Thursday, March 7, 2019

The Weird Definitions of MMT

Scott Sumner writes:

There are lots of macro models out there: old monetarism, market monetarism, old Keynesianism, new Keynesianism, supply-side economics, Fiscal Theory of the Price Level, NeoFisherism, Austrian, Real Business Cycle, etc., etc. People who believe in one tend to view the others as being at least partly wrong. But where they disagree, it’s usually possible to pin down some specific points of disagreement.

MMT is not like that...

As far as I can tell, MMT created this monster by combining the following:

  • Bizarre (and unconventional) definitions of terms.
  • The tendency to confuse accounting relationships with causal relationships.
  • Being wrong about basic questions of causality...
For instance, normal economists would think about government spending being financed by a mixture of taxes, debt and money creation. AFAIK, MMTers think spending is paid for with money creation. When they describe their views in detail, however, it looks like they believe that spending is paid for with taxes, debt and money creation, not just money creation. They simply characterize that fact differently. So how to attack this view?

If you say, “You’re wrong, spending is paid for with some mix of money creation, debt and taxes,” they’ll respond, “no, it’s just paid for by money creation.”

If you bring to bear all sorts of evidence that implies that spending is paid for by all three, they’ll respond, “We know all that, it’s in our model. Taxes are used to drain money from the system to prevent inflation.”

I’m struggling to think of an analogy from everyday life—perhaps someone can help me. But try this:

I ask my friend, “Did you pay for that new car out of your savings, or did you have to borrow the money? And your friend responds, “Neither, I paid for it with a check”. You say, “I get that, but where did the money for the check come from?” And the conversation keeps going around in circles.

So one problem is their weird definitions, insisting that government spending creates money that pays for the spending, which is based (AFAIK) on a misinterpretation of the implications of an accounting relationship involving the Treasury account on the Fed’s balance sheet.

But there are substantive problems too. They seem to not understand that when nominal rates are positive, high-powered money is several orders of magnitude more inflationary than T-securities. (High-powered money is zero interest base money in a positive interest rate environment). They don’t seem to understand the Fisher effect, and instead assume that flooding the economy with base money drives interest rates to zero. While it’s true that you can flood the economy with high-powered money when the equilibrium nominal rate is zero, if it isn’t zero then you’ll create lots of inflation and thus much higher interest rates—as the UK discovered in the 1970s.

RW note: It really appears to me that MMTers have a complex problem with consistent abstract and conceptual thinking. Someday there will be a Latin word for the problem. It really needs to be researched.

I have on a few occasions come across this type in the investment world. The way you expose them is to require them to make their points slowly, step-by-step. And the minute they contradict themselves you go back to their initial point which contradicts their current point.

This is a difficult task. It requires a lot of time and they need to be in front of you and it requires the kind of personality that won't let them jump around from point to point.


  1. The 38 genders of MMT. The social marxist has met their soulmate.

  2. Welcome to 'debating' with well conditioned people. It's the product of a 170 years or so in refining educational methods. It was deliberately designed so that people would think in compartments. The benefits it allows for the few to control the many abound because it prevents people from seeing scams that are right in front of them.

    For this example in the free stuff compartment there is only money creation to pay for it. In the inflation compartment there is taxation to prevent inflation. The two compartments never open on to each other. If you attempt blow a hole in the wall between them you'll either get circular nonsense or insults. Their mental bulkheads will remain intact.

  3. I must admit that it is the MMT whack-a-mole style of "debate" that has intrigued me since 2011. I'm simply fascinated by their ability to instantaneously and effortlessly spout B.S. and slip/slide away from actually answering any inquiries.