William K. Black
January 17, 2019 Bloomington, MN
AOC# drives Republicans berserk. Booing her, and only her, at the ceremony admitting the members of Congress, raging at her for dancing – yes dancing – in a college video, and attacking her for having a nickname (“Sandy”) in high school demonstrate the degree of derangement and the pathetic ammunition they have found in their failing efforts to discredit her. MMT has become an indirect beneficiary of this derangement. AOC# has expressed support for MMT – so the right is now eager to reach the famous second stage of opposition to good ideas (‘first they ignore them, then they attack them’). It is far better for the right to attack our good ideas, than ignore them. As with the right’s attacks on AOC#, the nature of their attacks on MMT is laughably extreme and nonsensical. When they attack MMT, they spread our views.
The AEI is a hard right non-think tank, witness their treatment of David Frum. The AEI, in league with Brookings’ now disgraced Robert Litan, led the catastrophic assault on financial regulation that created the criminogenic environment that produced the Great Financial Crisis (GFC).
Michael Strain was briefly a junior economist with the NY Fed, but his CV shows that he does not write about macroeconomics. His specialty is labor economics. Stan Veuger, a more junior AEI economist, does not write about macroeconomics. He focuses on public finance.
While I write periodically about macroeconomics, it is not my specialty. I channel my current and former colleagues at UMKC with the greatest expertise in MMT – Mathew Forstater, Scott Fullwiler, Stephanie Kelton, and Randy Wray.
Strain makes few substantive points in his fervid attack on MMT, which makes his rhetorical rage particularly strange. His title and subtitle indicate the problem. “Modern Monetary Theory’ Is a Joke That’s Not Funny.” “Yes, a government that issues its own currency can pay its bills. But piling up debt for no urgent reason is lunacy.”
Strain characterizes his rivals’ theories as a “joke” and “lunacy.” That means he has assigned himself an extraordinary burden of proof. He must prove MMT is “lunacy” of such a degree that it represents “a joke.” That means it has no validity and that anyone who advances the theory is delusional – that the theory rests on defects in logic so basic that no rational person could believe the theory. To be “a joke,” any reputable economist must be able to point out easily MMT’s purportedly gaping failures of logic.
Strain and Veuger never try to meet the burden they set for themselves with their frenzied rhetoric. The key test of a theory’s validity is its predictive ability. A theory that is so weak that it is a “joke” made by “luna[tics]” should collapse as soon as its predictive ability is tested. What predictive failures do Strain and Veuger demonstrate MMT scholars have made? None. What predictive failures do they attempt to show MMT scholars have made? None. That failure even to attempt to show MMT scholars’ predictive errors is extraordinarily telling. First, you know they would have attacked even a minor predictive error by MMT scholars – if they could find such an example. Second, that means they could not find even a minor predictive failure by MMT scholars. Third, the AEI’s failure to find any predictive failure by MMT scholars is fatal to their assertion that the MMT – the basis for MMT scholars’ macroeconomics predictions – is such a “joke” that it invariably produces “lunacy.”
What does Strain rail about given his understandable failure to tell his readers that MMT scholars have a superb predictive record on macroeconomic topics? “Modern macroeconomics” models, by contrast to MMT, have horrific predictive records. Paul Romer, the newest Nobel Laureate whose thesis adviser, Robert Lucas, is the father of ‘modern macro,’ has a justly famous destruction of ‘modern macro’ as worse than a pseudo-science. Romer literally describes modern macro as a joke and combines withering sarcasm with logic throughout to drive home that point. If AEI economists want to alert readers to failed macroeconomic theory that produces terrible policies and predictive failures, they would be excoriating ‘modern macro.’
Instead, Strain begins his assault on MMT with an admission that it is, at its core, correct.
The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills.
MMT scholars would add two additional constraints, a freely floating currency and national borrowing only in the sovereign currency to produce what I call a “fully sovereign currency.” Strain’s admission that the “bedrock” of MMT “is correct” is also fatal to AEI’s rant attacking MMT.
