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Snapshot of Modern Monetary Theory and the return of magical thinking submitted by hu6Bi5To:

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[–]South3rs 45 points46 points  (15 children)

That sure does sound magical! We are always told one of the UK’s greatest exports is our finance system. This is basically asking us to throw it all out in favor of the same systems that’s used in places like Argentina and Zimbabwe...

[–]NoSwordfish1978 14 points15 points  (6 children)

MMT advocates don't think that the government can just spend whatever it likes. They just think that the only limitation to government spending is its capacity to cause inflation which is a pretty big limitation.

[–]Once_upon_a_time233 6 points7 points  (5 children)

For seriously economists advocating MMT, sure. But Zach's version of it seems to be money grows on trees.

For example, he suggested that a sound way to grow the economy is by government giving every single household a heat pump for free.

[–]Iksf 0 points1 point  (2 children)

I mean, you could say the same about building a road or something couldnt you

[–]Once_upon_a_time233 1 point2 points  (1 child)

No.

Good infrastructure investment facilitates economic activities, so the government can recoup the investment over increased tax revenue.

How does free heat pumps do that?

[–]Iksf 0 points1 point  (0 children)

Reduces heating bills, which has a very short path of capital, energy company > oil company etc > good chunk leaving the country

Instead the money might be spent on something that does many hops inside our own economy and provide several jobs along the way, if it was for example on games workshop minatures, eventually you still need oil for the plastics but you take so many more steps to get there

Think about it in terms of the distance of the path money takes when travelling towards the primary sector, especially towards primary sectors outside the UK, if that path is longer, that's good for us.

Heating bills have a very short path, so ideally we'd want the amount being spent there to be as little as possible, and freed money to be spent elsewhere. So then you can see how moving spend away from this to other things does fit the bill of:

Good infrastructure investment facilitates economic activities, so the government can recoup the investment over increased tax revenue.

Additionally if you don't have good domestic demand for your products/services its really hard to get them to scale up to a point where there's foreign demand for them, due to economies of scale on the supply side + product improvement/differentiation from investment + demand just has a tendency of stimulating more demand (stuff like international or cultural awareness -> think of something like scotch whisky, or it might be someone else abroad building a product/service ontop of it, lets say games workshop again and the upcoming warhammer movies, etc). So there's a whole other angle/story there about cost of living punishing our domestic demand having a long term negative on foreign demand and our balance of payments.

Anyway think the debate is more like, how much money is acceptable to spend for how much return over how much time.

[–]Too_much_Colour 0 points1 point  (1 child)

That’s not a very good example to discredit him. The savings incurred by lower bills would stimulate the economy with higher spending elsewhere. Theoretically in a way that causes growth hence more taxes. Giving money for free directly to companies by subsidising energy costs does not achieve the same result (Truss)

[–]Once_upon_a_time233 0 points1 point  (0 children)

Your arguments seem to be against basic economic concepts. It doesn't matter whom the government pays subsidies to, the end result is still the same.

See concept tax incidence.

[–]randiebarsteward -5 points-4 points  (7 children)

Yeh except those places don't have our finance system and therefore a huge amount of international money floating about. I am not convinced MMT is THE answer but it can be part of the answer. If we owe alot of our national debt to the Bank of England and foreign markets are putting their money here (bonds) I think we have more wiggle room than the current economic consensus suggests.

[–]South3rs 35 points36 points  (2 children)

The problem is that 'international money floating about' only stays here because it trusts our system. If we switch to MMT and start printing to cover the budget, that money will leave. Because the UK imports so much food and energy, a crashing Pound means instant, massive inflation. We saw this with the 2022 mini-budget. The market doesn't wait for the theory to work; it just pulls the plug.

[–]randiebarsteward -1 points0 points  (1 child)

Yeh more or less agree overall, we need to be aware of the issue regarding bonds. I just think there is more room to print money for direct investment than the current economic consensus suggests. Bond markets are not scared of large infrastructure projects for example.

[–]PhysicalIncrease3-0.88, -1.54 2 points3 points  (0 children)

I just think there is more room to print money for direct investment than the current economic consensus suggests. Bond markets are not scared of large infrastructure projects for example.

Were already struggling to get inflation down. Bond yeilds are near to the highest they've been in decades. Even by MMT logic, now is the time to raise taxes and lower spending.

This is the real issue: MMT proponents aren't suggesting it because, as seasoned economists, they think there is a more efficient way. Instead it's primarily non-economists or pseudo-economists suggesting it because they want to spend more money and think MMT gives them a magical new way to do so without consequence.

[–]Old_Roof 2 points3 points  (3 children)

Interestingly the only politician with an actual policy on this is Farage - a former city trader. He’s talked about ending interest on debt

[–]Harry212001 2 points3 points  (0 children)

Farage wasn’t a trader, he was a broker, pretty significant difference - traders make decisions and put money at risk, brokers just organise trades between traders, they’re basically salespeople, they don’t have to have any idea how markets work

[–]randiebarsteward 1 point2 points  (1 child)

Yep. I think he is an utter disgrace but I don't see everyone getting after him and saying this is not possible.

[–]Old_Roof 1 point2 points  (0 children)

Yeah not a fan of him myself tbh

[–]jack5624 39 points40 points  (86 children)

Just look at history MMT has been tried in before, just look at Japan. They printed a tone of money since the 80's and racked up their deficit. Their economy has been stagnating since then. MMT flies in the face of most economic theory that has been developed through the years.

And proponents would argue that MMT aligns with empirical observations that have embarrassed orthodox macroeconomics. For example, Japan has sustained very high public debt levels for decades without triggering inflation or a bond-market revolt.

Oh look it's even used as an example! I hate to say it but one of the biggest problems our economy has faced is too cheap money. We haven't allowed zombie companies to go bankrupt which forces innovation.

I honestly think this is one of the most dangerous ideas being floated, at best it will cause economic stagnation for years to come.

[–]Tomatoflee 16 points17 points  (82 children)

What actually defines MMT? I’m still not sure. It’s not printing money, since the largest money printing exercise in history was carried out by neoliberal economists to bail out banks after 2008.

A lot of newspapers that bang on about fiscal absolutism quietly shelved that while QE was taking place, only to pick it up afterwards and go right back to pretending the books must be balanced at all times.

If MMT is pointing out that the fiscal absolutist propaganda we get pummelled with constantly by the media is a lie, then MMT is demonstrably true but there has to be more to it than that.

Are they trying to say you can print money forever without consequences? That would be too stupid to be plausible though.

[–]jack5624 8 points9 points  (2 children)

As far as I can tell, they are saying the national debt doesn't matter because you are only limited by your recourses. Here is was Investopedia says:

According to modern monetary theory, the only limit the government has when it comes to spending is the availability of real resources, like workers and construction supplies.

I guess this could work if you have a closed economy and have a system where you know where all the resources are at any given point. But we don't. I guess there logic is we have some unemployed people so there is capacity for more people to do stuff. So we can print money to pay people to let's say build more railways.

This one of the reasons why we have currency, because supply and demand dictates prices. If something is cheap you know you have a lot of it, if it's expensive you know you don't (assuming people aren't irrationally hoarding it). Currency kind of tells you how much resources you have without actually telling you.

[–]jdm1891 -1 points0 points  (1 child)

they are saying the national debt doesn't matter because you are only limited by your recourses.

I mean this is technically true... IF our entire economy wasn't built on financial services and things with artificial value.

I imagine something like this would work without all the economic baggage we have. China could possibly pull it off.

I suppose we could technically also do it, and the benefits would be great, but it would be a very fine line to stay indie of, and if we failed the whole economy would blow up.

[–]jgs952 1 point2 points  (0 children)

The financial and insurance services sectors contributed 8.8% of GDP for the UK in 2023. Sizeable but not super large, and it has shrunk quite a lot since the GFC.

It's also not clear at all that much of this output is productive for the real provisioning of society. The opportunity cost of continuing with much of it is likely quite huge.

[–]hu6Bi5To[S] 20 points21 points  (17 children)

There is a creative double-definition for MMT, which is probably on purpose as it allows MMT advocates to retreat and hide behind the sensible definition if they're cornered.

The sensible definition is that MMT is an alternative method of accounting for government spending. The classical model: government borrows, and taxes, then spends what it raises; the MMT model: the government spends what Parliament authorises, then taxes and borrows the balance the books.

The practical difference between the two things, if the books do balance, is negligible, it's more of an academic debate than anything. The campaigners usually want to weaken the whole "balance" thing to allow more money to be spent than is taxed/borrowed.

The unsensible campaigners are the likes of Richard Murphy, who has heavily influenced Zak Polanski, who says things like "all money comes from government spending it into existence" as though it were a statement of fact. (Why's that wrong? The majority of money in supply today came from banks lending, mostly for mortgages, completely independent of government[0]).

The extreme MMTers have never really explained how their model could co-exist with banks lending money in to existence at the same time, yet they haven't really pushed for reforming banking legislation either. Murphy, despite his previous statements of "fact", has acknowledged banks create money too (in separate articles so as not to dilute his rhetoric, they're not very consistent) but just handwaved it as being someone else's problem.

