Economists of nearly every flavor believe in the concept of “revealed preferences.” What matters is not what people say they will do in a hypothetical situation, but what they actually do. Their actions speak more credibly than their words. In this column I announce a related concept: “revealed biases.”
My colleagues, Randy Wray, Stephanie Kelton, and Mat Forstater, at the University of Missouri-Kansas City (UMKC) are among the leading theorists who have developed Modern Monetary Theory (MMT). MMT has been the subject of hundreds of academic papers and presentations. MMT has all the usual elements of an economic theory. It emphasizes the history of the monetary system, it provides a technically accurate description of how money is created, it distinguishes between nations with sovereign currencies and those like the Eurozone nations that have abandoned sovereign currencies, and it distinguishes among nations with sovereign currencies who remove the benefits of sovereignty by taking actions such as fixing the foreign exchange ratio or borrowing in other currencies, it allows predictions to be made that can be tested for accuracy, and it suggests which policies.
MMT has had a very good run. Its predictions have proven far more accurate than the austerians and my colleagues’ policy prescriptions have proven superior. Paul Krugman has noted that the greatest error he made in his predictions about the crisis arose from his failure to understand how vast the difference is between nations with sovereign currencies (who borrow in their own currency and employ freely floating exchange rates) and other nations. He hasn’t credited my colleagues and other MMT scholars for their insight about that point, but he has acknowledged that the MMT scholars proved correct.
MMT also has substantial support from the technical investor community. The reason is that MMT takes money seriously and relies on a technically accurate concept of money creation. These reasons are likely to strike the reader as strange – how could macroeconomics fail to take money and its creation seriously and why would it use models whose descriptions of money creation and transmission were false? (I mean “false,” not “simplifying.”) The short answer is that neoclassical economists love to (implicitly) assume critical aspects of economic life (e.g., “control fraud”) out of existence and instead make assumptions (about money, information, power, and transaction costs) that are obviously false. Doing so makes their models “work” and supports the policy advice that fits their ideological dogmas.
Recently, thanks in large part to Stephanie Kelton’s creation of the UMKC economics blog, New Economic Perspectives; MMT has also attracted considerable public support. The blog supplements our academic work and allows us to reach a broader audience on current issues. The delays inherent in formal academic publication make it impossible to provide analytics and policy suggestions when they are most needed.
Creating a blog has been a common response by economists off all stripes to these inherent publishing delays. The self-inflicted disaster in the Eurozone of creating a second, gratuitous Great Depression in much of the European periphery was done under the relentless claim of “TINA” (there is no alternative). MMT cuts through TINA and explains why the second Great Depression was inflicted. MMT presents superior policy alternatives. MMT, therefore, has a substantial group of supporters in Europe, particularly in the periphery.
Heterodox economists at the University of Massachusetts (Amherst) and UMKC were among the earliest, most persistent, and most effective critics of the Reinhart and Rogoff (R&R) “study” that claimed that government debt caused economic growth to slow and that there was a “cliff” when government debt reached 90% of GDP. Beyond that point “thar’ be dragons” – we all become Greece doomed to long term economic ruin by our profligacy. Operating from different perspectives, both schools demonstrated that R&R chose the nations and years and weighting to include/exclude in a manner that drove their results (along with the data entry error found by the graduate student at Amherst, the justly-praised Thomas Herndon). Once R&R’s gaming of data was corrected the 90% cliff disappeared and the most likely direction of causality was reversed (recession drive deficits, deficits do not drive recessions and slow growth).
R&R is one of the most destructive works in modern economics. It was intended to shape policy and it did so. It did so under the (implicit) premise that MMT must be false. Exposing R&R’s errors represents a great success of different strands of heterodox economics.
The broader point is that MMT is testable. R&R was testable, and it failed. Critics of MMT are free to point out errors in MMT and to test its predictions. They are free to examine the historical record and to discuss how money is created in a nation with a sovereign currency. They are free to discuss how interest rates are set by a central bank in a nation with a sovereign currency. We have unguarded quotations from Bernanke and Greenspan demonstrating that they know how money is created and interest rates are set. They strongly support MMT.
