I’ve mostly completed my study of MMT, although I have a few more papers to read. But I feel like I know enough to draw a few conclusions about how MMT relates to the broader field of economics.
When reading the Macroeconomics textbook by Mitchell, Wray and Watts, I was frequently struck by how MMT is almost the exact opposite of Chicago school economics, particularly the monetarist version I studied in the 1970s. On a wide range of issues, MMT is on one end of the spectrum, the Chicago school is on the other end, and the mainstream is somewhere in between.
Here on some examples:
1. Chicago economists believe that the supply and demand model is extremely useful for a wide range of markets, even markets that don’t meet the classical definition of “perfect competition”. Mainstream economists believe the S&D model is quite useful, but worry more about imperfect competition. MMTers are highly skeptical of S&D models, viewing the model as only useful in a very limited number of cases.
2. Chicago school economists believe that free market policies are almost always the best. Mainstream economists believe that free market policies are often optimal. MMTers are highly skeptical of what they call “neoliberalism“, viewing it as almost a religion.
3. Chicago school economists don’t believe there is much value in talking to bankers when trying to understand how monetary policy works. MMTers believe that knowledge of the nuts and bolts of the banking industry is highly important when trying to understand monetary policy.
4. Chicago school economists believe that the concept of opportunity cost is extremely important, and applies to almost all policy debates. That’s a bit less true of Keynesians, whereas MMTers assume that in many if not most cases the economy is well below full employment, and there is no opportunity cost to additional government expenditure.
5. Modern Chicago economists are extremely skeptical of the “Phillips curve” approach to macroeconomics. Earlier monetarists such as Milton Friedman thought there was a short run tradeoff between inflation and unemployment, but no long run trade-off. Mainstream economists sort of agree with Friedman, but also argue that there might be some long run trade-off due to hysteresis. MMTers seem to be most enthusiastic about the claim that boosting aggregate demand can boost employment over the long run, highly skeptical of natural rate models that say that AD doesn’t matter in the long run because money is neutral once inflation expectations adjust.
6. Chicago school economists tend to favor relying on monetary policy to determine AD, and are highly skeptical of the efficacy of fiscal policy. Mainstream economist favor of mix of the two, whereas MMTers prefer fiscal policy and are skeptical of the efficacy of monetary policy.
7. Chicago school economists argue that it is most useful to treat money as exogenous, i.e. under control of the central bank, at least under a fiat money regime. Mainstream economists treat money as endogenous in short run models with interest rate targeting, and exogenous in long run models trying to explain large changes in the trend rate of inflation. MMTers treat money as being almost completely endogenous.
8. Chicago school economists believe that changes in interest rates primarily reflect the income and Fisher effects. Thus falling interest rates are usually an indication that money has been tight in the recent past. Mainstream economists view interest rates as being heavily influenced by monetary policy (the liquidity effect), but also reflecting the income and Fisher effects, especially in the long run. MMTers see interest rates as almost entirely reflecting monetary policy, at least under fiat money. They mostly ignore the income and Fisher effects, and reject models of the “natural rate of interest.”
9. Chicago school economists see investment being determined by saving rates. Mainstream economists see investment as being determined by saving rates during normal times, but also worry about a “paradox of thrift” when interest rates are extremely low. MMTers see the paradox of thrift as being the norm.
10. Chicago school economists believe high inflation is caused by excessive money growth. Mainstream economists see high inflation as being caused by a mix of monetary policy and supply shocks. MMTers see high inflation as mostly reflecting aggregate supply problems.
Because I’m a Chicago school economist, the MMT model doesn’t have much appeal for me. That’s especially true because their arguments are often confusing and unpersuasive, even to mainstream economists. In my view, MMT may have some success promoting ideas such as aggressive fiscal stimulus, due to the worldwide trend toward low interest rates. I doubt, however, that they’ll make much headway in convincing the profession that their theoretical model makes sense, unless they can find a more persuasive way of explaining their ideas.
BTW, I’d say the same about market monetarism. I expect we’ll have some success convincing the profession that NGDP targeting make sense, but very little success in convincing economists that the monetarist approach to monetary theory has value. But I’ll keep trying.
