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1: A THREAD on Modern Monetary Theory (MMT) and my new @NationalAffairs article which attempts to outline many of the major empirical flaws of MMT. https://nationalaffairs.com/publications/detail/the-weakness-of-modern-monetary-theory
2: After reading the main MMT texts from Stephanie Kelton's "The Deficit Myth" to "Macroeconomics" by Bill Mitchell, L. Randall Wray, and Martin Watts and "Modern Monetary Theory" by L. Randall Wray, this is my attempt at an objective assessment.
3: Loosely summarizing: MMT argues that there's no upper bound on government borrowing in local currency, that central banks can engage in monetary financing of such deficits without inflation and that only government "overspending" can cause inflation as MMT's only limitation.
4: While a world reserve currency, avoidance of original sin (Eichengreen, Panizza and Hausmann (2003)), and moneyness of short-term debt (Greenwood, Hanson and Stein (2015)) can all contribute to a greater debt capacity, it does not imply there is no borrowing breaking point.
5: I've personally written academic papers in this government debt literature including how U.S. Treasury Floating Rate Notes (FRNs) exhibit "moneyness" and how a small fraction of FRN issuance can lower debt costs (see Hartley and Jermann (2020 @nberpubs) https://www.nber.org/papers/w27065
6: MMT statements about monetary financing of deficits not being inflationary are nonsense; the Mitchell, Wray and Watts text says "[n]o simple proportionate relationship exists between rises in the money supply and rises in the general price level"-historical data says otherwise
![6: MMT statements about monetary financing of deficits not being inflationary are nonsense; the Mitchell, Wray and Watts text says "[n]o simple proportionate relationship exists between rises in the money supply and rises in the general price level"-historical data says otherwise](https://pbs.twimg.com/media/EijGQUeXcAA9RpC.png "6: MMT statements about monetary financing of deficits not being inflationary are nonsense; the Mitchell, Wray and Watts text says \"[n]o simple proportionate relationship exists between rises in the money supply and rises in the general price level\"-historical data says otherwise")
7: While government spending and debt share similar properties to money and can play a role in determining the price level (see IS-LM or FTPL), the idea that inflation only occurs when government "overspending" happens is also flawed reasoning.
8: Kelton says "MMT recommends a federal job guarantee, which creates a nondiscretionary automatic stabilizer that promotes both full employment and price stability"; inflation well above 2% would almost certainly occur before achieving 0% unemployment through a jobs guarantee.
9: MMT statements on mechanics of government spending being automatically financed by money creation (Treasury drawing on its Fed acct) forget that there are offsetting measures (previously: OMOs selling bonds, today: more interest paying bank reserves) that make this irrelevant
10: We are not in an "MMT moment" especially given that we can't even fully agree on what MMT is (no models); it's not a consistent "theory" or one supported by rigorous empirical evidence. Instead, MMT advocates dismiss any empirical criticism as a mischaracterization of MMT.
11: Arguing that there is plenty fiscal space on the margin does not make one an "MMT" supporter or validate one of MMT's central claims. Many mainstream economists from Krugman to Summers have been arguing for expanded deficit spending for some time. It's not an "MMT idea".
12: @LHSummers, @PaulKrugman, @ojblanchard1 and many others deserve praise for publicly making many of the same points made in the above thread and in the @NationalAffairs piece. We need more voices like theirs to speak out on the major flaws of MMT.
