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I'd like to offer a Twitter book review of the Deficit Myth, which advances the ideas of Modern Monetary Theory or MMT. Overall, I was not impressed on a couple of different levels. 1/
The book presents MMT as the result of a novel discovery that government budgets and deficits are actually a social construction born of the economics discipline, rather than an immutable law. 2/
The core argument is that fiscal deficits are not at all akin to pocketbook debt because the government can play by different rules than households. This is because government debt is part of its relationship with the money supply as the currency issuer. 3/
This is all true, but... hardly a new discovery, it's Econ 101. And I am not just being surly, it's literally covered in the standard first-year economics textbooks. 4/ https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-long-run-consequences-of-stabilization-policies/money-growth-and-inflation/a/money-growth-and-inflation
The book then proposes that government debt doesn’t matter because governments control the supply of money and therefore, in theory, they can simply do away with all their debt with a pen stroke.
This is a huge oversimplification, but it's fundamentally true (kinda). 5/
This is a huge oversimplification, but it's fundamentally true (kinda). 5/
It's like the game Monopoly when the player administering the bank takes money from the bank’s stash when they need it.
That player can never go bankrupt because they control the supply of money. If they run out, they can just take more from the bank. 6/
That player can never go bankrupt because they control the supply of money. If they run out, they can just take more from the bank. 6/
As it is in monopoly, the government controls the money supply and cannot go bankrupt (sort of- *it's complicated ok??*) because it can make more money as it needs it. Yet are some pretty obvious problems with the long-term sustainability of this setup. Like fairness. 7/
If one player helps themselves to unlimited money, there is not a level playing field. You can get away with a bit of this if you are still otherwise sticking to the rules of the game, but if you treat the money supply as your own money, eventually others won’t want to play. 8/
Or in other words, the government can only expropriate so much (through inflation or otherwise) before killing the golden goose of productivity and innovation. 9/
https://en.wikipedia.org/wiki/Why_Nations_Fail
https://en.wikipedia.org/wiki/Why_Nations_Fail
More troubling still is that the book (and probably MMT generally) politicizes a slew of technocratic economic decisions.
To name a big one, it suggests that central banks need to adopt policies which support wealth redistribution. 10/
To name a big one, it suggests that central banks need to adopt policies which support wealth redistribution. 10/
Insisting that central banks adopt partisan policies is KIND OF A BIG DEAL. There is a thing called central bank independence which establishes an impenetrable firewall between central banks and partisan decisions. 11/
Suggesting that the central bank needs to help elected officials deploy wealth redistribution policies crosses a rubicon in economic governance.
It is tantamount to saying the Prime Minister should also head the Supreme Court. 12/
It is tantamount to saying the Prime Minister should also head the Supreme Court. 12/
The book then points out that 35% of Americans have no savings, 70% don’t have enough to retire and -with a wink- proposes a universal government retirement program that will be funded through inflation. Er.. I mean through MMT. 13/
This is electoral math that boils down to a proposal that 70% of Americans could use inflation to expropriate the savings of the remaining 30% of Americans.
I am no fan of this “us versus them” approach and find this dangerous. 14/
I am no fan of this “us versus them” approach and find this dangerous. 14/
My preferences aside, eschewing the public good in favour of majoritarianism puts MMT into the realm of populism. MMT is not the populism of the American right we’ve become accustomed to, but it is populism nonetheless.
This realization helped me to understand the book. 15/
This realization helped me to understand the book. 15/
Though it's couched in some economic jargon and has some economic truths in it, it is nonetheless fundamentally a pamphlet of anti-establishment political ideologies much more than it is an earnest attempt at education. 16/
(In a lot of ways MMT reminds me of Social Credit, an offbeat economic theory made by outsiders that turned into a grassroots political movement.
Social credit has come and gone, but was at a time an important political force, especially in Canada.)
https://en.wikipedia.org/wiki/Social_credit#Canada
Social credit has come and gone, but was at a time an important political force, especially in Canada.)
https://en.wikipedia.org/wiki/Social_credit#Canada
Now even if a radical redistribution of wealth fits with your vision of the world, and you don’t see the importance of central bank independence, it's still not obvious that MMT's policies would get you where you want to go. 17/
While inflationary policies do have some redistributive tendencies by hurting creditors and helping debtors, in 2020 its unlikely that the amount you borrow or lend aligns well with social class and that inflation would take from the rich and give to the poor. 18/
Yes, wealthy investors are creditors, but so are poor retirees.
Yes, the poor are debtors (maxed out credit cards), but so are professional landlords (multiple mortgages).
High inflation is not a finely attuned instrument of redistribution, it's a sledgehammer. 19/
Yes, the poor are debtors (maxed out credit cards), but so are professional landlords (multiple mortgages).
High inflation is not a finely attuned instrument of redistribution, it's a sledgehammer. 19/
Then there is the crucial difference of distinguishing “money” from “value”. The book does a terrible job with this and regularly conflates the two, leading it to freakish conclusions about how the money supply works 20/
Money represents value, but is not value, it is fiat.
If you double the amount of money in an economy, you have not doubled the value of the economy, you’ve halved the value of the money.