PS. It’s not clear to me that all of the ideas in the textbook I read are MMT beliefs. Thus there may be some MMTers who are more favorably inclined to free market policies.
READER COMMENTS
Lord Canes
Dec 19 2020 at 7:01pm
An excellent review of the confounding inconsistencies plaguing modern macroeconomics.
Scott Sumner mentions three schools ( Chicago, mainstream, MMT) but there probably needs to be a fourth and more accurate school that explains modern economics in the real world.
“MMTers see high inflation as mostly reflecting aggregate supply problems.”—Scott Sumner.
I do not think this is a fair summation of MMT. Many MMT’ers seem to call for an increase in taxes if there is an inflation problem, that is they sensibly advocate a decrease in demand. ( However, in a globalized economy defined by chronic excess capacity for most goods and services, the MMT’ers may have some practical insights. Supply side problems are not usually the problem.)
MMT’ers might profit by more prominently recognizing the benefits of free-market systems, and also prominently pondering the use of money-financed fiscal programs to boost demand, as opposed to issuing more bonds. MMT’ers should talk a lot more about tax cuts and less about additional government spending
Worth pondering is how the world got to a point where (for Chicago and mainstream schools) monetary policy must be executed through fractional-reserve banking systems.
Let me guess: commercial bankers were involved at the creation.
Jerry Brown
Dec 19 2020 at 7:27pm
I think this is a fair description of some of the differences. Not sure about point #1. Meaning I am not sure I understand it. If I were to say that an MMT economist like Bill Mitchell seems more optimistic (in general) that increases in demand would result in increases in supply rather than prices is that sort of what you mean?
Scott Sumner
Dec 20 2020 at 1:51am
The MMT textbook I read is somewhat dismissive of the S&D model, that’s what I base my claim on.
Francisco Flores
Dec 20 2020 at 11:06pm
The notion that MMT doesn’t appreciate supply & demand is a bit disingenuous. Most of their precepts are based on it. Just because they don’t devote a chapter on it doesn’t mean they don’t accept it. Just that it is flawed in many cases and that markets are highly imperfect and in need of a slap upside the head on occasion.
Scott Sumner
Dec 21 2020 at 12:43pm
It’s not that they don’t devote a chapter to it, they actively criticize the S&D model, for instance at the bottom of page 6 of their textbook.
Rajat
Dec 19 2020 at 7:38pm
Scott, you said:
You omitted attributing any potential success to tight monetary policy. Interest rates fell throughout the 80s, 90s and into the mid-00s without any sustained pressures for fiscal stimulus. If there was no Great Recession, or we had a rapid return to target inflation and low unemployment following the GR, then it’s unlikely the mainstream would have become as enamoured of fiscal stimulus as it has. While the mainstream continues to agree with the Chicago school above the ZLB, it is increasingly aligned with MMT at the ZLB – thanks to over a decade of tight monetary policy.
As for market monetarism, I think you’re underplaying the success of the ‘market’ part – the Fed’s shift to more forward-looking market indicators of nominal variables. That’s an area where MM has had a very important impact.
Scott Sumner
Dec 20 2020 at 1:53am
Yes, the tight money has certainly contributed to the low rates, something the MMTers don’t seem to understand.
Jason E Harrison
Dec 19 2020 at 7:45pm
How would you generally respond to “Paradox of Thrift” arguements?
Scott Sumner
Dec 20 2020 at 1:55pm
They confuse saving with money hoarding. The actual problem (if there is a problem) is money hoarding, and needs to be addressed by increasing the supply of money. Saving by itself is not a problem.
Market Fiscalist
Dec 20 2020 at 12:38am
Excellent summary of an excellent series of article on MMT.
A quibble: Scott says that ‘MMTers see high inflation as mostly reflecting aggregate supply problems’. They definitely do say that, but they also say that that too large deficit can lead to inflation so I’m not sure the term ‘mostly’ is justified.