Strain’s next concession is also fatal to his rhetoric.
In the years immediately after the Great Recession, which started in December 2007, this aspect of MMT stood in favorable contrast to the position of fiscal-policy centrists and many Republican politicians who called for significant reductions in the deficit at a time of very high unemployment.
That passage is a veiled concession that MMT scholars supported fiscal stimulus and correctly predicted that it would aid the recovery from the Great Financial Crisis (GFC) without producing harmful inflation. It is also a veiled confession that “fiscal policy centrists and many Republican politicians” who pushed for austerity and predicted that fiscal stimulus would fail to stimulate the economy and produce harmful inflation were wrong about the most important macroeconomic issue of our lives.
As in the card game Bridge, let us review the bidding at this juncture in Strain’s rant. He admits that MMT’s ‘bedrock’ understanding of sovereign money “is correct.” He admits that MMT scholars used their theories to get the appropriate response to the GFC correct, while their opponents got it dead wrong because of their flawed “centrist” theories favoring austerity. This means that MMT scholars got right, and “centrist” economists got wrong, the most important macroeconomic policy issue of their lives and ours. Strain repeatedly admits facts that falsify his rant – but his rant is impervious to facts.
Strain continues this pattern. He concedes that MMT “is growing in prominence.” It cannot do so if it is such a facial “joke’ that any economist recognizes MMT’s obvious “lunacy.”
Strain then makes another fatal admission. MMT “is growing in prominence” because of increasing support by “many solid economists.”
[T]he thrust of MMT — the deficits matter a lot less than its critics would have you believe — is attractive to many solid economists. (Though I am not yet sold on their arguments.)
Why is Strain “not yet sold on their arguments?” He does not say. He provides no basis for rejecting the “growing” number of “many solid economists” supporting MMT. Again, this is fatal to his rhetoric.
Strain finally begins presenting his supposed clinching argument against MMT – in his twelfth paragraph. His clinching argument, however, not only buries the lead, it buries his thesis.
But it is in its ideas about macroeconomic policy that MMT fully earns its place on the fringe.
The theory understands that the economy is constrained by real limits on its inputs to production. If you push its advocates hard enough they will admit that at some point all that spending could send the economy into a bout of damaging inflation.
Strain’s clinching argument begins with the fatal admission that MMT scholars correctly “understand that the economy is constrained by real limits on its inputs to production.” Given my long association with Mat, Scott, Stephanie, and Randy, I can testify from repeated, first-hand experience that each of them stresses the critical importance of real resource constraints in the talks they give on MMT. No one has to “push” them to “admit” that creating severe shortages of key real resources can produce high levels of inflation. MMT cannot be “fringe” (much less “a joke” and “lunacy”) because it correctly notes the importance of real resource limitations in potentially producing substantial inflation. If there is a global shortage of cadmium because of high private sector demand, and the government launches a program, such as a large expansion of military spending that creates a substantial increase in demand for cadmium, the price of cadmium will increase substantially.
Strain admits that MMT is (again) correct in its understanding of the importance of real resource limitations because of their potential to increase inflation. Implicitly, Strain concedes the opposite point that MMT scholars make – tax revenues cannot be the “shortage” when we have a fully sovereign currency. The important potential restraint we must focus on and address is real resources. Strain’s clinching argument against MMT turns out to be another fatal admission of its validity.
Strain also makes a political argument against MMT that implicitly concedes its economic validity.
Political progressives like Ocasio-Cortez who are showing sympathy for MMT are also being short-sighted. If we further loosen the shackles tax revenue has placed on federal spending, then Democrats may get Medicare for All the next time they control the government. But, in turn, when the GOP is next in the White House, what might it do with its newfound fiscal freedom?
