposes. Without it, you don't have MMT. It is a crucial piece of the theory and not an afterthought.
written by FDO15, February 20, 2012 1:12
MMTers do specifically tell you what government ought to do. They believe the government's creation of state money is the cause of unemployment in the first place so they use the state theory to explain why it is the government's responsibility to create full employment. This is why Warren calls it the "base case". MMT is just a politically charged policy being disguised as a description of the monetary system.
Why is private sector debt preferable?
written by Neil Wilson, February 20, 2012 2:01
"his pushes them toward larger government deficits then we would see if we also aggressively used channels two and three."

Which instead would lead to higher private sector debt and promote the dynamic instabilities that Steve Keen demonstrates in his work.

Running an economy that constantly requires poaching spending from the future relies on two assumptions

(i) that there will be more growth in the future at a faster rate - doubtful when we're running into the planet's limits.
(ii) that the amount of private debt doesn't matter and that it is merely a distributional issue.

An economy where individual's spending within their means and are able to live a life by doing that is clearly a superior policy outcome.

Requiring individuals to be in debt just to survive makes no sense.

Job Guarantee
written by Neil Wilson, February 20, 2012 2:07
Just for the avoidance of doubt, MMT states that the federal level government should pay the wages of those who cannot otherwise find a job at a level that allows them to live a life free of poverty. The private sector is then in full control of the amount of money used for that scheme. To reduce it all they have to do is hire somebody.

And the reason for doing that is that it allows you to get from 4% unused capacity in the economy to about 2% genuinely frictional unemployment.

Anybody objecting to that needs to state how much compensation they are prepared to pay the three million people who cannot and will not be able to obtain an income due to using the inferior unemployment buffer system.

I don't consider sacrificing three million people's lives on the altar of ideology to be an acceptable policy position. Do you?

written by reason, February 20, 2012 3:30
I'm a fan of yours and my view of MMT is as follows:
1. On the value of printing money when faced with a liquidity trap 100% in agreement
2. On running a somewhat looser fiscal policy and a tighter monetary than is a la mode at the moment - based on the MMT analysis that private financial assets come either from monetarised fiscal policy or from debt - and too much private debt is not a good idea - 100% in agreement
3. Regarding indifference to deficits - I'm with you 100% here
4. Regarding a job guarantee - don't like it, I think the micro-economic consequences are pernicious.

OK so 2 for 2 against.

I think you are underestimating the value of argument 2. But in general I think you should be Obama's CEA. Can't think of anyone who sees the issues clearer.
written by Calgacus, February 20, 2012 5:31
FDO15, They believe the government's creation of state money is the cause of unemployment in the first place so they use the state theory to explain why it is the government's responsibility to create full employment.

Well put. The point is that this argument is flawless & irrefutable. Governments, through their taxation, are the cause of unemployment. Therefore it is their responsibility, if there is any meaning to that word, to provide full employment. Lerner & Keynes & many others understood and said this, before the subject of "economics" vanished from academia. It was replaced by something with the same name, but more accurately described as "public defecation of morons from Harvard & Chicago etc." Their idiotic, empirically useless, often disgustingly pseudomathematical excreta have served very well in covering up the heritage of the earlier, more advanced intellectual culture for a long time.

MMTers do specifically tell you what government ought to do. More precisely, they demonstrate the complete obviousness of a JG as a universal path to achieving two "oughts" that economists & governments universally pretend to strive towards: 1) there ought to be full employment, 2) there ought to be stable prices. Therefore, the only logical reason to not like some kind of JG is because one wants unemployment and/or inflation. Or at least one will tolerate them more than, say the horrible consequence of the 99% being better off than slaves. And one probably doesn't care that the policy of forced unemployment will lead to less real wealth & slower growth & scientific & technological progress, as it has in the last several decades.
Keynes & MMT - big difference?
written by Ralph Musgrave, February 20, 2012 5:32

Dean Baker is right: there isn’t much difference between Keynes and MMT. One difference is that Keynes mainly advocated having government borrow and spend in a recession, whereas Abba Lerner and MMTers tend to favour the “print and spend” option. But Keynes certainly did not oppose the latter option.

