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.