The situation Strain envisions is not one where he postulates that society lacks the real resources to undertake the governmental program. He uses the revealing phrase “the shackles tax revenue has placed on federal spending.” His ‘shackles’ metaphor implicitly admits the validity of a key MMT precept. Public officials and economists who do not understand how a fully sovereign currency works apply a fake constraint – “tax revenue” – rather than what Strain admits is the actual constraints we need to consider and address, which are real resources. It is immensely harmful to “shackle” legislators such that they cannot implement useful government programs when they would not cause any substantial shortage of real resources. It is economically illiterate and obscene to “shackle” legislators to prevent such useful programs based on a phony fiscal limitation that is a holdover of thinking from the days of gold standards. Again, Strain concedes that MMT scholars are correct as to phony nature of the tax “shackle” and the potentially real nature of serious shortages of real resources.
#AOC, and Democrats as a whole, should not fail to adopt useful federal programs consistent with MMT theory because of fears of what Republicans will do. Republicans are the party in the modern era dedicated to huge tax cuts for the wealthy regardless of real resource restraints. They are not doing so because the Democrats correctly used fiscal stimulus in response to the Great Financial Crisis (GFC). It is insane for the Democrats to place economically illiterate “shackles” on themselves while knowing that Republicans are total hypocrites about budget deficits. #AOC was urging sound economics and policy when she urged Democrats not to self-‘shackle’ themselves to budget offset rules.
Strain’s final attacks on MMT are also political science arguments in which (I hope you sense a theme) he implicitly concedes that MMT scholars recommend appropriate governmental economic responses to potential crises. Strain and Veuger’s complaint about MMT is that Congress might not actually implement those appropriate economic policies. That is not a logical complaint against an economic theory. Congress or the Fed may not implement appropriate economic policies. That is true of any economic policy. All the economist can do is recommend the right economic policies and encourage legislators and central bankers to implement those policies. That means that #AOC is doing exactly the right thing in getting excellent economic advice about marginal tax rates and MMT.
Strain finishes with a point that MMT scholars also make. Stephanie Kelton made the same point in my presence. Economists, including MMT scholars, warn about “cost-push” inflation when there are sudden actions such as successful oil boycotts.
We typically think of inflation as being generated from an overheating economy with excess demand. But prices can also rise because it has become more expensive for businesses to produce goods and services. For example, this situation could occur if the price of oil were to increase rapidly — the economy could experience stagnation and inflation at the same time.
Once more, Strain ends up agreeing with MMT scholars. Strain points out that if the government raises taxes to counter stagflation it could prompt a recession. We do not have to guess what raising interest rates would do because that was Paul Volcker’s strategy beginning in 1979. That strategy produced a recession. There is no great economic policy against stagflation, particularly when a major international boycott drives it.
After all his concessions about MMT theory and scholars, Strain ends by tripling down on his rhetoric – and divorcing it from even a sham of making a logical argument.
Modern monetary theory is seductive in its promises and, occasionally, in its observations. But if enacted it could cause great harm to the U.S. economy. Like Medusa, it may seem beautiful. But if you look it in the eye you will turn to stone.
Medusa? When exactly did #AOC “turn to stone?” It is fitting that Strain rests his rhetoric on a fable that he cannot present any logical basis for raising in this context. The fable is that Medusa blinded her victims and left them incapable of action because she turned them to stone. MMT does the opposite. It opens policymakers’ eyes and galvanizes them to action. MMT allows legislators to focus on the real resource constraints, which typically are not present. MMT frees them from the economically illiterate “shackles” based on phony currency constraints, allowing the adoption of programs that help the public.
Strain does not show how MMT policies “could cause great harm to the U.S. economy.” He does not show how they would cause any harm. Instead, he implicitly concedes that MMT policies, fiscal stimulus in response to the GFC, produced great benefits to the U.S. economy. His only example of a potential harm arising from MMT is a political science argument that while MMT economists propose the correct economic policies that will aid the economy, Congress might not follow the policy advice of MMT economists. That is a nonsensical criticism of an economic policy.