MMTers also advocate ideas as to how the banking system works which are at variance to the standard text-book explanations.
Also higher wages
written by Matías Vernengo, February 20, 2012 7:41
A fourth channel would be increasing wages. I wrote more here http://nakedkeynesianism.blogs...tents.html
written by skeptonomist, February 20, 2012 7:57
Anyone who believes that Keynes himself thought that monetary policy would usually be a sufficient measure should read the last few paragraphs of chapter 12 of The General Theory, for example: "...I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest...it seems likely that the fluctuations in the market estimation of the mariginal efficiency of different types of capital...will be too great to be offset by any practicable changes in the rate of interest."

As for exchange rates, they could hardly be a solution to a serious worldwide recession, which has existed for several years now. This leaves fiscal expansion, but does not necessarily justify the MMT assumption that "deficits don't matter" (I don't think it was an MMTer who said that). In practice this attitude - whoever advocates it - seems to lead to endless tax cuts.
written by reason, February 20, 2012 8:35
My point three should read

3. Regarding indifference to TRADE deficits ...

Re job guarantee

"Just for the avoidance of doubt, MMT states that the federal level government should pay the wages of those who cannot otherwise find a job at a level that allows them to live a life free of poverty."

Sort of agree - but I want a citizens basic income - the microeconomics are better (i.e. independent of employment status).
neither modern nor a theory
written by Peter K., February 20, 2012 10:38
I agree with Dean's post. Germany's labor policies like work sharing seemed to help with staving off higher unemployment. Likewise, Obama's stimulus had aid to the states which allowed state and local governments to allow keep more employees on the payrolls.

"Economists seem to love to stick with aggregates, and avoid uncomfortable discussions of distribution. But apart from the important social questions of justice and power in a democratic society, the dynamics of the aggregates and dynamics of distribution are entangled. It is impossible to avoid the distribution question."

Dan seems focused on how inflation and devaluation hurt the average workers but does not understand how they help in the aggregate. Inflation helps with expectations and deleveraging which will get AD up again as debts are paid down. Same with devaluation. We have historical and international case histories of inflation and devaluation working.

Full employment helps with inequality and the distribution question as we saw in the late 90s.
written by Peter K., February 20, 2012 10:54
Ygleisas in slate on MMT
Hello Skeptonomist.
written by Ralph Musgrave, February 20, 2012 11:11

Skeptonomist, Thanks for that quote from Keynes. I’ve added it to my long list of reasons for thinking that interest rate adjustments are not much use. See here:


Government responsibility to hire everyone, Low-rated comment [Show]
Devaluing the Dollar to Increase Exports
written by Paul, February 20, 2012 2:11
Would any American government pursue a deliberate policy of devaluing the dollar relative to other currencies in order to increase exports? No President to my knowledge has ever even suggested such a plan, let alone implemented it. Not that it could work anyway since other countries are fully capable of devaluing their currencies to match ours in order not to lose export markets. Instead, countries use all manner of protectionist barriers, e.g., anti-dumping duties, safety regulations, quotas, etc., to restrict imports.

But as Keynes said, protectionism is a dangerous path:

"[A] policy of trade restrictions is a treacherous instrument even for the attainment of its ostensible object, since private interest, administrative incompetence and the intrinsic difficulty of the task may divert it into producing results directly opposite to those intended." The General Theory, p. 339.

Only where the gold standard created balance of payment problems did Keynes see a danger:

"[W]here the quantity of the domestic circulation and the domestic rate of interest are primarily determined by the balance of payments, as they were in Great Britain before the war, there is no orthodox means open to the authorities for countering unemployment at home except by struggling for an export surplus and an import of the monetary metal at the expense of their neighbours. Never in history was there a method devised of such efficacy for setting each country’s advantage at variance with its neighbours’ as the international gold (or, formerly, silver) standard. For it made domestic prosperity directly dependent on a competitive pursuit of markets and a competitive appetite for the precious metals." Id. pp. 348-49.

Keynes never saw an issue with balance of payments in a fiat money environment because, e.g., the U.S. retains the power to control the rates of interest through actions of the Fed.

