Warren Mosler, one of the founders of modern monetary theory (MMT) has a white paper (link) which acts as a summary of MMT. It is brief (1300 words) and meets the objective of providing an overview of the question “What is MMT?” for more advanced readers. The brief nature of the document means that everything is not covered, so I would like to emphasize that it does not represent all MMT.
In this article, I will summarize the content of the white paper, discuss what I consider to be the main legitimate criticisms of MMT that arise, and note some of my reservations about the document. I will close with comments for readers looking for an academic discussion. I expect to cover some topics in follow-up articles, such as a longer discussion of the reviews, as well as the implications of the discussion of price level theory.
Another point to note about the white paper is that it is extremely concise. There can be a lot of information hidden under the use of taglines. Since I know the arguments, I can easily follow the logic, but others could be triggered. All I can really do is add general information.
Summary
I will quote Warren Mosler’s white paper extensively, but I assume the reader has read the white paper himself.
Mosler answers the question “What is MMT?” as following.
MMT has largely started a description of monetary transactions, which are best viewed as debits and credits to accounts held by banks, businesses and individuals.
Warren Mosler is behind what was popularized as MMT in 1992. And while further research revealed writings by authors who had similar ideas on some of the understandings and ideas of MMT, including Abba Lerner, George Knapp, Mitchell Innes, Adam Smith and former NY Fed chief Beardsley Ruml, MMT is unique in his analysis of monetary economies, and therefore best viewed as his own school of thought.
To give more information, Warren Mosler is a fixed income investor who has successfully developed ideas around MMT independently of the other founders, William Mitchell and Randall Wray, who were academics, within the broad post school of thought -keynesian. The white paper follows Mosler’s thinking and is less dependent on post-Keynesian theory. The white paper manages to be brief by reducing the emphasis on post-Keynesian analysis – but this underestimates the scope of the broader MMT academic project.
According to the white paper, the main difference between MMT and other schools of thought is based on the following observations. This is what I will call the “operational core” of MMT.
MMT alone recognizes that the United States government and its agents are the sole supplier of what it requires for tax payments
In other words, the currency itself is a simple public monopoly.
The US government collects taxes payable in US dollars.
The US dollars to pay these taxes or buy US Treasury securities can only come from
the United States government and its agents.
The economy must sell goods, services or assets to the United States government (or borrow from the United States government), otherwise it will not be able to pay taxes or buy US treasury securities.
(The reader may note the use of “US government” in the foregoing. I will return to this point later.)
Most online discussions about MMT revolve around the operational core of MMT and its implications. However, this masks what is probably more important from a theoretical point of view: the discussion of the job guarantee and the determination of the price level.
Only MMT recognizes the source of the price level. The currency itself is a public monopoly. Monopolies are necessarily “price setters”.
Therefore: The price level is necessarily a function of the prices paid by government agents when it spends or the guarantees demanded when it lends. [emphasis in original]
In a market economy, the government need only fix one price, leaving market forces to permanently determine all other prices as expressions of relative value, influenced by the institutional structure.
If you want to discuss “what’s new in MMT?”, This is where you really have to start. However, criticisms of the MMT generally remain focused on the operational aspects.
(Update: I added a small technical appendix that deals with an observation that is easily missed. If we look at neoclassical models, the fiscal arm of government is assumed to be a price taker, and this assumption is echoed in almost all analyzes. This is a hypothesis which must be questioned.)
“Where does MMT apply?”
The white paper makes specific reference to “the United States”, which is unfortunate. A standard criticism of MMT is that it only applies to the United States, allegedly because the US dollar is “the reserve currency”. Most MMT supporters (like me) reject this argument. Instead, MMTs would normally indicate that countries with some form of currency parity – which includes euro area countries – are limited and do not have the freedom of fiscal policy. The preferred formulation is to use “currency sovereigns”.
At a minimum, most people recognize that many developed countries (outside the eurozone) are in a similar boat to the United States; too many people have lost too much money by betting on a default by the Japanese government. To what extent there is a debate, it is for developing countries. Having no expertise in development economics, I prefer to avoid this debate.
Monetary transactions: implications and debate
The key implication of the analysis of monetary operations is that monetary sovereigns cannot be forced to default unintentionally for financial reasons. Instead, the constraint on fiscal policy is the inflationary consequences – which will include the cost of imported goods.