What is not acceptable is what actually happens. There are minor variants on a theme – they attribute positions and beliefs to MMT scholars (and heterodox economics in general) that MMT scholars, and UMKC economists in general, do not hold. The dismissals demonstrate nothing about MMT and heterodox economics, but they reveal a great deal about the dominant biases of neoclassical economists. Their revealed biases are intense and crippling. Their dismissal of rival views is so extreme that the neoclassical scholars gleefully emphasize that they are ignorant of MMT and other heterodox scholarship such as my work on microstructure – and proud of their ignorance. Because they do not read our work, but rather wish to dismiss it as unworthy of being read they need to invent a basis for dismissing our work. Because they do not know what we believe they have no constraints on what they falsely attribute to us. Journalists love “good copy” and chose not to ask how it is logically possible for those dismissing our work to do so without reading our work. The more outrageous the comment dismissing our work, the better the journalist likes it.
The latest example of this is a column by Annie Lowrey on July 4, 2013 entitled “Warren Mosler, a Deficit Lover With a Following.” Warran Mosler is a member of the finance industry and a strong proponent of MMT. Lowrey incorrectly attributes a facially absurd quotation to Stephanie Kelton stating that MMT scholars do not publish scholarly articles. Kelton promptly corrected Lowrey.
The point I write to emphasize is related to this theme that MMT scholars are not real scholars. Lowrey quotes Mark Thoma as follows:
They deny the fact that the government use of real resources can drive the real interest rate up,’ said Mark Thoma, an economics professor and widely followed blogger who teaches at the University of Oregon. After delving into the technical details of modern monetary theory for a few minutes, he paused, then added, ‘I think it’s just nuts.’
A preliminary caution is in order – given Lowrey’s attribution of a faux quotation to Kelton we need to keep in mind the possibility that she did equal violence to Thoma. Two facts stand out if Thoma was quoted accurately. First, his “delving” into MMT consisted of “a few minutes.” What scholarly work of my colleagues on MMT did he read? What passage did he find in his “few minutes” that he concluded was “nuts?” That’s how one makes a scholarly argument about another scholar’s work. “Dr. X writes ‘[insert longer quotation here that demonstrates X’s views and the context in which X expressed.]’ X’s claim that ‘[insert key phrase from the longer quotation quoted here]’ is in error because [provide rationale here].” The reader will note that this is what I have done in critiquing Thoma’s dismissal of MMT as “just nuts.” “Just nuts” is just ad hominem.
If MMT were really “just nuts” Thoma wouldn’t have had to rely on an ad hominem attack. He would have quoted, for example, a passage from Wray’s new book discussing “the technical details” of MMT. He would then explain why Wray’s version of the technical details was wrong, with a supporting citation. It’s easy to show that people that get basic facts (“technical details”) wrong are wrong.
Thoma does not do that. He invents a claim that MMT scholars do not hold. Putting aside a technical non sequitur (discussed below), the claim Thoma invents is actually a direct, unattributed, steal from Paul Krugman. Krugman drives us to distraction because he attributes, always without quotation from any MMT scholar, a claim that no MMT scholar has ever made. The claim is that MMT scholars do not believe that the government’s consumption of real economic resources can contribute to inflation. Krugman and Thoma have never cited any MMT scholar making such a statement because the MMT scholars have not made such a statement. Wray and Kelton have repeatedly written and presented their explanation of why MMT does not predict that the government’s consumption of real economic resources cannot add to inflation. They have also explained why the proposed stimulus programs in response to the Great Recession would not lead to material inflation.
It is outrageous that Krugman and Thoma persist in spreading this false, invented claim about MMT. It is outrageous that the press accepts their assertions without any quotation from MMT scholars making such a statement. Krugman and Thoma can invent this claim and repeat it endlessly while ignoring my colleagues’ rebuttals that MMT predicts exactly the opposite. Krugman and Thoma can invent and repeat this claim, but they cannot invent non-existent quotations by MMT scholars. If journalists, or their own professional standards, ever required Krugman and Thoma to meet the most minimal standards of scholarship and fairness their inventions and false attributions about MMT scholars would cease immediately.
Thoma’s invented claim implicitly demonstrates that he does not understand a series of “technical details” – the nature of the “real interest rate,” how the Fed sets interest rates, and the relationship of interest rates to governmental spending. Wray explains these points in his response to Thoma. It is ironic that Thoma makes a series of technical errors in an attempt to dismiss MMT as “just nuts” based on invented technical errors.
The other variant in the dismissal of heterodox economics and MMT comes from Krugman’s least favorite economist, John Cochrane. Cochrane wanted to emphasize that unlike Thoma and Krugman he refused to waste even “a few minutes” of his time learning what we wrote. Cochrane explained why to the journalist who wrote a profile of our department.