While the money supply is flexible, the value of economic activity is not. 21/
If you double the amount of money in an economy, you have not doubled the value of the economy, you’ve halved the value of the money.
While the money supply is flexible, the value of economic activity is not. 21/
If the economy grows by 3% and the money supply grows by 106%, then $1 of currency now has $.50 in value.
If an economy grows by 3% per year, the money supply grows by 3% too, then $1 in currency has a constant value from one year to the next. 22/
If an economy grows by 3% per year, the money supply grows by 3% too, then $1 in currency has a constant value from one year to the next. 22/
It's a huge oversimplification, but this approach to the value of money is part of an economic ideology called “monetarism” which embraces principles of low inflation, balanced budgets and steady money supply.
23/
23/
At a high level, monetarism is a series of practices and values about monetary policy which insist the government not use its special privileges for tinkering with the money supply to fiscal advantage; that it plays monopoly without helping itself to the money from the bank. 24/
Monetarism has been elevated to the level of gospel in economics, to the point where alternatives have become almost sacrilegious. MMTers resent this, but overextend a valid objection by saying that “mainstream economics doesn’t understand inflationary options exist” /25
Mainstream economics definitely understands how to manipulate the damn money supply. MMT did not invent the idea. There is a worrying amount of group-think in economics and that should be addressed, but not nearly the degree of incompetence that MMT suggests. /26
While outside of the mainstream, there are sane and even handed arguments for moderately increasing inflation to spur growth, reduce the hoarding of capital and increase the government's ability to spend. But that's not quite where MMT is at either. /27
Ditching monetarism so that we can start vigorously playing with the money supply will open a pandora's box. The Deficit Myth irresponsibly downplays and trivializes the wider economic significance that would come with a paradigm shift away from monetary discipline. /28
And while a paradigmatic shift in economic theory may well be overdue, it will require a huge amount of work and many deft hands to develop a new political-economic order, something it's not immediately obvious that the MMT-ers have the ability to do. /29
MMT is often criticized for being amateurish. After diving into the Deficit Myth and the works of other MMT folks over the past few months, I tend to agree.
While MMT-ers uncover a lot of arcane truths, the most remarkable thing about MMT is its startling lack of rigor. /30
While MMT-ers uncover a lot of arcane truths, the most remarkable thing about MMT is its startling lack of rigor. /30
For instance, the book misrepresents “crowding-out” as being “just a theory” instead of a core principle of economics since… ever.
This is a frankly gargantuan claim that the book only supports with a quick assertion and a flick of the wrist. 31/ https://www.investopedia.com/terms/c/crowdingouteffect.asp
This is a frankly gargantuan claim that the book only supports with a quick assertion and a flick of the wrist. 31/ https://www.investopedia.com/terms/c/crowdingouteffect.asp
Later the book proposes a guaranteed government job for anyone facing unemployment, citing this as a novel approach to economic stabilization.
This is not novel; automatic stabilizers were popularized in the 1930s and have been used ever since. 32/
This is not novel; automatic stabilizers were popularized in the 1930s and have been used ever since. 32/
The idea of a guaranteed government job is older still, with workfare and poor houses having been around for hundreds of years while generally being frowned upon today on both humanitarian and policy effectiveness grounds.
https://en.wikipedia.org/wiki/Poorhouse /33
https://en.wikipedia.org/wiki/Poorhouse /33
(Fun fact, in present-day Atlantic Canada and some parts of Ontario, the slang word for “employment insurance” is “pogey” which is actually the original British/Scottish slang for “poor house”.)
https://en.wiktionary.org/wiki/pogey
https://en.wiktionary.org/wiki/pogey
These work programs are widely accepted among economists and historians as being substantially less effective than plain old unemployment benefits (and those already exist) which are much less ripe for abuse and ineffective administration than a jobs program. 34/
While I find sympathy with the idea that the current economic paradigm may need to be retired, these are dangerous times that need solid economic leadership. The most charitable thing you can say about MMT people is that their ideas are fundamentally untested. /35
To be somewhat less charitable, MMTers are totally unqualified to manage an economy, nevermind to completely rewrite its rules. Even the best among them have no hands-on experience and MMTers are seldom (if ever) found in functionary positions. /36
Not to be too credentialist about it, but it also strikes me as uncoincidental that all the MMT economists are odd ducks that come from 3rd tier academic institutions. They have generally very low standing in their field and are viewed as sort of economic witch-doctors. /37
But don’t take my word for it, here is a short clip of legendary economist Paul Krugman talking about MMT.
Or former US treasury secretary Larry Summers 38/
Or former US treasury secretary Larry Summers 38/
My overall appraisal is that its worth reading just to see what the Bernie Sanders people are up to. Kelton is a Bernie staffer and this is really a pamphlet of their economic platform. Seeing their outlook on the world was interesting, and not quite what I expected. 39/
As an economics book however, the Deficit Myth is filled with irresponsible and ideologically motivated half-truths, a left-leaning equivalent to “Death by China”
https://en.wikipedia.org/wiki/Death_by_China which I doubt that many, if any, serious economists have on their night stand. fin/
https://en.wikipedia.org/wiki/Death_by_China which I doubt that many, if any, serious economists have on their night stand. fin/