My own editorial comment: One reading of MMT is that it has the same aims as MM (full employment). MMT wants to achieve it via fiscal policy alone and MM wants to achieve it via monetary policy alone. In my view either way could work but monetary policy is better (at least under ‘normal’ conditions) because it is easier to isolate it from political interventions. My concern is that conditions never seem to be normal these day so MMT may get taken seriously and then those ‘political interventions’ will start to kick in.
Scott Sumner
Dec 20 2020 at 1:54am
The MMT textbook certainly gives the impression that supply shocks are the primary cause of inflation, and indeed even hyperinflation. The model certainly allows for excessive demand, but the actual cases they discuss are mostly attributed to supply problems.
Francisco Flores
Dec 24 2020 at 5:50pm
A stable democratically-elected and responsive government is not going to simply “print” money to hand out goodies. Inflation, which is highly unpopular, will result, if done in an uncontrolled manner. Moreover inflation is easily managed, for example the Job Gty law should include automatic across-the-board tax increases that kick in when certain monthly wage inflation target are hit. These can include:
a) Income Taxes,
b) Sales / VAT Taxes
c) Asset Value Taxes (or Wealth Taxes)
That’ll cool things off pronto. The taxes can be inserted into the Job Guarantee law so they kick in automatically if monthly inflation exceeds a certain level for say 6 months in a row.
So hyperinflation IS generally the result of a supply shock since demand is managed through taxation.
eg
Dec 20 2020 at 12:55pm
Where “normalcy” is concerned, I would encourage more familiarity with economic history, as unfashionable as that appears among economists.
The discipline was originally called “political economy” — “political interventions” ARE the norm, illusions propagated to the contrary notwithstanding.
The era of monetary policy dominance is already over, and fiscal policy has returned to its proper primacy — but acknowledgement of the facts on the ground is not evenly distributed.
Scott Sumner
Dec 21 2020 at 12:45pm
I strongly agree that economists need a better understanding of economic history. The understanding of MMTers seems particularly weak.
Ish
Dec 21 2020 at 9:14am
From my understanding if you assume money is endogenous like MMT does. You only have two options or a mix of them at least.
A gov runs a deficit and holds the negative equity(ie creates more money then it has resources) on its balance sheet forever. Essentially the gov is the borrower and the bank at the same time.
Or the private sector runs a deficit instead and as long as the new money created goes to output it can outgrow debt. Ang bank failure wipes out debts to an extent and this can kind of grow money supply too.
A negative interest rate from my basic under of the framework of what MMT says basically puts that negative equity onto the banks balance sheet in a pure endogenous account system. I go the bank and borrow $98 nd they give me $100, and I only need to pay have $98.They e created $2 they will never get back. The banks can’t operate like that so you need the gov to come in and recapitalize the bank by giving them the $2 to even out but thats then the gov taking the loss onto their balance sheet.
Just using a simple model of a bank that creates money and an actor that borrows it and has to pay it back. But this isn’t true in more classical economics.
Also it leads to another issue, where it the interest rates controls inflation but in the opposite way. A high interest rate in that model is inflationary a low rate deflationary. A negative rate could be either, either the company passes the saving on or it doesn’t and keep $2 to increase profits.
Michael Sanchez
Dec 20 2020 at 2:14am
I read that MMT says national debt is money the government put into the economy but didn’t tax back. We live in a globalized economy, that’s why their theories aren’t realistic. It seems like they’re assuming it’s a perfect ecosystem, sort of like communists do. Sounds like socialism via progressive visions to expand government role and control over the economy, and to make people even more dependant on government
eg
Dec 20 2020 at 1:25pm
Socialism? Communism? Dependency upon government? What does any of this have to do with fiat currency monetary operations that have been in effect in all advanced nations since the collapse of Bretton Woods and the abandonment of the gold standard?
Nothing, of course. The insights of MMT where sovereign fiat monetary operations are concerned are completely agnostic where the political spectrum is concerned — the policy space implied could just as readily be employed to facilitate any arrangement you like.
Michael Sanchez
Dec 20 2020 at 2:17am
Also sounds like it will only increase our “consumer capitalism” that has been trending since the 70s. Inequality follows trade deficit. Americans buy too much from overseas and don’t sell enough overseas
David Q
Dec 23 2020 at 6:21pm
“Americans buy too much from overseas and don’t sell enough overseas”
Isn’t that another way of saying we are getting great deals? I usually like great deals.