The white paper lists the implications of transaction analysis as follows.
1. The US government and its agents, from the start, spend (or lend) first, only then can taxes be paid or US treasury securities purchased.
This is in direct contrast to the rhetoric that the US government must tax to get US dollars to spend, and what it does not tax, it has to borrow from Chinese tastes and leave the debt to our grandchildren.
MMT therefore recognizes that it is not the US government that must get dollars to spend, but instead, the driving force is that taxpayers need US government dollars to be able to pay taxes and buy securities from the US Treasury.
2. The crowding out of private spending or borrowing, rising interest rates, federal funding requirements and solvency issues do not apply to a government that spends first, then borrows.
Another way of summarizing the implications of transaction analysis is that the debt-to-GDP ratio is a meaningless statistic. (I believe I heard this statement for the first time in a verbal comment from Warren Mosler.) If we look at “conventional” analyzes of fiscal policy (at least historically), we see the opposite – there is a considerable alarm as to the level of the debt-to-GDP ratio, and the objective of fiscal policy is to direct this ratio. UPDATE: This article provides a more in-depth discussion on using the debt-to-GDP ratio to clarify debates on MMT.
Debates on the implications of operations: yawn
If and when I write my introduction to MMT, I expect to include reprints of articles where I will discuss MMT debates online. Most articles will deal with disputes concerning monetary operations and their implications.
However, I would say that most of the debates end up being useless semantic battles. Critics ultimately recognize that the only real limitation on fiscal policy is the fall in the value of the national currency unit – either relative to national goods and services (“inflation”) or an increase in the prices of goods and imported services (“import inflation”). This is exactly what MMT says is the constraint – not some arbitrary level of the debt-to-GDP ratio.
I write popularizations for the economy. My job is to explain in plain language what these debates are. If we put the arguments of both parties in simple English and they say the same bloody thing, I become rather fussy. Therefore, I will not pursue this argument further here.
Novelty debates?
Another common criticism of MMT is that there is nothing new there. If we look at the operational core of MMT, it overlaps with functional finance (link to the manual), strongly associated with Abba Lerner.
It can be noted that the CMMs themselves cite Lerner and Functional Finance (as in the introduction to the white paper cited above). (This contrasts with neoclassical authors, who largely eliminated functional finance from citations.) So we would need to look at the actual articles written by MMTers to see where they claim the novelty. One of the distinguishing features of critics of MMT is a general reluctance to cite newspaper articles written by MMTers, so there is no real content in this debate to discuss.
(As a former academic, the discussion of academic novelty is a topic I would prefer to avoid, as my opinions would not be welcome if not offensive to the vast majority of faculty.)
Role of interest rates
From the point of view of a fixed income practitioner, the most eye-catching part of Mosler’s work is the discussion of interest rates.
Mosler in the white paper:
MMT recognizes that a positive policy rate translates into an interest payment that can be understood as “basic income for those who already have money”.
MMT recognizes that since government is a net payer of interest, higher interest rates can confer an expansionary, inflationary (and regressive) bias through two types of channels: interest income channels and futures price channels. This means that so-called “tightening the Fed” by raising rates can increase total spending and encourage price increases, unlike the announced effects of reduced demand and lower inflation. Likewise, lower rates suppress interest income from the economy, which contributes to reducing demand and lowering inflation, which is still contrary to the expected effects.
MMT understands that a permanent key rate of 0% is the basic case for the analysis of a floating exchange rate policy.
The role of interest rates in driving the economy is a subject that should be much more interesting. Why has the economy not accelerated, when there has been a multi-year period of negative real interest rates? Those of us with long memories are well aware of the argument that sustained negative real rates were the cause of inflation in the 1970s.
The price level
A popular argument among some trolls on the Internet is that there is no MMT inflation theory. The passage quoted above shows that this is incorrect. The problem is that it is not entirely clear that all MMTs agree on what all the details of the theory should be.
I will repeat Mosler’s statement:
In a market economy, the government need only fix one price, leaving market forces to permanently determine all other prices as expressions of relative value, influenced by the institutional structure.
There are actually many things hidden in this statement, but it puts Mosler’s thought a little closer to neoclassical theory than post-Keynesians. However, the theoretical divide is obscured by the fact that the role of the Job Guarantee is the same: it serves as an anchor at the price level.
