In my previous post I discussed some of the potential weaknesses of the various theoretical approaches to analyzing market conditions under the current crisis. I concluded by drawing attention to the particular approach of MMT theorists to interpret economic data to suit their particular policy aims, and the temptations those interpretations will pose to intellectuals and politicians alike. Here we will explore the particular strengths and weaknesses of that approach.
Those who value the traditions of individual liberty and self-government need to recognize that in one very peculiar way, MMT may in fact prove correct in its macro predictions.
Focused as the school is on certain types of tangible accounting measures (e.g. notes issued, taxes levied, and prices aggregated), MMT may very well prove to be strategically better placed to offer a just-so interpretation of the overt data. This is because of the particular and largely nominal ways in which costs may express themselves in this particular crisis; that is to say, the pattern that such costs will take over the middle to long term might very well look different from any previous economic crisis.
Market theorists need to be ready to apply their most basic insights into the nature of costs and benefits that flow from their more thoroughly subjectivist ideas of value. Here is where the unseen and unintended aspects at the core of economic phenomena come into play in the most rigorous evaluation of costs. But market theorists will have to be ready to apply these understandings without jumping to the conclusions suggested by older theoretical models.
MMT theorists often speak of driving nominal rates of interest down to zero because “it is much cleaner that way.” From this way of looking at the economy, aggregate price levels are gauges and open market operations and tax rates are so many spigots with on and off valves. Such an orientation places considerable store in the visible and the tangible.
In the same recent Business Insider essay cited in part 1, the author focused on the eminently visible such as the “manufacturing base,” foreign competition, and he advocated muscular high-profile fiscal and monetary policies. All this because a nation ought “to spend on whatever it places a priority on….”
Unlike the socialist theorists of a hundred years ago or the Keynesians just five decades ago, however, MMT theorists figure that they have far more in the way of institutional means to structure both the expression and perception of those policies: “Our government holds a monopoly to ‘issue’ the currency,” we are assured, “it does not merely ‘use’ it like the rest of us.”
Such a view reflects a deep seated faith in the efficacy of power: “we don’t wait to issue debt or collect taxes to spend money—Congress authorizes spending and the treasury calls upon the Federal reserve to provide funding, which the latter does at a key stroke.” All that is necessary from this view of the world is the political will to remove any excess currency that drives up prices.
Thus, MMT theorists will argue, government creates its own demand to meet its own supply. This is why Weimar is of no concern. It was hardly in control of its own destiny, but a truly sovereign nation is, they will contend.
Sovereign power to tax is MMT’s mantra. And economic activity, by their estimation, is not to be found in the private sector alone. Indeed the private economy, by their lights, is not even the most important sector where monetary policy is concerned. It is government action itself.
Hence only the most visible effects count for MMT theorists: “government deficit means that money is being put into the economy, while taxes and government surplus mean that money is being removed.” By going in debt to ourselves, MMT theorists frequently boast, we can both temper inflation as well as restructure the distribution of property and wealth!
Their aim is nothing less than “an epochal paradigm shift.” But I would also contend that the advantage is more apparent than real, and here is where the subjectivist paradigm of Austrian economics has renewed and vital relevance to the debate.
That will be the focus of the next and concluding post.
Hans Eicholz is a historian and Liberty Fund Senior Fellow. He is the author of Harmonizing Sentiments: The Declaration of Independence and the Jeffersonian Idea of Self-Government (2001), and more recently a contributor to The Constitutionalism of American States (2008).
READER COMMENTS
Ed Zimmer
Apr 18 2020 at 2:18pm
Forty-four paragraphs spread out over three Parts & what has been conveyed? A gross misrepresentation of MMT (which can no longer be excused as “misunderstanding”) & a classic example of the dangers in valuing erudition over reasoning.
I can only point again to my one-paragraph summary of MMT:
GDP is the measure of our PRODUCTIVE economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending, because ALL spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest. All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends ONLY on currency-users perception), there are no limits other than that perception.
Looking at the income side of GDP, you find that neither Federal borrowing nor income taxes are part of that income – so they DO NOT (and never have) paid for (or “funded”) that spending.
And note that the PRODUCTIVE economy is the production-and-consumption economy. It is NOT the FIRE (Finance, Insurance, Real Estate) economy – which has become little more than a gigantic gambling casino.
Pierre Lemieux
Apr 19 2020 at 11:28am
There is a danger of repeating Keynes and forgetting that GDP is first and foremost–is defined as–production? (We should not confuse accounting identities with economic theories.) I read your blurb as the extreme Keynes (whom Keynes himself might, or might not, disavow if he were back) who thought that state intervention had to be permanent and monopolize investment up to the “euthanasia of the rentier” (see the last chapter of The General Theory). Is this how the Soviet Union and Venezuela became such cornucopia?
Another question: Since, as you correctly say, money is what people accept as payment, why are private banks not allowed to produce their own money? (On this last point, see my post “A Bad Solution to Very Real Problems.”) Does this tell us anything about the dangerous cult of the sovereign state?
Tracy W
Apr 19 2020 at 5:01pm
Why does it matter what GDP is? It’s a measure, not the economy itself. It’s not even “the” measure, there are others, such as net national income.
Hans Eicholz
Apr 18 2020 at 3:49pm
I am only pointing to an emphasis in what your quote itself indicates. The measurable tangible markers…as you emphasize…rather than the unseen and unintended.
The tendency to which this orientation leads to the understatement of the costs involved is the issue. Does it have to be so? Will it consider the unseen in the equation of the consequences? And if not, why not?
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