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Home Publications Blogs Beat the Press Reconciling Modern Monetary Theory with the Wisdom of Mark Thoma

Reconciling Modern Monetary Theory with the Wisdom of Mark Thoma

Friday, 05 July 2013 06:22

The NYT had a brief discussion of Modern Monetary Theory (MMT) today in the context of a profile of Warren Mosler, one of its major proponents. The profile includes a dismissive comment from Mark Thoma, a professor at the University of Oregon and the creator of the blog, The Economist's View:

"They deny the fact that the government use of real resources can drive the real interest rate up ... I think it’s just nuts."

This description is not exactly right. MMT advocates would say that the Fed can keep real interest rates from rising by targeting the interest rate, printing whatever amount of money is needed to keep the interest rate (even a long-term interest rate) at the targeted level. In a context of excess demand, this would quickly lead to a serious problem with inflation.

The MMT remedy for inflation would be to increase taxes and thereby reduce demand. If this is done successfully then the government's demand for resources is offset by reduced private sector demand. In that situation there need not be any upward pressure on interest rates.

The main difference in this respect between MMT and more conventional Keynesians is that the latter would rely on both interest rates and taxes to limit demand and prevent inflation. Proponents of MMT would rely exclusively on taxes.

Comments (11)Add Comment
written by Chris Engel, July 05, 2013 6:59
It's possible Thoma's comment was taken out of a strange place (note the ellipsis and lack of context).

Then again, he's been wrong on a lot of things regarding MMT so it's not surprising he would put up a strawman and inject an ad hom for good measure in one single quote.
written by Stephanie Kelton, July 05, 2013 8:16
Thanks, Dean. It is possible that Mark was taken out of context. The quote attributed to me wasn't remotely close to anything I actually said. The notion that MMT has no academic footprint is laughable. There are literally hundreds of articles in peer-reviewed journals, books, chapters in edited volumes, etc. This was a(nother) deliberate attempt to cast MMT as a kooky Internet phenomenon. Anyone else wonder why the NYT would send a reporter and a photographer all the way to St. Croix (yes, they physically went there) for a story about a silly little Internet theory? I suspect they know it's much more than that.

On a different point: MMT supports tax increases and/or spending cuts to address demand-pull inflation. No different from, say, Abba Lerner or Marriner Eccles.

The real point of departure for MMTers and textbook Keynesians is, I think, very much bound up in the loanable funds theory of the interest rate (the former rejecting and the latter accepting it). From that follow all sorts of differences re: fiscal sustainability. Scott Fullwiler has written brilliantly on this.

Take care,

written by ltr, July 05, 2013 8:50
Annie Lowrey can never be trusted to report fairly. Mark Thoma does not speak in such a manner and I cannot believe the quote was accurate or in context.
written by ltr, July 05, 2013 8:56
The article is snide and stupid, with the intent from the opening line of simply ridiculing Modern Monetary Theory rather than explaining what it amount to.
written by Ian Winograd, July 05, 2013 9:18
Wealthier people are gaining a larger share of income, and they spend less of a percentage of the additional income they receive than poorer people. Wealthier people invest that money, but banks have fewer lending opportunitites, so dollars are being effectively removed from circulation. MMT is attempting to offset this.
written by Cortina, July 05, 2013 9:47
Ridicule is a step up from being completely ignored. MMT is starting to get noticed......Whoopee!
MMTers would support spending cuts
written by Dean, July 05, 2013 9:49
Thanks Stephanie,

I didn't mean to exclude spending cuts as a way to contain inflation. I should have just said fiscal policy.

yes, the characterization of MMT as just an Internet phenomenon is obviously wrong.
three points
written by paul boisvert, July 05, 2013 11:54
Dean agrees with Stephanie that spending cuts could also reduce demand, but the given case under discussion was a particular amount of government demand causing something (presumably bad) to happen. The remedy therefore would presumably not be to reduce government demand--we wanted the original amount of government demand in the first place, by assumption. If the situation changes (subsequently), it would of course be possible to address (unwanted) inflation via fiscal policy, once we no longer needed as much government demand.

Second point: Dean says the Fed printing money in a situation of excess demand will quickly lead to a serious problem with inflation. (By excess demand I assume he means more than is required to reach full employment.) It's not clear that there will be anything serious or problematic. First, it depends on how much excess demand there is--if there is not much excess demand from government, the amount of printing to keep interest rates down should generate only mild inflation, not serious inflation.

And the notion that any inflation (even serious inflation) is a problem (let alone a serious one) seems unsupported. [The fact that MMT'ers act (in public) as if they, too, believe this, I find odd.] Inflation is too many dollars chasing too few goods. Prices rise accordingly--but we have more dollars to pay those prices. It's a wash, overall.