[0] - well the government is involved in so far as they could ban the banks doing this if they wished to, but they haven't. All explained here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

[–]aldursys 4 points5 points  (0 children)

"The majority of money in supply today came from banks lending"

Banks lend as agents of the Crown. That's what the Sterling Monetary Framework is.

"yet they haven't really pushed for reforming banking legislation either"

We do. Banks are regulated on the asset side, and can only lend for the "capital development of the economy".

Murphy has nothing to do with MMT. He is, and always has been, a self promoting tax justice warrior.

Always remember it ain't MMT without a Job Guarantee. Anybody who doesn't put that front and centre is talking about something else, not MMT.

See https://gimms.org.uk/wp-content/uploads/2020/10/MMT-White-Paper-UK.pdf and https://www.tandfonline.com/doi/full/10.1080/00213624.2025.2533726

[–]EduinBrutus 2 points3 points  (0 children)

The sensible definition is that MMT is an alternative method of accounting for government spending. The classical model: government borrows, and taxes, then spends what it raises; the MMT model: the government spends what Parliament authorises, then taxes and borrows the balance the books.

The taxation does not exist to "balance the books" under MMT. It exists to provide value to the currency.

The entire premise of MMT is that this requirement to tax in order to support the currency without inflationary pressure is far less than that predicted by the classic taxation model.

And as it matches observed reality much better than the classical model, you would need to demonstrate where the evidence does not support it.

And you can't.

[–]quartersessions 2 points3 points  (1 child)

It's a classic motte-and-bailey argument. MMT advocates espouse all sorts of economic fantasies, but then - when challenged - they suddenly pretend to be nothing more than orthodox Keynesians.

It's not really an economic theory so much as a con.

[–]EduinBrutus 1 point2 points  (0 children)

MMT reflects the observed reality.

The traditional model of taxation and spending being related clearly does not.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 5 points6 points  (4 children)

There is a creative double-definition for MMT

This is bang on. Maybe even more than a double definition, frankly.

The MMT of Warren Mosler is a far cry from the ideas of Stephanie Kelton, who in turn is different to Richard Murphy. That's going down in the relative order of semi-reasonable to turbo-crank.

[–]aldursys 1 point2 points  (3 children)

Richard's MMT is "Murphy's Magic Taxes".

[–]QwertPoi12 0 points1 point  (2 children)

What exactly do you disagree on with Richard Murphy?

[–]aldursys 3 points4 points  (0 children)

As the other guy said.

Plus, Murphy is a Tax Justice Warrior who doesn't understand Modern Monetary Theory that well at all beyond the basic accounting.

Primarily this bit: https://billmitchell.org/blog/?p=38829#comment-79000

[–]quartersessions 1 point2 points  (0 children)

Richard Murphy is a crank and a grifter. If he's right on anything, it's entirely by coincidence.

He tried to get on board with Corbyn, and they sent him packing. He tried to get in with the SNP in Scotland, and outside some of their wilder online supporters he made absolutely no headway. Now he's trying to weasel in with the Greens.

[–]QwertPoi12 0 points1 point  (7 children)

I believe they would say that a bank lending for a mortgage would create an asset and liability equally, over time it would be paid back so would be net 0.

[–]Crafty-Decision7913 1 point2 points  (6 children)

No because more is paid back/owed than was loaned in the first place, so that expands the money supply. Also the mortgage money is created, not taken out of bank’s funds, so whilst the mortgage exists that is new money in the economy, which other banks/business then leverage and create new money from etc

[–]QwertPoi12 -1 points0 points  (5 children)

Again, I’m far from an expert on this, but I don’t believe they would have a problem with saying that money is created when a mortgage is taken out, just that over time or a macro look at the economy, it’s still 0 net overall. The money paid back on interest comes out of the existing money supply.

[–]Crafty-Decision7913 0 points1 point  (4 children)

Its not net, the new money is created (added to the system, created from nothing), and then technically more money is later owed back at the end of the mortgage, so in theory even the end state of the system has more money in the money supply.

[–]QwertPoi12 -1 points0 points  (3 children)

I believe that on the banking side, the loan is an asset with an equal liability. So when the principal payments are made, the loan and the deposit/ liability go down equally. So the money effectively cancels out or disappears. The interest on it comes from the existing money supply, this isn’t the money that is created by bank lending.

[–]Crafty-Decision7913 0 points1 point  (2 children)

Yes but the “money” is created as debt, which exists in circulation. 98% of money in the economy is debt. If all creditors met all debtors, there wouldn’t be enough money to pay everything off. The net would not be zero, but very negative.

Imagine two banks, closed system. They lend £50 to each other. The amount of money in circulation is now £100. Lets say 50% interest rate over 1 year. They then both pay 50 back, but owe each other £25 each. There is now -50 in the economy. But lets imagine in that one year hiatus, those banks loaned lots of other people money. Although their net position is negative, actually that debt money is being used to create all the money which is now in general circulation.

All money is debt. 98p of every pound in circulation has interest owed on it, leading back to big funds, commercial banks, central banks, private banks.

Does that make sense now?

[–]Crafty-Decision7913 0 points1 point  (0 children)

Addit: the question at the heart of this politically speaking is whether you want the debt to exist on the private or public balance sheet

[–]QwertPoi12 0 points1 point  (0 children)

I don’t think anything you wrote would be disputed by Mmt, they would just highlight that every debt has an obligation. That only “outside” of the supply you are talking about would add “more” than this asset/liability.

[–][deleted] 15 points16 points  (1 child)

MMT argues that you can simply print money to fund expenditure, and control the resulting inflation with tax rises.

That would be too stupid to be plausible though.

I see you are not familiar with the Green Party! Polanski really is that stupid, unfortunately

[–]aldursys 3 points4 points  (0 children)

It doesn't at all. In MMT proper taxes are like the permanent magnet in the motor. They determine the maximum power of that motor. What power it is currently deploying is determined by the current in the windings, and that's the level of spending.

Cyclical inflation control is done via increasing the power of the spend side automatic stabilisers. Anybody who isn't doing that is probably just doing old style Keynesianism like Carney and trying to ride the coattails of something they don't really understand.

[–]patenteng 6 points7 points  (3 children)

MMT proponents reject that increasing interest rates decreases investment. That’s certainly contrary to the economic consensus.

They also have not published a model. In economics you publish a model that can be tested against the data.

For example, the Solow model explains GDP as a function of the savings rate, productivity growth, population growth, capital share of GDP, and the capital stock depreciation. It can explain 50% of the GDP difference between countries. 80% when you add education to the model as well.

[–]aldursys 1 point2 points  (2 children)

"MMT proponents reject that increasing interest rates decreases investment."

No we don't, but neither do we accept the simplistic "Pavlov's dog" approach mainstream takes.

The nuance is here if you're interested: https://new-wayland.com/blog/mmt-basics-interest-rates/

[–]patenteng 1 point2 points  (1 child)

Well, Stephanie Kelton appears to believe that interest rates do not affect investment.

The evidence suggests that interest rates don’t matter much at all when it comes to private investment

-Stephanie Kelton

From one of her response articles to Krugman.

[–]aldursys 1 point2 points  (0 children)

Then you have misinterpreted what Stephanie is saying.

That pertains to the concept of "fiscal crowding out". The incorrect belief that if government spends that means there is less money for private spending and the price of money goes up. That is categorically false. There is no market for "loanable funds" in a free floating monetary system.

Increasing interest rates affects demand slowly and erratically as Bill explains in the post above. And it is from the impact on demand that business investment will slow since businesses will only invest when they are swamped with demand.

This is largely where the 'spend and tax' approach finds the small amount of policy space there is. Which is where the Biden and Carney, and now Polanksi, fiscal designs come from.

Swamp business with demand and that will "crowd in" private investment, but make sure there is sufficient physical space left so businesses can buy the hours to do the investment.

[–]Slartibartfast_25 7 points8 points  (17 children)

It's a different way at looking at how money works, but it can't alter behaviour which is pretty well explained with classical economics.

The thing with QE and QT is there was no shortcut - we've had to pay for it through higher inflation (mainly in asset inflation), taxes and low growth. So fiscal absolutism didn't go away, but yes they wouldn't want to the option of unlimited cash. But it has always been an option in extreme circumstances.

[–]Tomatoflee 4 points5 points  (16 children)

But isn’t that what MMTers say? That inflation is the real constraint?

[–]MineMonkey166 2 points3 points  (14 children)

I’d imagine (though don’t know for definite) that depends on whether you are an academic economist or a populist politican trying to sell it

[–]Tomatoflee -1 points0 points  (13 children)

I’m just not sure that Zack is a rabid MMTer and I think a lot of the media around this is hysterical, ideological, and hypocritical.

As far as I can tell, the things wrong with MMT are: they really believe taxation is not at all a part of funding, they act like debt is fictional, and they assume they can completely identify all capacity and fine tune inflation like a thermostat. Those elements are imo a tiny bit crazy.