Strain’s only example of harm arises from what he assumes would be MMT policy recommendations to respond to stagflation. As I have explained, there is no magic macroeconomic policy against stagflation produced by a massive international oil boycott. The conventional macroeconomic response, the Fed forcing the economy into a serious recession, produces precisely the harm that Strain ascribes to MMT.
Strain’s closing use of the Medusa myth illustrates the failure of his rant. The metaphor only makes sense against the critics of MMT. Medusa blinded and turned to stone those looked at her. The metaphor is that she effectively blinds anyone who opens his eyes to learn and that she makes it impossible for her victims to act to protect themselves and the public. This is a metaphor describing MMT opponents. They are the ones that admit their propagation of economic fables. Randy Wray made this point in his April 30, 2010 NEP blog (“Paul Samuelson on Deficit Myths”).
[Randy Wray referred to] “an interview Nobel winner Paul Samuelson gave to Mark Blaug (in his film on Keynes, “John Maynard Keynes: Life/Ideas/Legacy 1995”). There Samuelson said:”
I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.
MMT frees legislators of that blinding “superstition” and “myth.” Note that Samuelson was admitting the core truth of MMT theory and admitting the efforts of economists to keep legislators ignorant of the economic illiteracy of the “shackles.”
Given the fact that the Medusa metaphor is the opposite of the reality of who is blinding and incapacitating our elected representatives and the facts that Strain never attempts to explain any reason why the Medusa fable is remotely analogous to MMT proponents the question that arises is why Strain used it as his rant’s defining smear. There is only one reason that emerges from Strain’s text. His first sentence stresses that Alexandria Ocasio-Cortez supports MMT. The only other MMT proponent he identifies is Stephanie Kelton. The far right is obsessed with #AOC – and with her looks. Stephanie Kelton receives large numbers of comments, even in student course ratings, that focus on her looks rather than her prowess as an economist and teacher. This pattern is a common manifestation of misogyny, particularly against female economists. The variant of the Medusa myth that Strain explicitly uses emphasizes Medusa’s “beaut[y].” Strain’s variant of the Medusa myth is the one that combines female beauty and female rage into a ‘monster’ that destroys men. Strain’s Medusa metaphor and myth is another sad example of the far right’s obsession with #AOC in particular and strong women in general.
When their only respite is ridicule, they are straining veugerly. The obsession with AOC on the right is hilarious. They can’t stop thinking about her. She is driving them crazy.
The idea of government running like a household is really strongly built into our population. I’ve tried in vain to explain MMT to friends and their response is that it’s counter intuitive. I thought surely if I started at the base with debits and credits and built from there, they’d get it but they don’t. So I wish you luck in getting the ideas through.
“…the right is now eager to reach the famous second stage of opposition to good ideas (‘first they ignore them, then they attack them’). …”
And then they they say that (the good idea) has always been right, and they have always known it. (third stage)
The third stage has ‘always’ shown up in times of national emergency, such as big wars. (Modern times, that is.) Then financing becomes superfluous/irrelevant, and only matters of resource deployment are significant, crucial or vital. Saving the country becomes more important than trivial affairs such as account entries. The money is ‘printed’ and the resources are deployed.
Then when the emergency has passed, the rentiers return to their prior ranting that resources are scarce, and financing is the upper most concern, and the nation will come to ruin if the financiers don’t get their way.
MMT has always been there, the rentiers just won’t let it out of the bag unless there is a really big emergency, such as ‘the mother of all wars’. They know the score, but as dogs in the manger, no one else is allowed to have any hay.
Slightly off topic, but I saw on Noah Smith’s twitter feed speaking of AOC and democratic socialists trying to “implement MMT.” Which is like speaking of Isaac Newton trying to implement gravity.
“MMT scholars would add two additional constraints, a freely floating currency and national borrowing only in the sovereign currency to produce what I call a “fully sovereign currency.” …”
If the sovereign country has adequate self sufficiency, then the free floating currency isn’t really important, as the government is able to balance trade by intergovernmental negotiation without need of intermediary markets. We see this occurring when governments effectively do barter trades, oil or grains for industrial products for example. The free float is meaningless for states with that kind of power.