"It is the policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment programme directed to an optimum level of domestic employment which is twice blessed in the sense that it helps ourselves and our neighbours at the same time. And it is the simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally, whether we measure it by the level of domestic employment or by the volume of international trade." Id. p.349.
easy to follow graphic
written by jack, February 20, 2012 2:32
Dean, here's an easy to follow graphic

The people on the left of the chart get it, and the people on the right range from "mostly get it" to "less than worthless".
written by jack, February 20, 2012 2:45
stupid form.

Anyways, it's at http://www.neweconomicperspectives.org/
written by Barkley Rosser, February 20, 2012 2:58

Many (including I think Dean) think that the QE2 was all about growing the economy by devaluing the dollar, which was why both China and Germany screamed bloody murder when QE2 was announced. Obviously this policy has its limits, but while JMK was not supportive of this always, he did in certain places and times support trade protectionism for job protection.

Also, regarding JMK's own views, these changed with time and circumstances. So, he came off very concerned that large budget deficits could lead to inflation in his "How to Pay for the War." Anybody pushing the idea that JMK was all for humongous deficits all the time are mistaken.

I see a difference between theory and policy in the MMT school. So, for policy, the job guarantee is critical, and I am sympathetic with this. I do not see this as necessarily tied to the stronger version of the theory, however, which is chartalism, which one can find JMK supporting to some extent in his Treatise on Money. But I have always found the defense of hard core chartalism to be at best arbitrary. It becomes simply definitional to say that the many spontaneously emerged commodity monies observed throughout history are "not really money." That said, of course all modern monies are fiat and thus effectively chartalist, although that does not somehow lead to the only way to expand the money supply is to run budget deficits, which seems to be claimed at times by some.

Oh, and it is certainly true that it is a lot easier to run budget surpluses and have growth if one is running current account surpluses as well, as with Canada and Australia.
written by Perplexed, February 20, 2012 3:55
If I bring 1,000 bushels of corn that meet quality specs. to the market and you refuse me access to the market and force me to allow the corn to degrade and decay, there are laws that will force you to pay my damages (everything I lost by not having access, including legal and collection costs) for denying me access to that market. If what I bring to the market is my labor, you can pay another worker a higher wage than I would require and refuse me access to the market, force me to allow my "skills to degrade," and deny me access to any income at all. When I do work, you take part of my wages to fund "insurance" to cover losses that may be imposed on me by you're denial of my access to the market. Somehow you have concocted a system where you can legally do this to me, but not to my neighbor who brings goods to the market instead of labor. Economists call this the effects of "sticky prices" to provide cover for what is really happening.

Recognizing that, in a Democracy, there is tremendous risk that a powerful majority will impose it's will on a powerless minority, the Constitution was established to prevent abuses of this type, but no one challenges the right of an enormous majority (governments, producers, and employed workers) to impose the full costs of an output gap entirely on a small group of willing workers who are powerless to secure access to this so called "market" and powerless to recover any of the damages they suffer. WE MUST CLOSE THIS LOOPHOLE AND FORCE A CHOICE BETWEEN OTHER ALTERNATIVES.

If the option of sticking the entire cost of an output gap on a small minority were not available, we'd have to choose between allowing an actual, open market for all labor (with its corresponding rapid price declines and deflation) or fully compensating those that are the victims of our choice to allow the market restrictions that delay wage declines. Those benefiting from not having free markets should be paying for the benefits they receive to the extent they impose costs on others; not receiving the benefits while imposing the full costs on a small minority.

We can't get a serious discussion of stimulus spending or proposals such as MMT because of the enormous conflicts of interest that are built into and protected by current policies and laws that defy Constitutional protections. If the costs of the output gap were truly born by those imposing it others, the entire conversation around what to do about it would change.
Since Demand is the Answer, There is NO Reason to be Perplexed
written by Paul, February 20, 2012 4:30
The output gap is due to deficient aggregate demand, nothing more and nothing less. There is no conspiracy or Constitutional violation. There is only ignorance about what needs to be done to close the gap.

What needs to be done is to increase consumption, especially by consumers who constitute 70% of aggregate demand. This leads us back to the housing market where demand has been severely depressed for 5 years and prices are still falling. Until that is reversed, the output gap will remain. Not real complicated.
written by Perplexed, February 20, 2012 7:03
"The output gap is due to deficient aggregate demand, nothing more and nothing less. There is no conspiracy or Constitutional violation."