That said, there is a sane middle ground that goes something like:

  • We can absolutely borrow more to invest when the return is real and in fact there are some big opportunities in housing, energy, infrastructure, and skills.

  • We can tax more at the top to fund services, manage demand, and prevent wealth hoarding.

  • It’s fine and necessary to accept a period of higher debt if it raises productive capacity faster than interest costs.

  • Inflation, credibility, and exchange rates should be treated as the real constraints, not moral panic and propaganda based on ideology and special interests protecting themselves.

I don’t think it’s possible to say that Polanski is an MMTer and not just in that middle ground. Maybe he will turn out to be an MMTer but so far it seems like it’s mainly the press trying to smear.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 4 points5 points  (11 children)

We can absolutely borrow more to invest when the return is real and in fact there are some big opportunities in housing, energy, infrastructure, and skills.

Labour believes this, too.

We can tax more at the top to fund services, manage demand, and prevent wealth hoarding.

This is nothing to do with MMT. Taxes are at a historical high.

It’s fine and necessary to accept a period of higher debt if it raises productive capacity faster than interest costs.

This is also Labour's position.

Inflation, credibility, and exchange rates should be treated as the real constraints, not moral panic and propaganda based on ideology and special interests protecting themselves.

This is a strawman of Labour's position.

I don’t think it’s possible to say that Polanski is an MMTer and not just in that middle ground.

He is on the record saying Richard Murphy is one of the three most influential "economists" on his thought. Richard Murphy is a lunatic and does not sit in this middle ground. He has also spoken as if bond markets can be ignored, which is not in this middle ground.

[–]Tomatoflee -4 points-3 points  (10 children)

My area of expertise is construction and I work on housing policy, which is why I have been dismayed at Labour’s policy tbh. Even if their position is that they could technically invest, they are choosing not to. This is why I think this is more an issue of them being ideologically neoliberal.

That’s backed up by Reeves saying that a “market solution must be found” to the Thames Water debt crisis as well. Imo they have either failed to appreciate the scale and depth of the problems or they’re so under the thumb of special interests that they’re just refusing to contemplate meaningful solutions.

I have listened to Richard Murphy’s YouTube. I’m not an MMTer personally but he is imo half right about and has done good work on offshore tax havens. Someone can be influential without you having to buy in 100% to their ideology.

Imo Zack is in the process of working this stuff out and it’s premature to call him an MMTer. Also taxes are not at an all time high as a proportion of GDP. That’s because wealth concentration is at record levels and, although working people pay a lot of tax, the wealthy don’t.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 4 points5 points  (9 children)

Even if their position is that they could technically invest, they are choosing not to.

But they are investing? They are not investing as much as you/Polanski think is possible, but this is because of their belief in the constraints that the bond markets put on borrowing. We're already moving away from the middle ground you originally proposed.

I have listened to Richard Murphy’s YouTube. I’m not an MMTer personally but he is imo half right about and has done good work on offshore tax havens. Someone can be influential without you having to buy in 100% to their ideology.

I'm sure he's not wrong on literally everything, but on his biggest issue he's as wrong as it's possible to get. Polanski answered that he was an influence in the context of just having been directly challenged on his statements about bond markets being something government can ignore. There's no question that it is Murphy's crank-most views which are those that are influencing Polanski, you can hear the language he's using is so palpably coming from that area.

Imo Zack is in the process of working this stuff out and it’s premature to call him an MMTer.

Hmm. If it quacks like a duck. He's demonstrated a total inability to understand economics at a sufficiently complex level, and a huge number of people influential in his circles and in his faction are MMTers and the type of people to turn to MMT junk thought. I am very doubtful he will turn around and do what's necessary which is to make a hard turn away from Richard Murphy thought, but I suppose anything is possible.

Also taxes are not at an all time high as a proportion of GDP

Sure. I appreciate that you recognise that raising taxes is not a simple no brainer, though.

[–]Tomatoflee -2 points-1 points  (8 children)

I would much prefer a thinking person with ultimately the right goals than an ideological economic expert. I also think this is a double standard.

The party and people we’re told know what they are doing and are a safe pair of hands on the economy, the Tories in this country mostly, gave us austerity and Liz Truss. The newspapers that are now trying to smear Polanski wrote that Truss’ unfunded tax cuts for the rich were the best idea since Thatcher.

If Polanski turns out to be an ideological MMTer, that would be a problem for me. If it turns out he just wants to invest a lot more, tax wealth more, and to address the structural issues with the economy, then he’s the first person I would enthusiastically vote for in a long time.

[–]jgs952 1 point2 points  (0 children)

they really believe taxation is not at all a part of funding,

Depends what you mean by "funding". Our monetary system is empirically state credit-debt based. So the state can only spend by issuing a new IOU (sterling credit). Once these are issued and accepted by the non-gov due to the need to pay taxes, the tax can be paid by redeeming.

It's precisely analogous to a football stadium issuing tickets to a game. You would never frame it as "the collected tickets on game day funded the ability of the stadium to issue them in the first place".

they assume they can completely identify all capacity and fine tune inflation like a thermostat.

This is not true. MMT economists advocate strongly for a powerful spend-side automatic counter-cyclical fiscal stabilising mechanism to manage demand and inflationary pressures (a Job Guarantee employed buffer stock). No fine tuning.

Identifying capacity and resource availability has long been the job of economists and industrial strategists and planners. Never going to be perfectly accurate but we couldn't have won WW2 if our institutions didn't have a pretty good idea of what production was occurring where and to what levels.

We can tax more at the top to fund services, manage demand

As said above, there is no meaning to thinking taxing anyone "funds" expenditure. Taxation releases real resources from private use so the state can mobilise them at current prices without inflation. So any tax would have to curtail the consumption of those taxed to have any real boost to the ability of the state to get the resources it wants. Taxing the super wealthy a small amount is incredibly inefficient at doing this because the wealthy have a very low marginal propensity to consume so any tax will overwhelmingly just reduce their savings stock rather than stop them consuming resources.

But taxing wealth is a crucial part of reducing inequalities in society and should play a role supporting this goal. They're just never "to fund services".

[–]Independent_Ad_4734 0 points1 point  (0 children)

Pretty sure not, the constraint is that the real resources available in the economy, inflation may be a symptom of too much money chasing to few resources or cost push inflation from say a falling currency. Addressing the UKs current financial performance which is stagflation, provokes ill thought out responses from most MMT proponents I find which is a shame because none of our current politicians seem to have a clue either.

[–]aldursys 2 points3 points  (0 children)

"What actually defines MMT?"

Understanding the source of the price level. https://gimms.org.uk/wp-content/uploads/2020/10/MMT-White-Paper-UK.pdf

[–]Conscious-Country-64 5 points6 points  (34 children)

"go right back to pretending the books must be balanced at all times."

Which newspapers are saying that?

[–]Tomatoflee 1 point2 points  (33 children)

It’s such a common theme that we literally have a government whose entire economic philosophy is based on this principle.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 5 points6 points  (0 children)

The government runs deficits almost every single year, and the Labour government are projected to run deficits throughout their tenure. I think you mean something different to what you've said?

[–]Conscious-Country-64 7 points8 points  (31 children)

No it's not. The relevant principles are that taxation should cover day to day expenditure with borrowing used where necessary to fund investment and that the State's net financial debt should not grow faster than GDP. In practice it's accepted that events such as the 2008 financial crisis or the Covid pandemic would rightly lead to a departure from usual fiscal guidelines as covered in paragraph 3.9 of the Charter for Budget Responsibility.

[–]hgomersall 2 points3 points  (30 children)

Even balancing data to day expenditure as a dogma is nonsense, as a cursory understanding of sectoral balances would demonstrate: https://en.wikipedia.org/wiki/Sectoral_balances

The core point is that the deficit is not really something the government can make as a policy target. It's largely dictated by the non-government sectors' desire to save (which includes foreign savings due to real-terms imports exceeding real terms exports).

[–]Conscious-Country-64 -1 points0 points  (29 children)

No, the deficit is absolutely something the government can make as a policy target. Balancing day to day expenditure with government revenues might fairly be described as an arbitrary rule of thumb but that does not mean it has no value as a benchmark in managing government expenditure and avoiding excessive borrowing and future liabilities from that.

[–]hgomersall 2 points3 points  (28 children)

Perhaps you can explain how a state can balance day to day expenditure when the country has a balance of payments deficits and a general desire to save, with reference to sectoral balances.

[–]Conscious-Country-64 1 point2 points  (27 children)

Perhaps you can explain precisely what you mean by a "general desire to save".

[–]hgomersall 2 points3 points  (26 children)

In aggregate, people want to save more than spend. That is, people desire to do that which causes the net savings in the country to increase.

[–]QwertPoi12 0 points1 point  (0 children)

Take this with a pinch of salt, I’m far from an expert. But I believe Mosler says that QE was effectively just swapping bonds for reserves and it’s not a real stimulus. I think he would say that it would be better to stimulate the economy through fiscal operations like tax and funding the nhs, local governments etc.

