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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.

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

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.

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

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.

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.

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.”

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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

Here is the link again:

Comments welcome!

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