Thread by @giacomorondina

What can an economist with mainstream training learn from #MMT? I articulate my answer in a new paper titled “A Blue Paper on Modern Monetary Theory” #MMTBluePaper.

bit.ly/30puulV

Here are the background and a quick summary. 1/19

I, for one, have learned a lot. The MMT literature explores procedural, accounting, and institutional aspects of modern monetary institutions and their coordination with the fiscal authority.

An excellent bibliography of MMT can be found here

levyinstitute.org/pubs/wp_778.pdf

2/19

The analysis naturally leads to a powerful message which is at the core of MMT: a government with a sovereign currency can always afford to pay in the currency it prints and it is not subjected to the same financial constraints of a household.

nyti.ms/3cScgME

3/19

In other (more poetic) words, the government deficit is a myth. #DeficitMyth

stephaniekelton.com/book/

4/19

My reaction, as I suspect one also from any economist with mainstream training, has been: well, we knew that already. In fact, it is almost a trivial conclusion.

But as I kept thinking about it, I gradually began to realize how liberating that message is.

5/19

Just think about it. Do we want to save the planet from climate change with a #GreenNewDeal?

We should not worry about how to pay for it, the Government always can.

We just need to find the political will to do it.

6/19

In exposing the “affordability” argument as devoid of any accounting, procedural, and institutional underpinnings, #MMT casts itself as a seductive cry to political activism by calling for “the birth of the people’s economy.”

7/19

Energized by the call, I set out to investigate the economics of #MMT. In the #MMTBluePaper I argue that the economic theory in #MMT is still embryonic. The crux of the problem: the distinction between nominal and real magnitudes is often vague.

8/19

A quick refresher: “nominal” are things measured in the unit of account (e.g. dollars, euros, etc.); “real” are the same things measured in stuff – goods and services – that ultimately affect people’s well-being.

9/19

As a matter of financial accounting, #MMT’s propositions are correct, if not tautological, when applied to nominal magnitudes: the public sector’s deficit is always equal to the private sector surplus. “To the penny,” indeed.

https://twitter.com/StephanieKelton/status/1192900320839569410?s=20

10/19

L. Randall Wray puts in Copernican terms: “This reverses the orthodox causal sequence. […] The deficit spending by the government provides the income that allows the nongovernment sector to run a surplus.” Modern Monetary Theory, page 106, 2015.

11/19

In terms of nominal income, the statement is an accounting identity.

In terms of real income, it is a big deal.

The ultimate question is then when and how the public deficit/private surplus turns into higher real income, and thus higher people’s well-being.

12/19

In the paper, I design simple economic environments featuring the foundational elements of #MMT, and obtain explicit conditions on individual behavior, technologies, and markets for the government deficit spending to increase real income.

13/19

The upshot: the government must have exclusive access to a "technology" – broadly interpretable as a way to either directly produce, coordinate, regulate, etc. -- that is superior to that available to the non-government sector. And the government must be credible.

14/19

A related insight is that, in the presence of a severe financial friction, typical of monetary production economies, the government’s deficit provides a financial instrument that allows resources to flow to their most productive uses.

jstor.org/stable/2006605

15/19

Other environments may well indicate alternative, and possibly markedly different, conditions. The point here is that being explicit about assumptions facilitates the criticism of a theory and its progress (or dismissal).

16/19

A couple of concluding thoughts. I am grateful to #MMT because it has led me to question economic propositions that I took for granted and to put them to the test of an alternative approach.

17/19

I have also experienced the frustration of getting close to understanding the economics of #MMT, only to have the (unstated) assumptions changed under my feet. I fear the same frustration has kept many genuinely interested economists away from a fuller engagement.

18/19

I think a better way can be found. The #MMTBluePaper is my two cents to the cause.

Here is the link again: bit.ly/30puulV

Comments welcome!

19/19

A shout out to @mileskimball who has encouraged me to work on this project.