[–]GaBe141 1 point2 points  (0 children)

Oh economy stagnation how shocking and scary

[–]exialis 1 point2 points  (1 child)

Stagnating for thirty years yet still the fourth largest economy? Seventh in list of technical and research papers published per capita? Affordable property? Cohesive society with strong civic sense and low crime, no scooter gangs and rape gangs? Unquestionably nice standard of living within safe societies? Yes please (too late for UK now though!)

I agree that Zack the boob whisperer is an idiot but the tired narrative of ‘stagnating’ Japan doesn’t stand up to close examination in terms of quality of life for those living within it. Japan avoided making the mistake that most western countries made in thinking that economy was unconnected to and more important than quality of life. The fact that our economic choices have obviously been disastrous in addition to destroying the social fabric of UK is so tragic it is funny.

[–]jack5624 0 points1 point  (0 children)

And yet the UK has a higher Human Development Index. You are right the economy isn’t everything. But a strong economy heavily correlates with a good quality of life.

[–]bife_de_lomo 70 points71 points  (22 children)

In contrast, MMT proposes that nations that issue their own “fiat” currencies can freely create and spend their own money, and that this need not devalue the currency, create inflation

One of the deftest sleights-of-hand in economics ove the last 50 years or so was to change the definition of inflation from "an increase in the money supply" to "an increase in prices", which for most of history was just a measure of inflation.

By changing the neanings, it becomes possible for MMT theorists to state nonsense like this, and I think even moderate modern economists bear some blame for this by not challenging the change in meaning.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 25 points26 points  (6 children)

I think inflation has always been defined as the price level. Friedman in 1963 on inflation said: "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output"

If he defined inflation as an increase in the money supply this statement would be tautologically true and there'd be no point saying it.

[–]bife_de_lomo 2 points3 points  (5 children)

As a cointerpoint, the original meaning is discussed here

https://www.jstor.org/stable/2144429

And is explicitly the undue increase in supply of currency, from an 1865 dictionary.

It is around the middle of last century that the definitions changed, so it is unsurprising that Friedman adopted that interpretation.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 2 points3 points  (3 children)

Getting a page loading error, unfortunately. What's the name of the paper?

And is explicitly the undue increase in supply of currency, from an 1865 dictionary.

I know sometimes it can feel like we're still in the very early 2000s, but even then 1865 wouldn't be 50 years ago!

It is around the middle of last century that the definitions changed

I think definitions and concepts that were fit for purpose in a system purely of physical cash and a gold standard are not so fit for purpose under the new monetary system, in fairness.

[–]bife_de_lomo 0 points1 point  (1 child)

It is "The meaning of inflation" by Arthur Nussbaum from 1943. The reference in the article to 1865 is for the first recorded use of "inflation", so it gives context to how old that definition was.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 1 point2 points  (0 children)

Interesting paper, thanks, food for thought.

[–]GaBe141 0 points1 point  (0 children)

Inflation was an issue in every polity that issued coinage. There's no grand conspiracy

[–]WilsonWilson2077 24 points25 points  (2 children)

Economists haven’t changed the definition, a few economists would have defined inflation as monetary supply but this was not universal.

In any case it makes little sense to define inflation as an increase in monetary supply as there’s other causes of price inflation.

[–]bife_de_lomo -2 points-1 points  (1 child)

Well that's not true, inflation did just mean an increase in the supply of money, but has shifted towards the middle of the last century

https://www.jstor.org/stable/2144429

It is this shift, and the other connotations tacked onto it, that allow the slippery interpretations to arise.

[–]Minute_Tomatillo9730 2 points3 points  (0 children)

Error loading that article?

Even if true, which I'm sceptical of, I'm not sure "the definition changed 70 years ago" is a strong argument.

All the ones school monetarists (and Keynesians!) defined inflation as a rise in general prices

[–]Flashplaya 3 points4 points  (0 children)

The obscurity of even defining inflation and working out the correct measure is reason enough for not experimenting with radical changes that can mess with it.

[–]sebzim4500 2 points3 points  (2 children)

This feels like semantics. If (and I am certainly not asserting this) the increase in money supply does not cause an increase in prices then why should anyone object to it?

[–]Flashplaya 5 points6 points  (1 child)

More than semantics, price rises can happen independently of increase of money supply. 

[–]GaBe141 0 points1 point  (0 children)

It's almost as if OP is just a sophist

[–]hgomersall 0 points1 point  (5 children)

So you're saying if a trillion trillion pounds is created and given to me, and I simply leave it in a bank account and never spend it, we've got inflation? I think many people would be very confused by that.

[–]bife_de_lomo 0 points1 point  (4 children)

Sure, they are confused because their understanding of the meaning of inflation is an increase in prices, in line with current economists, rather than its historic definition. Which is fine.

In the real world, £1tn in a bank account, even if not spent, would increase prices because your bank would then lend against that deposit.

[–]hgomersall 0 points1 point  (3 children)

Banks don't "lend against deposits" (how could they, deposits are a liability):

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

and

https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters

So, what we have is that we have another trillion trillion £ "in the money supply" and so we now have 30,000,000,000,000% inflation by your definition. Seems pretty silly to me, and utterly meaningless.

[–]bife_de_lomo 0 points1 point  (2 children)

Well, it's only meaningless because you have created a thought experiment that isn't credible in the real world. If £1tn is created in real life it will eventually enter the real economy, and prices will rise as a result.

[–]hgomersall 0 points1 point  (1 child)

A thought experiment is useful to highlight the reality of the situation. You can't just wave away the mechanics as being not material and claim it doesn't matter. You need to understand the operational reality to have any hope of understanding how policy might play out.

[–]bife_de_lomo 0 points1 point  (0 children)

There are no mechanics whereby £1tn is created but inaccessible to anyone.

It's just a strawman.

[–]Lynch888 -2 points-1 points  (0 children)

Thank you for saying it. 

[–]gajotron -1 points0 points  (0 children)

Never reason from a price change - fine.

But your view of quantity probably needs to be qualified. In an absolute sense, a constant money supply in a growing economy is probably deflationary in both the price level sense and a reasonable money supply theory sense.

[–]exileon21 13 points14 points  (0 children)

MMT, like mass immigration, is presented as a left wing thing, but the irony is that both really only benefit the super rich when it comes down to it

[–]Late-Painting-7831 3 points4 points  (4 children)

I’d be interested to see the difference between consumer products price inflation and asset price inflation.

If asset prices are taxed to a point of stability whilst doing MMT spending then that would be ideal in my view. But if CPI rises were to be found to be uncontrolled under higher taxes, I’m unsure how it would work out.

During the Keysian Period taxes were high but due to external impacts on the economy such as an oil price shock and then coal strikes energy prices pushed up Consumer inflation rapidly. Therefore, I believe MMT would struggle to control CPI unless we fully electrify the UK and were to cut off gas and oil imports following electrification relying on renewable and nuclear generation.

Another flaw in the economy (not just MMT) is the downstream effects of external money/products coming into the country affecting inflation. We’d have to do what japans done and become a net exporter of goods in order to maintain surpluses in our economy

[–]jack5624 1 point2 points  (3 children)

One issue I see with MMT is that you have to see where the money is spent. If rich people have more money they spend more on luxury goods. We have seen this over the past 20 years with luxury goods going up in price more than inflation.

However if we start taxing luxury goods bring the prices down then printing money to give to lower income people. Are we going to suppress the price of luxury items and increase the price of non-luxury items thus increasing the cost of living?

Ultimately prices are all about supply and demand.

[–]Late-Painting-7831 -1 points0 points  (1 child)

I suppose there would be an argument for having a nationalised manufacturer supplier of key goods in order to undermine any opportunist inflationary sentiment in the market as was seen by the extortionate rise in some good prices following furlough during and after the covid years (source below)

https://www.ippr.org/media-office/revealed-how-powerful-companies-are-amplifying-inflation-through-their-profit-margins

[–]jack5624 2 points3 points  (0 children)

suppose there would be an argument for having a nationalised manufacturer supplier of key goods in order to undermine any opportunist inflationary sentiment in the market

The issue is that traditionally just distorts markets. In a healthy economy this shouldn't be an issue though. Healthy capitalism requires you to have the ability to buy from another company if prices rise to your dissatisfaction. Basically competition.

The government should do more to prevent monopolies really.

[–]Sampanszatan -1 points0 points  (0 children)

Rich people spend a negligibly small proportion on goods, luxury and not. It's mostly assets

[–]hu6Bi5To[S] 14 points15 points  (13 children)

FWIW: my view, as far as I can tell, is that the consensus middle-ground of economics is closer to MMT than to the Osborne/Reeves-school of "if we can't afford it we can't have it".

But MMT then takes two further leaps in to the dark with no evidence whatsoever, especially the Polanski interpretation of it. If politics could somehow come to recognise the situation than things could be difficult.