I will return to this subject in a later article. But I will summarize what I consider to be the key point. Mosler’s complaint (to which I arrived independently) was that all the prices that matter in neoclassical models are relative prices: unit wages / price of a unit of goods, price of the unit of goods / price of a unit of currency, etc. There is nothing to determine the price level; we can scale all spot prices by a scalar factor, and all that happens is the endowment of the initial changes in financial wealth in real terms.
Neoclassicals largely dodge this question by changing the subject. One cannot find the complete solutions worked out to the models, there is rather a jump to the discussion of the derivatives of an unknown solution. Only the tax theory of the price level captures this nettle.
It can be noted that Mosler’s point of view and the price level fiscal theory suggest a similar solution: the spot price level is based on fiscal policy. The difference is that the price level budget theory is based on rather silly assumptions: the price level is now determined by the constraints of buying commodities on the futures markets – including the 20 billion years to come. Conversely, Mosler’s argument is that the price level can be set by spot market transactions – and the best way to do this is to set a floor price for labor wages.
Unfortunately, this is a somewhat theoretical discussion. What happens in the absence of a job guarantee (which is pretty much the case everywhere)? This concern explains why the summary of the white paper is too concise for the needs of many readers.
Final remarks
Many people who might be interested in MMT are subject to severe reading time constraints and need concise, high-level summaries. Warren Mosler’s white paper fits this description. That said, there is a discussion missing on the post-Keynesian theoretical wing of MMT, which is obviously important for those interested in new approaches to the macro.
My objective in this article was to comment on the high level content of the white paper, and the main legitimate criticisms that could be made of its content. The baffling thing about online discussions about MMT is that most revolve around critics who don’t make sense, but who are ultimately linguistic disputes (“what is a financial constraint? “). Interesting elements of MMT are overlooked – perhaps because it would require reading journal articles.
For academics
Warren Mosler’s white paper is not a document for academics, although they may find it useful. Based on various attempts to criticize MMT that I have seen over the years, academics have struggled to master MMT, which I find rather surprising.
- A potential starting point is the manual Macroeconomics, by William Mitchell, L. Randall Wray and Martin Watts (my first comments). However, it will be discovered that the manual is intended for undergraduate students, with fairly limited bibliographic information. If you want to work with this manual, you may need to browse the index to find a discussion of basic information.
- There are different article search engines, such as Google Scholar. These services did not exist when I was an academic, so I am not an expert on their use. The obvious starting point would be to look for promising publications from William Mitchell and L. Randall Wray, as they are considered to be the founders of MMT (along with Warren Mosler). There are other basic articles written by other MMT researchers, but I will dodge by giving a list here (to avoid offending anyone by omitting them).
- We could visit various study centers or websites and consult their resources. The Gower Initiative for Modern Money Studies (URL: https://gimms.org.uk/) has announced that it will develop a list of key journal articles. There is a database of articles at https://www.zotero.org/groups/2251544/mmt_academic_resources/items. Another major website is New Economic Perspectives (URL: http://neweconomicperspectives.org/).
I expect I will write an MMT primer of some sort, and I will have a discussion of the key articles.
Update: Link to the next article in this sequence, on determining the price level.
Annex: Government as a price taker?
Based on a comment by Ralph Musgrave on the Mike Norman Economics website (URL: http://mikenormaneconomics.blogspot.com/2020/01/mmt-primer-moslers-white-paper-brian.html), I realize that there is a lot of information hidden in Mosler’s price statements based on what the government is paying.
The integrated assumption of neoclassical models is that the government is a price taker: it must buy goods at market prices. Real world governments somehow follow this (although the salaries of government employees are administered in concert with union negotiations).
The standard assumption is that the government purchases a fixed quantity of goods in real terms, and if the price increases, nominal spending increases. This feeds inflation. Mosler’s argument emphasizes that governments do not have to follow this framework.
If the government refuses to pay a price increase, the volume of goods and services purchased will necessarily decrease. This tightens fiscal policy compared to plans. Since taxes are collected on the basis of nominal income or transactions (if a value added tax is imposed), higher prices and wages in the private sector will result in a higher tax burden. At some point, restrictive fiscal policy would reverse inflationary pressures.
This is a topic I will come back to when I discuss aspects of the price level in a later article, but it highlights how relying on conventional assumptions translates into missing aspects of what MMTs say.
(c) Brian Romanchuk 2019 2020