No amount of explaining the sources of the output gap explains the rationale of legally denying access to a market. Unemployment is the result of a choice to allow restricted access to a market, not some occurrence of nature.
Guidance from Perplexed on my money needs.
written by Calgacus, February 21, 2012 2:01
@Paul: Perplexed is saying the same thing, but providing a deeper explanation. The same way credit theories of money are a little deeper & explain state theories, the way Functional Finance/MMT/Keynes's Keynesianism is a little deeper & explains old fashioned "Keynesianism" (which could tend toward "something for nothing" inflationism.)

Had to write something to fit the title! :-)
written by Calgacus, February 21, 2012 4:41
Me:"Therefore it is their responsibility, if there is any meaning to that word, to provide full employment."
FDO15:What an absurd statement. We create state money for public purpose to better the living standards of the majority of our citizens. We do not create it so everyone can get something for nothing.
Nobody is proposing "something for nothing." The JG proposes money for WORK - Jobs. JG workers get their dollars from the same place everybody else ultimately gets their dollars - the US government. "MMT", real Keynesian/Lernerian economics, tends to be less "something for nothing" than old-fashioned US investment-led, inflationary "Keynesianism". The "logically absurd" (Mosler) belief is that the government does not have the responsibility to provide employment on those it has forced unemployment on.

One of the downsides of this organization of state money is that it has downsides. Many downsides. There is no free lunch.
There emphatically is a free lunch. Rational behavior is a free lunch. That's why we call it "rational". The very easy task of attaining full employment - something that no society that has tried has ever failed at - provides a free lunch. Full employment is something that premonetary societies easily attain and always have, simply because they understand their pre-money better than we understand our supposedly more advanced monetary economies.

And one of those downsides is involuntary unemployment. This doesn't mean everyone else should potentially suffer just because you think it is the government's "responsibility" to hire everyone.
A truly bizarre, weird, wacky, completely illogical belief. The kind of nonsense Keynes inveighed against fuddling minds with. Unfortunately many have their minds poisoned by this "up is down" "water freezes when heated" type of belief. Other people working does not make you suffer. How could it? It makes you wealthier. Your wealth depends on other people working, on the economy working as efficiently as possible, which all logic, common sense & experience unequivocally show means full employment. Progress is faster under full employment. Why would you want to have less real wealth? What is so great about being poor that you want yourself & everyone else to be poorer?

What a ridiculous socialist concept that is. David Graeber likes to say that capitalism is the worst sort of communism there is, but it is still a form of communism. (The fact, the universality of money makes it a communism.) Lerner emphasized that the fact of a monetary economy that is more fundamental & important than whether it is "capitalist" or "socialist", and applied the same analysis to both, as did many others who understood their Keynes & Lerner. It is not "socialism", or some weird, debatable morality, but simple logic & accounting that prove that governments have "a responsibility for full employment". (Lerner's words) Everybody used to understand this, even economists, before the fall of the current dark age of economics in academia, and worse, the infection of these gross insults to intelligence - not morality - into the general population.
written by Oliver, February 21, 2012 8:06
From an interview by Philip Pilkington with Paul Davidson, published at http://www.nakedcapitalism.com...dson.html:

PP: In your book you are sceptical about using a devaluation of the US dollar to decrease the trade deficit and raise employment. Yet many economists think that this would be a good strategy. Could you explain your scepticism and lay out briefly an alternative arrangement?

PD: There are several reasons for my scepticism that devaluing the US dollar is a desirable policy for reducing the US trade deficit by making imports sufficiently more expensive and making US exports cheaper to foreigners so that Americans reduce their total US spending on imports and foreigners increase their total US spending on US exports, until spending on imports equals what foreigners spend to buy US exports.

The first reason this is not a desirable plan is based on a technical condition called the ‘Marshall-Lerner condition’. Basically this condition says if the sum of the price elasticities for imports and exports is less than unity, then devaluation will increase the trade deficit. One need only note that in the 1980s when the US dollar exchange rate tended to decline rapidly, the US trade deficit increased! Consequently, from an empirical point of view, the Marshall-Lerner condition seems relevant to the USA trade balance problem then and therefore devaluation could worsen the US trade deficit, as it did in the 1980s. A sage once said: “those who do not study history are bound to repeat its errors”. The many economists you cite as thinking devaluation is a good strategy, obviously want the US to repeat the errors of the 1980s.