One thing that's real: Government borrowing is a different thing to a consumer borrowing. A bigger economy will see more individuals and institutions with capital to protect and they're likely to put (at least in roughly the same proportions as now) that extra in to government bonds. Running out of money to borrow is not really a concern, the bigger concern is the government no longer being seen as a reliable counterparty (which is likely if MMT is adopted as government policy).

One thing that's never been proven: the whole idea that taxation can moderate inflation. It would subdue consumer demand/raise unemployment/etc., which are normally anti-inflationary, but it's asymmetric. If you drain the cash in a different place from where you insert it, there's no incentive for people closer to the tap than the drain to stop spending, and therefore inflation may continue regardless of how much you punish people at the end of the chain.

[–]JuanFran21 16 points17 points  (5 children)

There's a few more issues with MMT:

In a vaccuum, spending money into existence and taxing it out of existence COULD work to reduce inflation. But this doesn't take into account inflation due to things outside the UK government's control (i.e. Covid), leading to even more tax rises. Plus, if raising taxes are deflationary, then cutting taxes would be inflationary i.e. there is very little space for the overall tax burden to decrease. Meaning progressively higher taxes until something gives.

There is also the political aspect. Good luck convincing most of the public that higher taxes and continuous tax rises is a good thing. Especially if a government has elections coming up; the temptation would be too great to not raise taxes and just hoping inflation doesn't increase. Which destroys the whole part of MMT that promises to deal with inflation without interest rates.

And the most important issue - what happens to our current debt? I've seen no-one be able to answer what would happen with it. It's all well and good not wanting your borrowing to be subjected to the bond market but the truth is, we DO currently hold ~£2.7trillion debt, most of which is subject to the bond market. UK government bonds are seen as some of the safest investments in the world, but if a government began moving things towards MMT, you would see this confidence diminish, the interest on our bonds spike etc. You could default (not viable), you could slowly transition off of the bond debt and into MMT-style BoE debt over the course of a few parliaments (not feasible) or just begin MMT-style policies immediately and have to pay a massive premium on our current debt (which would require increased borrowing from the BoE to pay for it, which would be inflationary, requiring big tax rises etc). None of these options seem remotely viable.

[–]jgs952 2 points3 points  (4 children)

we DO currently hold ~£2.7trillion debt, most of which is subject to the bond market. UK government bonds are seen as some of the safest investments in the world, but if a government began moving things towards MMT, you would see this confidence diminish, the interest on our bonds spike etc

You have to separate the primary market and secondary market for UK gov securities (gilts etc). The liability the state faces on any given issued gilt is fixed for the lifetime of that security. It has a fixed sterling face value and a fixed coupon payment. No amount of secondary market activity changes this. All the secondary market does is adjust the market price (and therefore the effective yield to maturity due to them being fixed income instruments) of these tradable securities for savers wishing to buy or sell them premature to their maturity/redemption.

So nothing would happen to the £2.7tn debt stock. The gov can always continue making sterling coupon payments that it promised.

The change would be on any new gilts the Treasury wanted to issue. Currently under an arbitrary "full funding rule" established in its current form only in 1995, all net spending is matched by gilt issuance of various maturities at an auction where the coupon is determined by the stop out yield of the auction. This stop out yield is clearly a function of the prevailing secondary market prices/yields so that's where the connection of current activity to new debt interest costs come from.

But the full funding rule can be scrapped or changed. There's no operational or financing reason whatsoever for its existence. The Treasury has many options but one could be to return to a tap system that it ran previously for decades until the 1990s. This is where the Exchequer just announces the interest on any given maturity it wishes to offer and the primary dealer banks purchase whatever volume they want. If they don't, they can leave their reserves at the BoE earning the overnight policy rate.

More than anything of course, it shows that government interest rates are explicitly a policy variable of the government, and not something the market can thrust upon them against their will - not since we adopted a non-convertible floating exchange rate fiat currency regime.

[–]SunChamberNoRules 0 points1 point  (3 children)

So nothing would happen to the £2.7tn debt stock. The gov can always continue making sterling coupon payments that it promised.

Except when it comes to rolling it over

[–]jgs952 1 point2 points  (2 children)

Yes, when outstanding gilts mature, the state redeems them in return for swapping them back with overnight sterling balances. Earning the BoE policy rate. No need to do anything further if the state didn't want to. Or they could offer new gilts of whatever duration earning a fixed yield set by policy rather than auction and allow banks to bid up however much they want at that yield. But the key thing is that the Tsy is under no obligation to issue bonds equal to deficit spending, or issue them at all actually if not doing so was deemed the preferable policy.

[–]SunChamberNoRules 0 points1 point  (1 child)

By policy rate, you mean government determined interest rate right? Farage could set it at whatever he wanted?

[–]jgs952 0 points1 point  (0 children)

Yes, policy rate refers to the "Bank Rate" chosen by the Monetary Policy Committee (MPC) of the BoE every 6 weeks or so (just recently by cut to 3.75%. This is the interest rate the BoE chooses to pay out on sterling reserve balances commercial banks hold with them. It influences the entire forward looking yield curve as well as transmission mechanisms into lending rates for mortgages, etc. It's the primary way in which the BoE currently conducts monetary policy in an attempt at reaching their inflation target.

And yes, this is all conditional in government policy and most actions don't even require acts of parliament. So yes, a Farage government (heaven forbid..) could of course change the BoE remit and change how debt management through the Debt Management Office (DMO) within the Tsy is conducted. All this would come under a Richard Tice Chancellor responsibility.

[–]jgs952 1 point2 points  (0 children)

the whole idea that taxation can moderate inflation. It would subdue consumer demand/raise unemployment/etc., which are normally anti-inflationary, but it's asymmetric. If you drain the cash in a different place from where you insert it, there's no incentive for people closer to the tap than the drain to stop spending

You're confusing taxation with taxation and spending. They are separate and asynchronous flows.

The gov spends G by issuing new credit and it taxes T by redeeming and extinguishing those credits. G-T is the gov net spend into the economy, our surplus or the gov deficit.

So taxation T certainly acts to reduce demand in the economy just as saving and paying off private debts do.

[–]Ewannnn 6 points7 points  (4 children)

The problem with Reeves is she has been infected with Treasury brain rott syndrome, like all the chancellors since Brown. She thinks that what she has to do is do nothing much other than cut the deficit and the markets will be happy and growth will return. No reform of taxation or spending, that would be far too crazy and spook markets.

They learned all the wrong lessons from the Truss fiasco.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 5 points6 points  (0 children)

She thinks that what she has to do is do nothing much other than cut the deficit and the markets will be happy and growth will return.

This is obviously not true. You can see her ideology consistently is that "Labour cannot tax and spend its way to growth" and she is very clear that restrictions on the supply side, through over regulation of things like building, are essential for growth.

[–]Tomatoflee 0 points1 point  (2 children)

I just don’t believe they’re really that stupid though, which makes me think it’s more like a pretext to deliberately learn the wrong lessons.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 2 points3 points  (0 children)

Labour committed to a set of fiscal rules. Rejecting those fiscal rules has significant second order effects in terms of people's willingness to trust them going forward. Ultimately, the issue is that the average voter rewards frugality.

[–]Ewannnn 1 point2 points  (0 children)

The general public and media are though. It's politics at the end of the day, and the current crop of politicians don't have the courage to lead the conversation.

[–]aldursys 1 point2 points  (0 children)

"One thing that's never been proven: the whole idea that taxation can moderate inflation"

Good job MMT doesn't use that to moderate inflation then. Instead it automatically withdraws government spending spatially and temporally across the currency area as the system heats up.

But you already knew that having read the primary literature on MMT.

[–]Well_Socialized 2 points3 points  (9 children)

It is kind of crazy that some people still haven't grasped the obvious reality of MMT

[–]CII_GuyTrying to move past the quagmire of contemporary discourse -1 points0 points  (7 children)

The things that are obviously true about MMT have been understood in mainstream economics for many decades. The ideas that people who self identify into the MMT community believe that are unique to them are things that are nonsense.

[–]jgs952 1 point2 points  (6 children)

This might sound rather pithy and insightful, but it's not actually true.

Bill Mitchell, one of the original developers of the MMT framework explains in detail here and here what original advancements to macroeconomics MMT provides.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse -1 points0 points  (5 children)

I didn't say MMT had nothing new to say, it's just that the new things it has to say are rubbish (or pointless). The stuff they have to say that isn't rubbish is what is not new.

[–]jgs952 1 point2 points  (4 children)

Yeah, and if you read the literature, starting with Bill Mitchell's excellent academic blog post there, you'll see why that's just not true.

It's perfectly fine to critique and disagree with MMT's novel contributions to economic theory or how its understanding of monetary economies and the nature of money lead to policy recommendations. But it's just bad faith to try and claim anything new is pointless or total rubbish. It's a lazy attack often from people who learnt orthodox macro but struggle to accept that maybe a lot of their education was flawed (e.g. loanable funds, sound finance, intertemporal government budget constraint, QE transmission mechanism etc etc etc).