Cochrane speaks proudly for mainstream, also known as neoclassical, economics. Talking with me over the phone before the conference, he made clear that his condemnation was general: ‘I haven’t read their specific work. I’m busy, and I try to read what is considered interesting and valid.’ His position on heterodox economists was unambiguous: They’re kooks. ‘They are about two percent of academe and about zero percent of finance.’ He was dismissive of their prediction of the credit-bubble collapse. ‘Beware those who predict nine of the last two crashes, okay? They’re just not rigorous and don’t use modern mathematical tools. This business is a wide-open meritocracy. You have to distinguish between closed minds and a lack of quality. The perception is that this is 1969 stuff. Give me new data and new ideas.’
In 2012, without ever reading our work (because he his “busy,”), Cochrane dismisses our scholarship as unworthy of being read because he knows without reading it that it is “not rigorous,” that we are innumerate, and that our research “lack[s] quality.” We clearly lack his analytical powers to discern everything about a body of scholarship without ever even looking at it. In fact, we haven’t predicted non-existent crises. The Chicago School, however, has unsuccessfully predicted nine of the last zero cases of U.S. inflationary crises over the last quarter century.
Let’s contrast Cochrane’s dismissal of all of heterodox economics with Cochrane’s attacks on Krugman in 2009.
I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.
Yes, we too like it when critics “take time to read [our] work and criticize it.” Cochrane proceeded to ridicule Krugman’s complaint that the Cochrane and his Chicago School colleagues “marginalized” their critics.
Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.
This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.
It gets worse Krugman hints at dark conspiracies, claiming “dissenters are marginalized.
Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.
Yes, “if you bother to read them,” rather than making baseless personal attacks and using innuendo. After reading Cochrane.12 and Cochrane.09 I have one question: I know that Cochrane.12 is too busy to read our work, but why is he too busy to read Cochrane.09? Or did Cochrane decide in 2012 to emulate the things he claimed in 2009 that Krugman did to him that he considered reprehensible? I invite the reader to try to evaluate whether Cochrane’s hypocrisy exceeds his self-blindness.
Cochrane, Krugman, and Thoma share the characteristic that they have not even found “some embarrassing quote from an old interview” of a MMT scholar to attack. The fact is that it is the heterodox scholars who have displayed vastly superior predictive ability that the theoclassical scholars and significantly better predictive ability than neoclassical scholars. It was our success that prompted the title of the article profiling our department:
James Galbraith has an excellent article explaining who got it right.
It is precisely the predictive success of MMT and control fraud theory that distinguishes UMKC’s work from those advocating a return to a gold standard. Proponents of that view have consistently made enormous predictive errors about imminent hyper-inflation. Lowrey’s claim that the two policies are mirror policies of the left (MMT) and right (gold) is falsified by MMT’s predictive successes contrasted to the gold standard proponents’ predictive failures. The left/right dichotomy is also false. Many MMT proponents, including Warren Mosler, are conservatives. Mosler despises banking regulators; I’m a former banking regulator.
It’s certainly good to have MMT discussed in the New York Times. We now need to have it discussed with a focus on the scholarly work and predictive successes. We need debates on the merits that focus on the ideas rather than personalities (or yachts and race cars). We look forward to having our critics quote from our scholarly works and explain what specific positions they disagree with and why. Such a debate would be a great service to the Nation and the Eurozone.
Here’s the deal – it is intellectually dishonest to create and repeat these strawman arguments based on inventing positions that one ascribes to MMT scholars that are often the opposite of MMT actual positions. We were willing to assume in the interests of comity that the initial positions falsely ascribed to MMT scholars were the product of not having read and understood the MMT scholarly literature. Krugman and Thoma had, at best, spent “a few minutes” reading MMT scholars’ work and they misinterpreted it. At this juncture, dozens of MMT proponents have written to make clear to Krugman and Thoma that they are misrepresenting the position of MMT scholars. There is no excuse for any repetition of the strawman claims.
Here are the simple rules for Thoma, Krugman, and Cochrane going forward. They are the same rules we operate under when we criticize other scholars’ work.
- At least skim Wray’s most recent book on MMT.
- Read at least one article on “control fraud” (or any of my six recent testimonies before Congress and the FCIC on the ongoing crisis). Alternatively, at least skim my book. George Akerlof and Paul Volcker liked it enough to provide on-line blurbs, so it would be a good investment of your time.
- Respond with whatever critiques you have. What do you agree with and what do you disagree with? Quote specific passages from our work that you disagree with and consider material.
- We’ll respond. We’ll all learn from the process and can work together to seek better public policies.