If one cites the problem inflation causes for those on "fixed" incomes--i.e. the "poor", not those on fixed incomes of a $million a year--that's a distributive problem. But poor people have a distributive problem even without inflation--they're still poor. If we are worried about the poor, let's eliminate poverty, regardless of any inflation level. Inflation is a separate issue, and any effects on poor people, if we have (separately) decided that it's fine to leave them in poverty, can be addressed by indexing of Social Security, minimum wage, tax credits, or whatever "dole" we use to help them better enjoy being poor.

At full employment, there is no particular need for anything above very modest inflation, but there seems to be no "serious problem" that results from more of it, either. Yes, people may have to change prices a bit more often--a minor problem (grocery stores change most prices every week). And inflation tends to help (poorer) debtors vs. (wealthier) creditors--an anti-problem, except for the wealthy, who are, astonishingly, largely those who (rationally) oppose inflation.

To intimate a "serious problem" with inflation seems to envision higher amounts of normal inflation as incipient hyperinflation--but as all Keynesians and MMT'ers admit, regular inflation never leads to "currency collapse", which is a better name for hyperinflation, precisely to sever the connection in (uninformed) people's minds from regular inflation. Hyperinflation is of course a serious problem, or rather a symptom of the serious economic collapse of society due to war or other exogenous catastrophes. But hyperinflation simply won't result from routine Fed printing to manage interest rates or stimulate demand (since we currently have too little demand for full employment.)

Finally, if the Fed in targeting a nominal interest rate generates inflation, real interest rates (nominal minus inflation) will fall, not rise. Even if (somehow) private interest rates then disconnect from the Fed-induced government rates and go up, they will just be rising towards the original real rate, before the inflation. Is there a case that they can disconnect, rise, and eventually overshoot the original real rate? MMT'ers might want to weigh in on this, as well as Dean.
In so doing, it would be helpful to hold discussions in temporal terms--inflation and interest rates and economic growth rise and fall over time, partially in relation to each other. Many discussion make claims about the phenomena in essential or general terms, as if they were static, rather than dynamic.
With Friends Like These
written by Benedict@Large, July 05, 2013 12:14
My respect for Thoma just crashed. He's now just one more "economist" who can't tell the difference between correlation and causation. (Never mind using the word "silly". That's just "stupid", not to mention "unprofessional".)

What drives interest rates is RISK. That's all. What drives risk up? Lots of new business activity. Bankers rightly start to worry that product will go unsold. So they raise interest rates. Very simple.

Now, might it be that use of real resources goes up at this time? Sure, but that's only coincidental (it's a sign that there's a lot of business activity), and is not even necessary. For instance, a huge productivity increase in the service sector without pay increases could well drive interest rates even with zero increase in resource utilization. [From which we can conclude, if resource utilization is not a necessary part of the equation, it's superfluous, i.e., it's not a part of the equation at all.] Now why is this so hard for a trained economist to understand?

And by the way, note Thoma's right wing blinders at work in "the government use of real resources". Since when does it make a difference who's using those resources?

I guess we now have to put Thoma firmly in MMT's "With Friends Like These" camp. [Noting ltr's comment above, if Thoma was misquoted, obviously that would change my sentiments here. In that case, I'd have to change who I was mad at, but the substance would still apply.]

ALSO: Dean, MMT would also use interest rates. The difference is that the mainstream says interest rates DRIVE everything, while MMT says interest rates can be set by the Fed to be anything at any time. Obviously, they could set them stupidly, but an MMTer would be too smart to do that. And note, even if the Fed appeals to the market for help in setting interest rates, as it unwittingly does now, it does so BY CHOICE. The Fed ALWAYS sets interest rates.

[And while I'm at it, Congress ALWAYS sets the unemployment rate, even if it unwittingly appeals to the market for help, as it does now. That's MMT too.]
written by Schofield, July 06, 2013 10:30
In the UK The Radcliffe Report published in 1960 on the role that interest rates played in moderating economic activity came to the conclusion that it was a slow method to achieve moderation:-

Taxing Ultra High Net Worth and Income
written by Jim Shannon, July 06, 2013 10:48
Clearly governments have always been about the MONEY and who gets to keep the most!
Clearly UHNW individuals have the most because all governments have been controlled by the MONIED ELITE!
Clearly UHNW individuals have NEVER been TAXED like those who are not RICH.
Clearly, we need to TAX ALL the CentaMillionaire$ and Billionaire$ out of existence.
Clearly, those who are NOT UHNW individuals support the corrupting power of the MONIED ELITE.
That's a FACT of our collective reality!

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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.