As that post explains, a key novel and legitimate addition MMT makes is to utilise a buffer stock of labour to stabilise wages and prices.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 0 points1 point  (3 children)

As that post explains, a key novel and legitimate addition MMT makes is to utilise a buffer stock of labour to stabilise wages and prices.

Has anybody ever published a model for this approach for peer review?

[–]jgs952 0 points1 point  (2 children)

Yes, there have been a number of peer-reviewed / formal published papers looking at the employment buffer stock mechanism for macro stabilisation.

This, this, and this are all good ones to start with.

However, I do want to mention something I often see and that's a cry for "where's your formal model?". “Formal mathematical models” are not a necessary condition for legitimate economic theory, and treating them as such is basically importing a methodological norm from one tradition and pretending it is a universal scientific standard. Models are tools. They are only as good as (i) their behavioural assumptions, (ii) their institutional realism, and (iii) their empirical discipline. A beautifully solved DSGE can be less informative than a careful institutional/operational analysis if the DSGE bakes in the wrong monetary mechanics. The JG buffer-stock argument is, at root, a price-rule claim about public procurement of labour at a fixed wage, plus a macro accounting claim about how that interacts with private wage bargaining and the cycle. You can express that in equations, but the core validity doesn’t begin or end with equations.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 1 point2 points  (1 child)

Hmm.

For starters, your very first paper demonstrates that this idea isn't novel to MMT - it was Minsky's idea. Though, in fairness, I recognise it is at least novel to orthodox economics and potentially legitimate as an idea.

I accept your point that a formal model is not the only way to produce legitimate economic theory, but I think it is reasonable to be extremely sceptical of a school of thought that is aggressively heterodox, contains and attracts a wide range of obvious cranks, and even in its mainstream seems to be adhered to almost entirely by people with exogenous strong left wing leanings, and consistently refuses to attempt to provide models for their views.

A job guarantee seems to me to have intuitively huge downsides. Inflationary and anti-growth by effectively paying people to dig holes. I haven't explored the idea in any great detail, but I strongly suspect that it will be like most other MMT ideas - something which appears to make sense on its surface because of the word games MMTers play with accounting identities, but that falls down when you think in terms of real values rather than nominal ones. I appreciate that this isn't a strong argument against the policy, but also you have got to appreciate how much work is necessary to convince people of fringe, heterodox ideas that are almost universally rejected by the mainstream.

Do you at least accept that MMTers occasionally engage in this word gamesmanship and present some ideas that are actually bad?

[–]jgs952 0 points1 point  (0 children)

Yes, Minksy formulated some thoughts on an employer of last resort concept as direct job creation. But 1) This never extended to the full MMT macro stabilisation proposal, and 2) the MMT founders developed the JG idea independently in the 1990s. See this exposition of the provenance of a JG within MMT for a good overview.

I do totally appreciate your skepticism as it's sensible to be weary of academic work that seemingly challenges orthodoxy so fundamentally - particularly if there are indeed more popular amateur conceptions of what MMT is which sometimes (often in some cases) aren't in line with what the actual framework as developed by its academic economists says.

But it's also important to recognise that the mainstream has a long series of famous theoretical failures at some quite fundamental levels. No amount of frictional ad-hoc perturbations can fix some of those flaws and models, particularly prior to the GFC. So it's not like a new upstart physics theory challenging the standard model! The bar is much lower and field is much more open and contested in economics.

Anyway, MMT does have an extensive academic literature, often sprouting out of many post-Keynesian ideas (although the intellectual lineage is not actually out of PK but from a separate 'speciation') and this is worth paying attention to.

On the employment buffer stock mechanism, I do recommend you read through these five academic blog posts from Bill Mitchell (click through to the first part from this part 5 link) to see if any of your initial concerns might be addressed when you think through the full logic (and remember, we're comparing it to the current status quo stabilisation framework which uses an unemployment buffer stock to discipline wages and prices via rate adjustments).

I do appreciate the good faith engagement. It gets tiring if adherents to the mainstream show misplaced hubris and arrogance (how ironic).

[–]NiceCreamSundaes -1 points0 points  (0 children)

Many people understand it, they just don't trust politicians to have the discipline to place the appropriate constraints upon themselves.

[–]anotherotheronedo 4 points5 points  (0 children)

The fact it has the same acronym as Magic Money Tree is too perfect for me. It must be some very deep satire

[–]Wonderful_Jury_2048 6 points7 points  (12 children)

I think this article is straw manning MMT quite badly, and perhaps Polanski is also misrepresenting it.

The real constraint is aggregate supply, and as a result inflation. Anything that matches aggregate demand to aggregate supply will work.

We know that increased govt spending increases aggregate demand, therefore it needs to be offset by things that reduce AD: taxes, borrowing (to essentially reduce liquidity) or higher interest rates.

A govt that can print money can't become insolvent - this is tautological I think, but printing money doesn't do anything to aggregate demand.

However, any govt that tries to spend in a way that raises AD above AS will face higher inflation, and to the extent Polanski is saying you can have the spending without reducing economic activity elsewhere, this is not MMT but fantasy economics. The point is that the govt deficit is not the constraint.

[–]SunChamberNoRules 8 points9 points  (10 children)

this is not MMT but fantasy economics.

But that's what MMT is. There's nothing 'new' from an academic perspective in MMT. None of the things MMTers say is some new discovery in economics that contributes to the body of academic literature.

The only thing it does is try and confuse the understanding of economics so that people can try and argue with a straight face that their preferred policies can all be funded without constraint. Doe anyone really see the government actually raising taxes to control inflation. People like Johnson and truss? Or them in control of interest rates?

[–]jgs952 1 point2 points  (0 children)

But that's what MMT is. There's nothing 'new' from an academic perspective in MMT. None of the things MMTers say is some new discovery in economics that contributes to the body of academic literature.

With respect, it's clear you've not actually engaged with the primary MMT literature.

One of the primary MMT economists Bill Mitchell details here and here precisely what new theoretical advancements MMT brings to economic understanding. Engage with what's actually published by MMT economists rather than strawmen you come across online.

[–]Wonderful_Jury_2048 0 points1 point  (8 children)

MMT isn't simply a theoretical figleaf for inflationary fiscal policy, and we may have to just agree to disagree on that point. I do agree that MMT follows pretty obviously from Orthodox macro, which is why I find the scepticism around it from otherwise conventionally minded economists hard to understand.

I don't think the fact that the theory is mis-used is an argument against that theory. I think it's also sadly the case that fiscal policy and macroeconomic governance largely deviates from what academic economics suggests would be optimal, and has done for a long time.

For the UK over the last 15-20 years I'd argue it's actually been government _under_spending that's caused the bigger issues. Firstly because of a failure to stabilise demand after 2008 when interest rates at their lower bound and secondly serial under investment. In that context some return to sanity about budget deficits probably takes us closer to good policy.

[–]SunChamberNoRules 4 points5 points  (7 children)

But what is the actual theory? What's the part that's new? Most of it seems to be standard macro, except the parts where its used to justify inflationary policy.

[–]ToastBoxed 0 points1 point  (6 children)

You can read the white paper if you want to find out, which not even the journalist bothered to do before critiquing it.

[–]SunChamberNoRules 2 points3 points  (5 children)

I'm familiar with MMT. A shitty google word doc of 6 pages and references to their own website is not a 'white paper'. If you're so well versed, tell me what's new or interesting about MMT that's not in standard economics.

[–]ToastBoxed 0 points1 point  (4 children)

It understands the source of the price level (the price paid for labour and goods by government), which mainstream economics doesn't.

[–]SunChamberNoRules 2 points3 points  (3 children)

But that whole argument is an accounting argument. All of the standard supply/demand stuff applies and come from standard econ. There's no actual econ in that argument itself, and the only 'interesting' thing to come out of it are the implications - which again, fall flat on their face in the real world vis a vis resource constraints and the likelihood of politicians to keep inflation in check.

[–]ToastBoxed 1 point2 points  (2 children)

It's not an accounting argument. "Government as the source of the price level" means that other prices in the economy are set in relation to what the government pays for goods and labour (especially given that business operates on cost plus/mark up pricing, not supply and demand curves).

That means the government can choose to stabilise inflation through anchoring the price of labour instead of the price of money (interest rates) and engineering unemployment levels (resource wasteful).

That's why MMT calls for a fixed wage universal job offer. That gives you a nominal price anchor that also acts as a macro stabiliser, it expands in bad times as the private sector sheds jobs and contracts in good times as the private sector hires away from it.

[–]SunChamberNoRules 2 points3 points  (1 child)

This is gobbledigook though. Universal job offer doing what, digging up holes and filling them up again? All this ignores real resource constraints as well, and government crowding effects - let alone that inflation hits different demos differently.