David Q
Thomas Hutcheson
Dec 20 2020 at 7:49am
“in many if not most cases the economy is well below full employment, and there is no opportunity cost to additional government expenditure.”
The contrast here is that mainstream economists would not say that the opportunity cost of additional expenditure are zero, just less than the market price that has to be paid for them.
Thomas Hutcheson
Dec 20 2020 at 7:53am
“boosting aggregate demand can boost employment over the long run”
This is partly correct in that investors seeing fewer and shallower episodes of inadequate demand, will have their “animal spirits” raised.
Thomas Hutcheson
Dec 20 2020 at 7:58am
The Chicago school is “highly skeptical of the efficacy of fiscal policy,” and rightly so or would be IF we could rely on the CB to actually do it job and enforce Say’s law. Where they err is in not realizing that what looks like “fiscal policy” additional expenditure during a recession (assuming that the central bank has allowed an AD recession to occur) can be optimal so long as the expenditure meet the standard NPV test for any other expenditure.
Thomas Hutcheson
Dec 20 2020 at 8:02am
Mainstream economists “also worry about a “paradox of thrift” when interest rates are extremely low.” And they are right to do so if central bankers are reluctant to enforce Say’s Law and governments are not following the NPV rule for expenditures.
Thomas Hutcheson
Dec 20 2020 at 8:45am
My bad for jumping in without starting by saying I think this interpretation of Chicago/Mainstream and MMT is exactly right.
Thomas Hutcheson
Dec 20 2020 at 9:00am
It seems to me that MM has two different strands.
1) Insistence that a central bank can and really should promote both price stability (meaning an optimal rate of increase increase in the price level due to sticky prices) and employment (rea income) with a 1 to 1 tradeoff between the two when there is a tradeoff. [Corollary: ST interest rates are one instrument but should not be the only one and the level of nominal ST rates at any moment in time cannot be interpreted as what monetary policy is or should be.]
2) In conducting it’s business, central banks ought to use market indicators (ideally an NGDP futures market) in achieving its targets.
Cobey Williamson
Dec 20 2020 at 9:38am
That is akin to saying “because I am a Catholic, I don’t believe in heliocentrism.” The comparison to religion was apt indeed.
Scott Sumner
Dec 20 2020 at 2:05pm
Cobey, You said:
“That is akin to saying “because I am a Catholic, I don’t believe in heliocentrism.”
If you read the entire paragraph you’d understand. If someone holds the view X, then they are not likely to be persuaded by people claiming “not X” if the arguments for “not X” are weak and unpersuasive. If MMTers wanted to be taken seriously, they really ought not say things like, “monetarists assume velocity is constant.”
MMTers don’t understand that to convince people like Paul Krugman you need to engage with him at his intellectual level. Make arguments that he would find persuasive. Instead I see MMTers respond to Krugman with undergraduate level economic arguments. Sorry, but that won’t work. Krugman is not a fool.
But
Jerry Brown
Dec 20 2020 at 3:47pm
Yes Paul Krugman is smart. Really smart and quick. Every time I see him in a discussion I am impressed again and know there is no chance I would be able to match the facility he has there. And he is also a very good writer.
But given all that, MMT points out some disagreements or flaws in the foundations of what he bases his ideas upon. Some of that does not have to be at some super intellectual level in order to discuss with either him or you. Steve Keen pretty much showed that in his arguments with Krugman about banking.
I would like to think that a very intelligent individual like Paul Krugman (or Scott Sumner) would be able to discuss and defend better some of the more basic ideas and assumptions upon which their more than ‘undergraduate level’ conclusions are based.
Scott Sumner
Dec 21 2020 at 12:49pm
You said:
“But given all that, MMT points out some disagreements or flaws in the foundations of what he bases his ideas upon.”
“That’s what’s so annoying about MMTers, they don’t even understand when they are losing an argument. They make a claim, Krugman disagrees, and then they seem to think that Krugman has admitted he was wrong. He hasn’t. And there’s no reason for him to do so. Look at his debate with Stephanie Kelton.