Secondly, those who argue that devaluation would end the US trade deficit are essentially arguing that if US exports become cheap enough to foreigners then US made products and their labor input would become ‘competitive’ with foreign produced goods’ labor costs. Since labor productivity in most manufactured goods is the same whether produced in the USA or in China, this means that the US labor costs per unit of output when measured in a single currency must be competitive with the labor costs , say, in China in order for US produced goods to be able to compete in the global marketplace.

In other words for US goods to be competitive, devaluation must reduce the value of labor income in the in the US to the equivalent of what is earned in China (where a recent New York Times article indicated workers in a Chinese factory were paid $15 a day for a 12 hour work day and 6 day work week). But do we really want a policy which reduces the average American worker’s annual income to less than $5000 per year? (The economists who say ‘yes’ really mean as long as we don’t reduce economists incomes!)

I should think that we don’t want to advocate a policy that reduces American workers income to the level of a Chinese ‘coolie’. Especially when there is a simpler way to correct the US trade deficit. This alternative is what I have called the International Monetary Clearing Union [IMCU] where the trading nations would essentially enter into an agreement to spend all their income earned on exports on the purchase of imports from foreigners. [The details of my IMCU plan can be read in my book The Keynes Solution]. Accordingly no nation could run a persistent trade imbalance. While at the same time no nation need depress their workers income.

written by Oliver, February 21, 2012 8:12
maybe I should add, for those who haven't heard of Paul Davidson, that he is not part of the MMT camp, but rather one of the fathers of Post-Keynsianism. Some, such as Randy Wray, consider MMT a branch of Post-Keynsianism though.
The Specialness of MMT
written by Tyler, February 21, 2012 9:05
MMT's specialness resides in its ability to prove that federal government spending is not constrained by taxes. As such, government programs such as Social Security do not need a bogus trust fund. Claiming otherwise constitutes "Loser Liberalism," not Keynesianism.
written by Tyler, February 21, 2012 10:28
The American federal government, being Monetarily Sovereign, never needs revenue to conduct spending.

Did Keynes teach this? If not, this is what is modern about MMT.
No Tyler, Keynes Never Said That
written by Paul, February 21, 2012 12:29
Keynes realized what should be obvious: the economy needs both an accelerator and a brake.

When the economy reaches full employment, taxes act as the brake on demand to balance the demand/supply equilibrium.
written by Eclectic Obsvr, February 21, 2012 2:23
I'm not sure I fully agree with you about channel one. Let's suggest for example, we have a zero deficit situation-- i.e spending-minus revenue result by spending money on infrastructure getting a multiplier effect and taxing a sector/segment more for offset of that spending that has a lower expansionary/contractionary effect such as might take place for differential marginal propensities to consume or invest.

Just saying---
written by Tyler, February 21, 2012 2:35
Paul, I totally agree with you that taxes have the power to stifle demand. Regarding Keynes, it appears he rightly believed that a balanced federal budget is not desirable. Last year, James Galbraith wrote:

"The recommendation that government run a balanced budget 'over the cycle' does not, so far as I know, come from Keynes.

"I believe it originated as a recommendation of a moderate-liberal business group called the Committee for Economic Development in the 1950s.

"The CED’s formula had a kind of rough-and-ready common sense that won it advocates for many years. But it became obsolete, at best, when the Bretton Woods gold-exchange system collapsed in 1971.

"In an age when the rest of the world uses US Treasury bills and bonds as the principal reserve asset, the US has to run a budget deficit, even for the most part in good times, in order to accommodate them.

"This has been the reality now for 40 years."

MMT: Socialism or not?
written by Gary, February 22, 2012 12:00
@ Government responsibility to hire everyone: written by FDO15

If anyone REALLY wants to have a discussion about "Socialism" or rather mercantilism, I could suggest this title:
Corporate Capitalism As a State-Guaranteed System of Privilege
Mutualist.Org: Free Market Anti-Capitalism

I'm not claiming this is economically sound, and I don't think it is, but this is an historical survey going back to the Enclosure Acts and Poor Laws (described as nearly Stalinistic) which used govt violence to force people off of communal farm land and out of cottage industries into "working for da man" for lower wages, with the alternative being prison.