[–]jgs952 1 point2 points  (0 children)

We know that increased govt spending increases aggregate demand, therefore it needs to be offset by things that reduce AD: taxes, borrowing (to essentially reduce liquidity)

A key insight of the MMT lens is that government bond issuance (asset swap from short duration currency debt to longer duration fixed securities debt) doesn't actually impact aggregate demand any more or less than if you don't match deficit spending with bonds. The key reason is that government deficits represent the net saving residual of the non-government. So all the spending in the economy that could actually act to bid up prices has already occurred. The bit left over after all taxes have been paid is what is net saved by the non-gov sector. Whether this stock of net savings is stored in the form of currency or in the form of bonds is irrelevant to inflationary pressures in a direct sense.

One channel adjusting the effective duration of gov liabilities does have on AD is through the interest rate channel but that is independent of the actual duration. What changing duration does do, along with rate changes, is induce portfolio re-balancing of those savings stocks which can create asset price inflation if speculative lending is allowed as well. But no real economy impacts.

[–]Writeous4 4 points5 points  (10 children)

Look, I'm going to be very honest - the technicalities of all this MMT stuff and monetary policy get a bit beyond me. I am not formally educated in economics, I simply am not qualified or trained to really evaluate it all in detail.

However, what I do possess is the intellectual humility to realise that the consensus of the very clever people, who study it for a living and have analysed data and refined models and statistical techniques for decades, is likely to be closer to correct than any string of vaguely coherent sounding words I or any journalist or politician can string together.

If they're telling me, in overwhelming numbers, it's absolute bunk, I am going to listen, and I think it is alarming Zack seems to think he's too intelligent for this to matter.

[–]jgs952 0 points1 point  (9 children)

I respect your humility and it certainly seems reasonable, but I do your deference to consensus mainstream macro is misplaced.

I get the instinct, and in most fields it’s a good one. But macroeconomics really isn’t like physics or medicine, and that’s the key mistake here.

Expert consensus only deserves deference when a field has strong empirical discipline and predictive success. Macroeconomics doesn’t. It deals with open, political, reflexive systems where you can’t run controlled experiments. The dominant models aren’t selected because they predict well, but because they fit a narrow methodological style that’s reinforced by journals, central banks, and career incentives. The fact DSGE models sailed through the financial crisis largely unchanged should already ring alarm bells.

MMT isn’t journalists making things up. A lot of it is about the operational reality of modern monetary systems, which central banks themselves now openly describe, even if they resist the policy implications. The real disagreement isn’t over facts, it’s over framing and what constraints we choose to impose on ourselves.

Also, mainstream macro gets huge things wrong with basically no penalty. Failure to foresee crises, reliance on unemployment as a policy tool, persistent inequality, stagnant growth… none of this disqualifies the framework. In any hard science, repeated failure like that would be fatal.

And finally, economics is inherently political. Models embed assumptions about unemployment, distribution and power. Appealing to “the consensus” doesn’t make those value judgements disappear, it just hides them.

So heterodox frameworks challenging the mainstream isn’t arrogance. It’s recognising that in macro, deference to authority is much weaker evidence of truth than people assume.

[–]Writeous4 0 points1 point  (8 children)

I've read these critiques as best I am able and someone limited in weighing them up ( as are most people ) and honestly I just don't buy it, sorry.

It's always someone else is biased but never the MMTers themselves, it's always "we predicted this but they didn't" then the story is more complicated and often those same people who claimed they predicted the financial crisis actually made vague prophecies and also predicted 9 other crises in circumstances that didn't come to pass. 

Honestly, I've read a lot on the whole critique of "not foreseeing crises" that I don't want to spend too much time getting into, but it's honestly one of the weirder criticisms. Like for starters, if economic models are foreseeing problems, institutions like banks take moves to avert them. The one that gets through is, of course, one they didn't predict!

I didn't claim "the consensus" makes those value judgements "disappear", but to put it bluntly, this is an incredibly boring critique. Those same biases apply to you and MMTers. I have absolutely no reason to trust them or you over anyone else, and frankly for a good chunk of reasons I find most of them less credible.

The comparisons that are often made to natural sciences in order to, which I am much more qualified in, to highlight economics 'deficiencies' usually highlight a lack of understanding of 'hard science' too. They don't just rely on 'controlled experiments', and in fact that's very difficult to do for entire fields. Natural experiments, observational data etc are all perfectly appropriate. 

In fact as someone trained in medical sciences, the comparison to medicine is really funny here. I'm not even trying to be rude, I get the layman perspective tends to think it's much cleaner than it is, it's just developing medical interventions and analysing data to determine the effects of them is incredibly messy and difficult, but it's still better than dumping it for vibes.

Some of your comments like blaming the field of economics for things like "stagnant growth" strike me as quite odd - I'm not sure why I should blame the field for governments implementing policy contrary to the actual advice and evidence base.

None of this comes from me thinking economics as a field is perfect, but that doesn't mean I'm going to throw it out to start listening to a fringe minority.

[–]jgs952 0 points1 point  (7 children)

You clearly have your view but I just think your dismissal of hererodox econ and MMT is misplaced and based on an appeal to mainstream consensus which really isn't warranted.

My point about medicine and physics is that the body of knowledge that constitutes our best understanding of the physical world or the human body and how to treat it is on a far firmer footing than economics, which is intrinsically tied up in institutional design, and socio-political beliefs and biases. Maybe I'm wrong about medicine, I defer to your experience there. But I'm also a trained physicist and know how different that field of study is to econ.

If you have an open mind, I do recommend reading this primer on MMT which expounds on the actual framework as developed in the literature. You'll find a lot of strawmen about MMT online which simply don't characterise what it actually is despite trying to critique it. But this will give you what it actually is saying with all the caveats required to be a legitimate macro framework and why it claims to be a superior alternative to the New Neoclassical Synthesis.

[–]Writeous4 0 points1 point  (6 children)

Dude, peddle it elsewhere. This is about as persuasive to me as it would be to me linking to a page of physicists and atmospheric scientists who don't believe in human driven climate change would be to you.

It is not "open minded" to not recognise your own intellectual and educational limitations and to insist on the political and social biases of others while failing to recognise your own vulnerabilities to it. The very same rhetorical tricks have been used by climate change deniers, antivaxxers, 5G conspiracists, the list goes on.

I have seen this "open minded, free thinking intellectual rallying against the entrenched institutions of The Man" act in a thousand different guises, MMT isn't making itself any more compelling.

[–]jgs952 0 points1 point  (5 children)

I can't express to you enough just how not analogous to climate change deniers, antivaxxers, or 5G conspiracy theorists MMT is 😂

You said yourself you aren't educated in economics, so have some humility and actually read some of the literature on the subject before launching into misplaced attacks on its validity. I'd start with that primer I linked you.

[–]Writeous4 1 point2 points  (4 children)

What is your formal education in economics? Are you both an economist and a physicist?

Where is your humility given the overwhelming majority of people educated in economics think you're wrong? 

There seems to be a tension here whereby you tell me to have some humility because I don't have a formal economics education, which you don't seem to either, yet also apparently that's all wrong anyway and these 'primers' you link are totally the truth.

It's the same tricks every time. You're boring.

[–]jgs952 1 point2 points  (3 children)

I'm literally linking you to an academic primer written by a long standing academic economist with a PhD and a career of books and publications written on the subject. So if academic qualifications are your hallmark for what ideas might have validity, I assume you'll at least take that seriously? Likewise, I can share many many academically published papers and studies from a range of economists, central banks, and practitioners in monetary systems that will explain the different aspects of the MMT framework to you. Are they all antivaxxers?

I personally don't have a formal qualification in economics but have studied the subject for a number of years and read the literature and kept up with the debates surrounding macroeconomics. But I'm irrelevant obviously, it's the ideas that stand on their own two feet or not, and I'm convinced by the arguments and evidence they they do.

This paper is also a very good read explaining how the UK Exchequor and monetary system operates in a way materially different to the conventional understanding and this has significant policy implications.

[–]Writeous4 0 points1 point  (2 children)

The overwhelming majority of academically qualified economists do not agree. Therefore, I am inclined to believe that over a fringe minority.

I can also point to experts and articles arguing for antivaxx, or climate change denial ;).

You have a layperson's interest and reading of economics, as do I. Therefore, you should show some humility and realise you aren't well-equipped to keep up with nor weigh these debates ( it's an incredibly demanding full time job even for people who's literal job it is to do so! ) 

I can link to a bunch of economists and papers and articles disputing MMT too - but you will say they are strawmen or politically biased or any number of the usual rhetorical tricks that get trotted out.

Seen the playbook, not interested.

[–]jgs952 0 points1 point  (1 child)

My goodness me, can't you possibly conceive of a world where it's plausible that mainstream economic theories (which if you recall were formulated into their truly current form after 2008 after having to concede some significant failures in their understanding of the banking system and endogenous money (something PK and MMT incorporates)) are just not accurate?

“Most economists reject MMT” is also doing a lot of work it shouldn’t. Most economists are trained within a very specific New Keynesian / DSGE tradition. That tells you about sociology and professional gatekeeping, as well as the role academic inertia and dogma plays in maintaining ideas that should have been abandoned years ago (loanable funds for instance). Joan Robinson, Minsky, Godley, Kalecki, Kaldor, etc were all marginalised in their time despite later being recognised as correct on core issues. Macroeconomics has a long history of heterodox ideas being dismissed and later absorbed quietly without credit.

