Thread by @rohangrey

Thread on @dylanmatt's Vox piece on MMT (vox.com/future-perfect…):

It's long, so here goes:

1. Dylan’s clarification that many mainstream critics have been engaging with a strawman is much appreciated. The amount of uncritical echo chamber-esque repetition by journalists 1/n

of these strawman attacks has been disappointing, perhaps encapsulated most starkly when Fed Chair Powell was quoted as saying “MMT is just wrong” when in fact the “wrong” claim he was referring to was something no MMTer would ever claim.

2. Dylan is absolutely right about 2/n

3. the importance of MMT’s insights in emboldening the Democrats to stop being ‘suckers’ in debates with Republicans fiscal responsibility. This fits squarely with the history of deficit politics that @JoshuaMound explained here: jacobinmag.com/2017/07/trump-…. 3/n

3. Dylan’s contrasting of MMTs endogenous money approach vs the orthodox loanable funds view is on-point & helpful. I think one aspect of the orthodox argument he doesnt focus on that is also important to understand the context here is that orthodox view is if higher deficits 4/n

push on full output limits, that will cause the Fed to step in and counteract pressure by raising rates. So higher deficits “cause” higher rates, not in a market sense, but in a “if fiscal authorities do X, monetary authorities will react by doing Y” sense. Often this is 5/n

conflated with discussions about loanable funds/markets in a way conveniently naturalizes the Fed’s reaction function, so “higher deficits cause higher interest rates” becomes a true statement *because the Fed will make it true*. 6/n

To which, of course, the MMT response is “if you don’t want that outcome to happen, just don’t raise rates then.” i.e. there’s nothing immutable about the current monetary policy framework.

4. Dylan’s explanation of the function of taxes under the MMT approach is accurate 7/n

and I appreciate his citation of our FT piece on inflation explaining that taxes aren’t the *only* way to fight excess-demand induced inflation. For completeness, i’d add that taxes can also serve redistributive and behavior-modifying functions, a la the Ruml-ian framework 8/n

outlined here: bilbo.economicoutlook.net/blog/wp-conten….

5. The description of the sectoral balances approach, as well as the explanation for why MMT sees positive net-saving of the private sector to be important to long-term stability is good. For more detail 9/n

see this piece by @joeweisenthal: businessinsider.com/how-bill-clint….

6. Dylan’s nuanced explanation of the difference b/w “MMT says you can use taxes to address inflation” and “if you have to raise taxes at full employment, then you’re back in the realm of deficit-reduction a la 10/n

mainstream” is much appreciated. For completeness, it’s also worth noting that from the MMT pov, another reason ‘monetizing deficits’ isn’t likely to be hyperinflationary, beyond taking inflation seriously, is that there is little evidence that ‘debt-financing’ is any more 11/n

inflationary than ‘money-financing’. Indeed, if the interest rate is the same on bonds vs money, they function as near-substitutes from an aggregate demand pov. See, e.g., this piece by @stephaniekelton and @stf18: ftalphaville.ft.com/2013/12/12/172…, and this piece by Kocherlakota 12/n

bloomberg.com/opinion/articl….

7. It is disappointing that Dylan repeats the claim that Mason/Jayadev’s piece was about MMT per se, when Mason himself later clarified that it was about Lerner’s functional finance specifically, not how MMT uses FF, or MMT writ large. 13/n

See,

https://twitter.com/rohangrey/status/1104531328995917824

.
Given @JWMason1 was consulted in drafting this piece, it is a pity he didn’t bother to make this clarification either, because this has been a huge source of ongoing misunderstanding in the media debates over MMT. It is important to combat 14/n

this misunderstanding because, preference for PZIRP aside, MMT argues that nterest rates are not capable of achieving full employment on their own. So it’s not a mere mirror image of the orthodox approach, which treats monetary and fiscal levers as equivalent alternatives. 15/n

It fundamentally denies the symmetry of the two tools (and the implicit neutral rate theory that underpins contemporary preference for monetary policy). This has profound implications for how much faith we should put in interest-rate-centric frameworks for demand-management, 16/n

and the relative benefits of a JG as automatic stabilizer.