Others have written that early New World colonies were populated by slaves -- whites from Ireland and England. Ted Nace described the Virginia Colony as populated by child-slave workers kidnapped from pauper orphanages with govt help. The first few thousand kids endured brutal conditions, near starvation, torture for stealing a bit of food, and 3/4 died the first year.

The text goes on from there --- purposely quoting Murray Rothbard and a bit of Mises and friends, as well as critically quoting Schumpeter and Chandler --- to illuminate various strains of State-Capitalism aka Corporate Liberalism, from Colonial Days, through the Railroads, Progressive Era, World Wars and the "Open Door" policy of govt-assisted expansion of markets, the New Deal, Marshall Plan, Cold War, and on to state-subsidized Globalization.

The historical record shows, per New Left Historian Gabe Kolko as well as Rothbard that the Fed and end of the Gold Std was mightily approved by Banking and Big Business during a nearly decade-long discussion that was nationwide, with conferences in Chicago and NYC, not just "Jekyll Island". Not only did this protect against bank runs but it also provided a source for export capital aka "foreign aid", so corps would not have to invest their own money in "development". Ditto Bretton Woods institutions.

Socialism question now resolved? Anyone still believe that "free markets" really exist? Regardless of the viability or likelihood of Agorism happening (it exists, at the fringes, now), Kevin Carson's critique of "free markets" neoliberal baloney is priceless. Note the title: It's a call for ACTUAL free markets, a viewpoint echoed by Dean Baker's recent book on Loser Liberalism.

Setting that all aside, ...
2: MMT = Socialism?
written by Gary, February 22, 2012 12:04
Setting that all aside, ... the Post-Keynesians like Michael Hudson and including the MMT crowd are not promoting Anarchism or Agorism as the previous sample. Hudson's main point is that for all this Corporate Liberalism expansion and govt investment in infrastructure from the mid-1800s, classical and progressive economists (political economy) expected rentier privileges and the "Free Lunch" for insiders and monopolists to be countered via heavy taxation. Not blanket corporate taxes, but taxation of predation and privilege. MMT says "Not to raise revenue either", not at the federal level anyhow.

Instead, rentier income by our largest financial firms and hedge funds equals some 40% of our GDP, now not a "service" but our main "engine of growth" minus of course any foundation of economic growth, instead purely mathematical growth via debt-leveraged asset inflation. (and Big Pharma, and Mil-Ind, etc.) Socialism much?

MMT proponents, if I may explain this in my own words, see that MMT is already in use when it comes to the War on Terror (Iraq) and Bush Tax Cuts and what Baker mentioned a $240 Bn annual price-subsidy for the Medical Industry. None of this shows any adherence to fiscal restraint, as if a "budget deficit" mattered. Cheney and Reagan said they don't. One Fed chief during FDR/WW2 said deficits create jobs. It did. Full employment initiatives were just not "kosher" in the US except under the umbrella of "national defense", and as a tool for Cold War anti-communist "public relations".

Rather, fiscal restraint --- as if the US was still operating on a Gold Standard --- is only applicable when it comes to Human Beings, Children, Elderly, workers in general, and those "little people" who pay taxes and rely on Soc. Security (per Leona Helms, Simpson, etc.).

Warren Mosler, no dreamy-lib, explains further why his Work-Fare suggestion (a) is better than Unemployment and Welfare (b) is better than "ending Welfare as we know it" but without adding jobs (c) could allow the "minimum wage" to end as redundant (d) is a way of keeping people sharp, engaged, learning, useful, EMPLOYABLE by the private sector (e) would reverse a total waste of talent for millions and an entire generation of graduates (f) not pose much of a barrier to the private sector hiring talent (g) much more.

Mosler is considered the "more conservative" MMT-er, emphasizes tax cuts for the 99%, and justifies his views along rather CONSERVATIVE pro-business lines, in the non-Wingnut definition of "conservative".
one more point to buttress the Socialism counter-arg
written by Gary, February 22, 2012 12:18
On the libertarian Mises.org, one can find chapters of a book by the famous acerbic social critic Albert J. Nock. It's a bio of Thomas Jefferson, the most idealistic of the Founders. He is contrasted with Hamilton, the top proponent of Elite Economic Privilege in that era.