At a minimum you need to understand what the other side is saying.
Jerry Brown
Dec 26 2020 at 12:25am
There are facts. And then there are different ways to interpret the facts. But Krugman was just wrong on the facts in that case.
It is certainly possible that you might understand what someone is claiming and at the same time be able to disagree with it.
Anyways- Merry Christmas Scott.
Francisco Flores
Dec 21 2020 at 10:02am
Krugman is not a fool and fully understands that he has been wrong about the workings and flexibilities of the monetary/fiscal system post 1971. But he can’t just come right out and say that as it would send him to early retirement. So he is slowly creeping over to MMT. Give him time.
eg
Dec 20 2020 at 1:05pm
I think that your summation of the distinction between the two schools is excellent.
Normative evaluations of their relative benefits to citizens will have to be looked for elsewhere, I imagine.
Lori Jean Wagner
Dec 20 2020 at 2:06pm
MMT isn’t a theory as in an idea to be considered. & other than one other person in this comment thread, no one has mentioned the fact that all Countries now operate on fiat currency.. Congress authorizes spending and the Fed makes it available.. Then it’s taxed out of existence at the end of the year.
WmCobbett
Dec 20 2020 at 9:20pm
I have been studying monetary theory , incl. MMT, for years and I think most of your comments about MMT miss the mark. I suggest readers here do their own reading and form their own opinions.
Francisco Flores
Dec 20 2020 at 11:41pm
Prof Sumner, you sound so reasonable when critiquing a textbook. So let’s get down to brass tax (tacks?). Do you agree with these 4 FACTS:
A) The US government is unlike a:
state,
municipality,
business, or
household,
in that it can issue its own currency.
B) A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
issues,
borrows in, and
floats
its own currency, can NEVER run out of cash and is not vulnerable to hyperinflation..
C) The sovereign, like the US, can:
issue currency to spend and buy anything the economy produces,
up to the productive capacity of the economy (adjusted for turnover/velocity),
without creating inflation.
In other words the US government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled by i) selling government securities, ii) raising interest paid on deposits at the fed, iii) raising taxes across the board (on income, sales/vat, and asset values), or iv) a cut in spending.
Inflation is easily managed in these circumstances. For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
Income Taxes,
Sales/VAT Taxes
Asset Value (or Wealth) Taxes
That’ll cool things off pronto.
D) The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.
Private Debt, by the way, can be a problem and is largely responsible for many of our recessions.
Do you agree with these? Yes or No?
robc
Dec 21 2020 at 8:31am
B is clearly wrong. I stopped there, it is so far wrong that nothing else is worth reading.
And actually, A is wrong, as private currency is legal. See Ithaca, NY or Canadian Tire for examples.
Henri Hein
Dec 22 2020 at 12:15am
Spelling “facts” in all upper-case was my clue.
Francisco Flores
Dec 24 2020 at 5:36pm
If you disagree that they are facts (FACTS!), feel free to refudiate them.
Scott Sumner
Dec 21 2020 at 12:55pm
You said:
“The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities.”
So government debt can be “repaid” by replacing one for of government obligation with another? Who knew?
Francisco Flores
Dec 24 2020 at 5:35pm
Exactly. Replacing an obligation to provide dollars with essentially dollars. So the whole debt hysteria is about what exactly? Nothing. In addition, passing on Federal Debt to our grandchildren is exactly the same as passing on Reserve Deposits or money to our grandchildren. Here’s a blurb on the Federal Debt from an intergenerational equity standpoint. The poor, poor snot-nosed kids! So are the Kids going to be Alright? Who can tell?
https://fflorescpa.wordpress.com/2018/07/28/the-kids-are-not-alright-the-truth-about-the-federal-debt-and-intergenerational-equity/
Francisco Flores
Dec 25 2020 at 4:14pm
Bill Mitchell explains MMT for Japanese folk:
http://bilbo.economicoutlook.net/blog/?p=46569
Francisco Flores
Dec 26 2020 at 4:33pm
Stephanie Kelton spelling it out for humans:
https://www.youtube.com/watch?v=mAONzH3qfWQ&t=6s
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