Modern Monetary Theory

A blogger, who I read regularly, reported that faculty from University of Missouri at Kansas City (UMKC)  was running seminars for Italians upset by austerity pushing the so-called “Modern Monetary Theory” (MMT). Which, like a certain “empire¹,” is neither modern or a theory. It is not modern because it was originally developed in 1895, when it was called “chartalism,” and it is not a theory because it has never been subjected to any kind of validation or falsification and there is no evidence that it works in practice. Therefore it is only a hypothesis.

Anyway, muttering aside, it does serve as a distillation of the idiocy purveyed by so-called economists. Basically, chartalism holds that government should simply print whatever money it wishes to spend, which spending is to include providing a job for anyone that wants one. Taxation is simply a method of slowing demand when necessary to control inflation. Government bonds are simply a way to manage liquidity and interest rates.

There is no point in providing someone with a job if, in doing so, value is destroyed. It is probably cheaper to pay someone to sit at home, as we presently do, than pay them to do something useless which needs additional inputs, such as equipment, supervision and so forth. The Soviet Union failed because government and much of its industry destroyed value – that is, the value of its outputs was less than that of its inputs.

This naive proposal illustrates the monetarist view, which has many flavors, although all converge on the central idea that the economy is all about money. This, of course, is nonsense. The economy is about the exchange of goods and services which enables the division of labor, and to understand and manage the economy we must look to this “real” economy, that is, the actual goods and services that are exchanged. Unfortunately we manage the real economy by using money as a measuring stick. Monetarists want to distort the measuring stick so that the “numbers” look better, although the reality is not. Yes, we need some way to measure value so that we can trade guns for butter. But we are far better off with a stable measuring stick so that our measurements are stable enough to be useful. When inflation runs wild, the destructive effects are obvious. Less obvious are the distortions caused by lower levels of inflation, but they are nonetheless real and cause suboptimal decisions to be made.

Advocates of MMT characterize government spending as long term investment, on infrastructure, R&D and so forth. You only have to look around at our crumbling infrastructure and “investments” such as Solyndra to know that this is not so. Government spending is consumption, but consumption which provides very little value – and in many cases negative value – to the public. As government spending rises as a proportion of GDP, that means that less money is available for investment and the capital stock is gradually depleted. This is the “broken window” fallacy – Bastiat’s fallacy – that is the underlying flaw in MMT. The depletion of the capital stock is not seen until it is too late, and then the economy must be rebuilt by a drastic shift from consumption to investment. The last time this was seen was in World War II, when national need justified a severe cutback to consumption and the mobilization of women to build the plant, equipment and infrastructure needed to win the war.

When they hear the term “government money,” most people’s BS detectors go on, because they know that the government has no money. That is, it does not create or add value to exchangeable goods or services, but merely reallocates the goods and services created by the private sector. MMT seeks to eliminate the checks and balances – the notion of government debt as a measure of cumulative deficits, for example – that serve to contain government’s consumption. Weak as these checks and balances have proved to be, they may yet keep us from Armageddon. Eliminating them, in my opinion, would be fatal.

¹Ce corps qui s’appelait et qui s’appelle encore le saint empire romain n’était en aucune manière ni saint, ni romain, ni empire. – Voltaire

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  • helsworth  On February 4, 2014 at 12:22 pm

    You fail to grasp a key notion, that unemployment is a monetary phenomenon caused by taxation. The unemployment rate, just like the currency, just like bank reserves, is a buffer stock. Taxation creates unemployment of money paying jobs, and public spending employs the unemployed previously created by taxation.
    A simple lesson in double-entry bookkeeping expresses the accounting truth, not one’s ideological opinion about governments or markets.
    Someone’s spending is another’s income. One man’s liability is another’s asset. Every surplus has a corresponding deficit.
    The government deficit equals the net savings or net surplus of the nongovernment sector in a given fiscal year.

    Your statement that government has no money is utterly false. Government creates money by circulating it in its expenditures, and it destroys it via taxation. These are vertical transactions. By running fiscal deficits, the government creates net financial assets within the private sector. And by running fiscal surpluses, the government erodes private sector financial assets accrued over time. You don’t understand how a modern free floating fiat regime works. The government (with monetary sovereignty; ergo not the eurozone states)’s money is tax-driven money. Money is a government issued liability, it is a tax credit.

    Your argument about government spending crowding out investment is neoliberal myth/dogma.

    Returning back to the unemployment rate, MMTers and Post-keynesians in general favor an alternative price anchor, namely, an employed buffer stock.
    Unemployment has few (questionable at best) benefits and lots of horrendous costs to individuals, families, and societies, including divorce, deteriorating physical and mental health, abuse of children and spouses, gang activity, and crime.

    By the way, if you’re worried about inflation; then you should probably make a distinction between currency depreciation and actual (negative) supply shocks. Because seasonal adjustments of the price levels are not inflation. Inflation is kept in check by fiscal policy, not by monetary policy (the latter is a blunt tool at best). And when you’re running at full output, and aggregate demand is rising past that point, then you begin to worry about inflation and begin to reduce the fiscal deficit. So far, most economies are nowhere near that point. In fact, according to the lost output clock, the US has lost 5,2 trillion dollars in lost production and consumption from the start of the financial crisis up to date. That’s economic activity which may never be recovered, became time doesn’t stand still.

    • reality  On February 4, 2014 at 8:11 pm

      Res ipsa loquitur

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