Hamilton won. Kevin Carson jokes that Austrians are aiming at reversing history towards the achievement of Hamiltonian ends by Jeffersonian means.

Nock goes into great detail in dissecting and describing the U.S. Constitution as it was considered at the time, a kind of a *coup* by mostly ex-Tory elites. All were Lawyers, Govt Creditors, middlemen, traders, monopoly capitalists, he says. NOT ONE was an actual producer of wealth. The producers aka farmers and artisans --- per Hamilton's insight --- were scattered and possessed little political power or opportunity to thwart his designs. The plan was to create a kind of "pyramid" of wealth for the top 1%, sufficient "Trickle Down" for necessary buy-in by the next 9% or 20% so, and the rest to be subjected to what unrelated critic Noam Chomsky describes as "free markets for YOU but the Nanny State for US".

Ergo, complaining about "socialism" at this point is SOOOO 19th Century.

Hmmm. I suddenly decided to google "Noam Chomsky" and "Nock" to see if the latter anarchist cited the earlier one.
written by coberly, February 24, 2012 10:23
wow. i am not qualified to enter this discussion. but i worry that some of you might be over qualified. human attention is limited, and when you get lost in a theoretical argument you may miss some of what is going on in the real world.

i wonder what effect the following three phenomena would have on the forgoing discussion:

outsourcing of jobs.

government capture by very narrow interests.

high degree of corruption in business.
I'm not entirely sold on the JG
written by MMT minus job guarantee, February 24, 2012 4:29
I understand the argument that it is the government's use of fiat money and imposition of taxes that is the source of unemployment, but I don't entirely buy it for a couple of reasons. First, it defines unemployment rather narrowly, as the need for an income in the fiat currency together with the lack of that income. This need is originally generated by the imposition of a tax, and the use of the fiat currency as a medium of market exchange guarantees that this need is dispersed throughout the economy, even if only a small sector of the private economy is actually taxed. But, unemployment is not specifically the need for an income in some fiat currency, but more generally the need for an income. The starving peasant who is disallowed from foraging for food in the King's forest, and who is forbidden from earning his bread by working in the King's fields in a pre-monetary society is still unemployed, though he owes no tax to the King in either the form of the King's coin or the real products of grain or labor.

Second, I think it belies an assumption that all too many are willing to take for granted, or at least not challenge sufficiently, that there are limits to demand, and those limits are too easily met with modern productivity. Economists, and indeed most normal people tend to think that people's propensity to consume, provided they have the income for it, is inexhaustible. You can plug it into the formulas themselves, set income to be infinite, and the marginal propensity to consume becomes infinite as well. This deserves to be challenged, because, at the end of the day, there's only so much food a person can eat, only so many wardrobes of clothes they can wear, only so many houses they can live in, or cars they can drive, movies they can watch, songs they can listen to, video games they can play, or blog posts they can make.

Of course, we are no where near those limits now, but these are limits established by supposing that everybody consumes as much as they possibly can. What if people tend not to consume much more than a couple of orders of magnitude more than they need to survive somewhat comfortably, despite the fact that they could afford to consume much more? And even worse, what if modern productivity, through the specialization of labor and modern technology, means that only a fraction of those who wish to work, who need an income in order to consume as much as they care to, are needed to produce everything everybody cares to consume? The notion that one's income is deserved only by their contribution to production and against the supply of other possible contributions would limit the distribution of income, reducing future demand, and preventing consumption by those excluded from the production process.

In short (too late), it's not just fiat money and taxes that cause unemployment, it's also human being's tendency to be satisfied with a comfortable life and the capacity of production to secure that comfortable life without requiring everyone's contribution that can be a cause. Perhaps another reason to skip the "Job" part of the JG, and just make it an income guarantee, or perhaps better, make the "job" be enrollment in an accredited degree program.
MMT does not match experimental evidence
written by Vincent Cate, February 26, 2012 2:21
The difference between MMT and Keynesians is that MMT says you can monetize all the debt without causing inflation. There have been many experiments in monetizing debt through history. The record is very clear, if you do this in large amounts you get inflation. If the central bank is the main buyer of government debt you will probably get hyperinflation.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.