8. Dylan’s citation of our FT piece (ftalphaville.ft.com/2019/03/01/155…) arguing for a wider range of anti-inflation tools than mere taxes (while preserving an important role for taxes) is appreciated. However, he didn’t 17/n

fully connect the dots between my arg regarding credit policy and the argument around ZIRP, even though it is a central point of Monnet’s book (ie that the Bank of France regulated inflation primarily using credit policy instead of interest rate adjustments). So his claim 18/n

that “Committing to a zero interest rate policy permanently, for instance, would be a dramatic move by the Fed, effectively a repudiation of its statutory commitments to ensure price stability and full employment” is untrue–in fact, its likely that greater reliance on credit 19/n

policy (under a ZIRP regime) would give the Fed *more* ability to manage inflation than it does today, when marginally rate increases are relatively non-impactful, short of raising rates to astronomical levels and causing a massive recession a la Volcker. 20/n

9. It’s also unfortunate that Dylan equtes the preference of some MMTers for eliminating tsy bonds (to simplify fiscal policy) with the idea of eliminating all safe asset provisioning. My personal preference, which i’ve argued publicly at least as early as 2016, 21/n

ie (

https://twitter.com/RaulACarrillo/status/731133351894122496

), is to have the central bank issue securities if it wishes to provide a safe asset benchmark for financial markets, and leave the treasury (and fiscal policy) out of it entirely. Other countries already use CB securities (see 22/n

ie imf.org/external/pubs/… and bankofengland.co.uk/-/media/boe/fi…) and there’s no reason why the policy goal of providing a safe asset, which has more to do with macroprudential and financial regulatory concerns, should be conflated with fiscal policy and budgetary financing. 23/n

Indeed, historically when faced with a shortage of outstanding government securities (ie due to a budget surplus), central banks lean on treasury departments to issue tsys beyond whats needed to fund the budget anyway–this almost happened in the US after Clinton surpluses 24/n

(ie npr.org/sections/money…), happened in Australia after the Ruddock surpluses (ie researchgate.net/publication/25…) and happens today in Singapore (ie gov.sg/factually/cont…).

9. Finally, regarding the Job Guarantee and the non-inflationary role of the buffer stock 25/n

– there is a lot to say on this topic, and more writing for MMTers to do on how best to link the buffer stock JG to the broader wage structure in ways that both restricts the potential for wage-price spirals while also accommodating period wage demands and increases in the 26/n

minimum wage consistent with increasing labor profits vis-a-vis capitalist profits. But it’s important to be clear that a) the current system has an effective minimum wage of zero for the involuntary unemployed, whereas a JG sets a ‘true’ minwage that then can be the focus 27/n

point for ongoing labor struggle; and b) the risk that the JG-as-price-anchor is trying to address it not that the minimum wage will be set ‘too high’ at the outset, but rather than adjusting the base wage in accordance w market pressures will put the market in the driver's 28/n

seat re: wage adjustments. It is consistent with the buffer stock model to have a) a spread of JG wages (Fadhel Kaboub, for example, has modelled a JG with two wages), and b) a high minimum wage at the outset. I have advocated combining a JG with a ‘skills & credentials' 29/n

policy that provides a wage-premium on top of the base JG wage as a form of indirect industrial policy. The critical point in all of these approaches building on the core MMT framework is that changes to base wage/wage structure is made explicitly, as one-off adjustments 30/n

rather than continuously adjusting automatically in accordance w prevailing market conditions. Depending on other conditions/policies and the level of wage increase, this may cause a one-off price adjustment, or it may not. But it certainly doesn’t lead to wage-price spirals 31/n

or hyperinflation. Because after the initial adjustment, whatever the new wage is will become the new baseline that market wages are forced to compete against. In that sense, the JG base wage is always lower than the market wage by definition.

32/n

10. Overall, this is a welcome intervention and clarifies a lot of important aspects that other media discourses around MMT have thus far obfuscated. Cheers, Dylan.

33/33.