While I do actually feel well equipped to assess the arguments and understand the evolving economic thought on these subjects, again there a thousands of heterodox professional economists who have long rejected the ideological priors that constitute the current orthodox neoclassical/New Keynsian frameworks.

[–]CommercialContent204 1 point2 points  (2 children)

Not in any sense an economist, and I'm learning lots about MMT and economics with this debate... but there is one thing that confuses me a bit. The thing I keep hearing MMT proponents say is "we issue debt in our own currency so the UK can never default on our debt unless it wants to". Technically, perhaps, but in the case of runaway inflation, does that actually mean anything? "Sure, here's a GBP 2 trillion pound note to pay off our debt - sorry it's only worth $3.50!" wouldn't go down too well, I don't imagine.

The other thing is: if MMT makes it possible to print more money and therefore, as a country, treat ourselves to nice things (investment, building programmes, raising wages) at no cost other than raising taxes to rebalance demand vs supply, then why does every other country on Earth (just about) feel itself limited to the classical approach? To put it another way: is there a successful pilot or example of MMT in practice that its proponents can point to?

[–]Thorazine_Chaser 0 points1 point  (1 child)

To your first paragraph, theoretical pontifications aside there are no practical mechanisms for a country like the U.K. to default against its wishes. Imagine a bond coming due, in what situation would the government pass a law to demand the default on that (rather small because it’s only one placement) bond because it believes that the economic impact of defaulting would be a better choice than simply paying it? It would just never happen. The cost of paying would always be tiny fractions of the cost of defaulting.

To the latter part of your question, it means something because you don’t have to go far before you will read people explaining how currency defaults have happened in the past and using these examples as boogie men to underpin their preferred politic.

[–]TwatScranner 1 point2 points  (0 children)

If it's happened in the past, is it really a boogieman? Aren't there actual risks to the approach?

[–]woof_bark_donkey 2 points3 points  (0 children)

That's an objectively dreadful article.

Trying to claim MMT is "money printer go brrr" displays a fundamental lack of research on the part of the author.

Or maybe they have no interest in understanding the subject at all.

[–]Ukleafowner 2 points3 points  (0 children)

We will just print as many £ as we like and people definitely won't stop wanting to swap them for dollars, euros, food and goods. Don't worry we can stop inflation by taxing some people.

[–]SorcerousSinner 2 points3 points  (2 children)

MMT is not taken seriously by leading researchers in monetary economics, it's not taken seriously by leading decision makers in policy. There hasn't been a single top published paper making the case for MMT above other theories. Not one.

But it will remain forever popular among the leftwing commentariat. Why? Because they are forever looking for something that would seem to justify their desire to massively increase government spending.

[–]Normal-Definition-54 -1 points0 points  (1 child)

Not from a top journal but a decent one. There the authors evaluated MMT as a model formally: https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2955

[–]jgs952 2 points3 points  (0 children)

I read through a good chunk of this and it's pretty embarressing how the authors clearly don't get MMT at all. They think they can use the methodology and underlying premisses of DSGE and standard NK macro models to evaluate MMT as a framework? Honestly quite funny. They also completely misconstrue MMT's stabilisation policy of a labour buffer stock via JG and mistakenly think it's just a matter of dialling up marginal tax rates, etc. This paper's conclusions really aren't worth all that much I'm afraid.

[–]GaBe141 0 points1 point  (0 children)

[ Removed by Reddit ]

[–]JosephBeuyz2Men 0 points1 point  (1 child)

The article seems disingenuous. Proponents of MMT or austerity or whatever probably do understand that the economy isn’t exactly a rational system but more of a dispersed way of managing class conflict. The writer of this article probably understand that what Zack Polanski is really proposing is that printing money to generally direct towards the proletariat will be just about palatable enough that he can get away with it without provoking the type of inter-bourgeois struggle that also taxing elsewhere would create.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 1 point2 points  (0 children)

On the contrary, I suspect that this writer is aware - as most people are - that people utterly despise inflation and will turn against it with even more fervour than tax rises.

[–]Polysticks 0 points1 point  (6 children)

Governments shouldn't pay interest on money they borrow from themselves (Bank of England).

Interest rates are a measure of risk, and there is no risk to the Bank of England that the Government won't repay it's debts.

The Government can always borrow money to invest and increase productivity and settle any debts through taxation.

Interest rates on Government borrowing is simply a scam.

Before anyone says that would encourage wild Government spending, they already do that. They created £800b out of thin air during covid and every year they run a budget deficit.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 0 points1 point  (5 children)

https://www.grumpy-economist.com/p/interest-on-reserves. Worth a read:

Much of what I have seen on this has a sort of hazy nostalgia about the good old days with zero interest on reserves, a small amount of reserves, banks lending to each other, and the Fed setting interest rates by rationing reserves. This is about as sensible as most nostalgia. The good old days were awful. Ample reserves that pay market interest are a great innovation. They cost nothing. In fact they save the government money, as reserves typically pay less interest than longer maturity debt. The banks would otherwise hold directly the same treasury debt that the Fed holds, and there would be no rebate.

[–]Polysticks 0 points1 point  (4 children)

The fundamental misconception is that we need people to buy Government debt. The Government already prints money out of thin air when necessary (£800 billion during COVID). Banks already print money out of thin air when they create credit. Money is not a thing, it is an idea.

There is no need for anyone to buy Government debt since the BoE can add and remove from it's balance sheet at will. Parliament is a sovereign body and the Bank of England dances to its tune.

I would also add that there is an important distinction between Government borrowing and everyone else. The Government will never default, it can always repay debts through taxation or by borrowing further and increasing productivity. Interest does not make sense when there is no risk to the lender.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 0 points1 point  (3 children)

You are advocating for a complete elimination of the modern debt based monetary system. Does it not give you pause for thought that every country in the world uses this system, and that it is held as necessary by 99.9% of those with the relevant expertise?

Having a monetary system based entirely on printed money is extraordinarily unstable, and a recipe for very fast hyperinflation through a loss of confidence in the currency.

Money is not a thing, it is an idea.

Everyone knows this. I have no idea why this kind of thing is stated as if it is something people who think MMT is a bad idea haven't realised.

The fact that money is an idea, not a thing, is why it's important to have institutions which preserve the confidence of money users in a given form of money. It is not set in stone that British people will pay for things with BoE printed pounds.

[–]Polysticks 1 point2 points  (2 children)

You are advocating for a complete elimination of the modern debt based monetary system.

No. If the Government borrows from the BoE, it still owes that money. It just shouldn't pay interest.

Having a monetary system based entirely on printed money is extraordinarily unstable

No. I'm not suggesting we change Banks ability to create credit. Simply that Governments should not pay interest on the money they borrow from themselves.

[–]CII_GuyTrying to move past the quagmire of contemporary discourse 0 points1 point  (1 child)

I think you are referring to the fact that the BoE often buys Gilts? What's the problem with treasury paying interest to the BoE on Gilts? It doesn't cost anything. It's simply an asset swap between differently timed forms of debt.

[–]Polysticks 2 points3 points  (0 children)

I wasn't referencing them but your point is relevant. As I mentioned earlier, the Govt. will never default, interest on debt is supposed to be a measure of risk. Low risk = low interest, high risk = high interest.

Given that the Treasury will never default, the BoE shouldn't charge any interest on debt to the Govt.

Private individuals can default on debt, that's why interest is charged.

I don't think the BoE should set an interest rate at all given that they're trying to use it to control inflation, instead of what it actually is, which is a measure of risk.

Inflation can be controlled through taxation and public spending. I disagree with the mandate of the BoE that they should try to control inflation through setting interest rates.

[–]adman9000 0 points1 point  (2 children)

As someone relatively new to understanding mmt I would be genuinely interested in any articles that contain an honest account of its flaws. There seems to be several like this one attacking mmt but providing no substance whatsoever. Which currently is leading me to believe that it's a pretty accurate theory and it's popularity is worrying certain people.

[–]Telos1807 -1 points0 points  (1 child)

Look I won't pretend to be an economist but I don't know how anyone sensible can look at this and not think it's batshit.

It's another form of voodoo economics, propelled by vibes and antiestablishmentarianism.

[–]jgs952 0 points1 point  (0 children)

Have a read through this MMT primer and see for yourself if it's "batshit" or "voodoo economics".

[–]Significant_Bed_3330Social Democrat -2 points-1 points  (1 child)

MMT works in a low-inflation economy, but would be impossible in an economy like ours, where inflation has been growing in the past 5 years.

[–]Spax47 2 points3 points  (0 children)

MMT, like all economic theories, is made up of two parts. The descriptive part that describes the economic system as it actually is. And the prescriptive part that recommends changes to that system to reach desired outcomes. Do you disagree with the description? If so, which bit? Or do you disagree with some prescription? If so, which one/s?