“Given my long association with Mat, Scott, Stephanie, and Randy, I can testify from repeated, first-hand experience that each of them stresses the critical importance of real resource constraints in the talks they give on MMT. No one has to “push” them to “admit” that creating severe shortages of key real resources can produce high levels of inflation. ”
It’s a little strange that advocating MMT would somehow be separate from, or not allow price controls and/or rationing. Why no price controls or no rationing? This is routine in emergencies, wars, why not any other time???
-Such as when one needs to clamp down on destructive rent extraction, as we now see in so many sectors such as health care. Bring the lid down on them hard. In my view destructive rent extraction is an internal enemy of a competitive economy. For an economy to be competitive, rent extraction has to be severely restrained. A constraint that has to be operating is constrain rent extraction. But what do we see? Rent extraction to the max, in the US. MMT doesn’t (wouldn’t) hamper the economy, rent extraction does.
And why not reconfigure the tax code to dis-incentivize rent extraction, junk bond deals, LBOs and that kind of thing. Tax rentier income at the highest rate possible. Like the golden years. what was it? 90% or something?
“Strain points out that if the government raises taxes to counter stagflation it could prompt a recession. ”
No way. This needs to be clarified, more well qualified. High marginal tax rates on unearned income does not cause recessions. High taxes on labor, that have definite pass through pressures on real demand, that is pro-recessionary.
In the golden years, there were high marginal rates on high tax brackets and unearned income, with low tax rates on labor. Cut the tax penalties on labor, where real demand comes from.
And about balanced budgets, refer to the sector balances approach. When gov runs a surplus, the country goes into recession.
But I should have started with this, that Bill Black has done it again, and written a really good, top notch article. Bill Black is one of the top reads in economics today.
Very nicely written with excellent points. The only objection I have is making the divide Republican vs Democrat. AOC makes more the point about not being on the corporate payroll which we see on both sides of the aisle. Also I don’t think Nancy Pelosi’s paygo is what AOC or MMT have in mind.
A lot of basic issues are bipartisan like support for Medicare for All. I’ve actually wondered if AOC is working for the deplorables? 🙂
Alexandria Ocasio-Cortez Retweeted Brian L Kahn
Our first policy proposal – a #GreenNewDeal to mobilize nat’l jobs + infrastructure investment to address environment, fix our communities, & save the planet, has support from a majority of **conservative Republican voters.**
Maybe THAT’S why GOP media is so scared of us. Alexandria Ocasio-Cortez added
Tim, great points.
I think the problem with exchange rates comes up with less powerful countries (soft currencies) that aren’t self sufficient. And this will probably get worse with climate change problems.
I think Mary Mellor’s idea of ‘sufficiency provisioning’ (Debt or Democracy: Public Money for Sustainability and Social Justice) gets into the same sort of things you are suggesting with rent control etc.
She makes the point that local currencies can work very well locally to promote employment but can have trouble when they reach out to get resources outside of their currency space especially if they have a soft currency. Global sustainability programs need to take a closer look at how to overcome this sort of social injustice.
Wow! I hadn’t realized Samuelson would cite James Buchanan! He’s the Koch-funded “nobel” laureate at the center of Nancy MacLean’s Democracy in Chains about the right conspiring to disempower “collective action.”
Tim: The free float is meaningless for states with that kind of power.
Freely floating is a matter of degree. Every country intervenes in currency markets now and then – does a “dirty float” But, no. Bad policy can wreck a currency and economy- peg it at a crazily high rate and something ‘s gotta give. A country is not going to find any takers for barter deals that don’t reflect standard or real values.
Free float is meaningful. Rigid pegs are an unnatural constraint and human stupidity can and has found ways for them to wreck even rich countries. The UK was a leading economy, still the reserve currency issuer in the 20s, but Winston Churchill’s decision to peg the pound at the excessively high prewar rate to gold (in effect a crazily high peg to the US dollar) – See Keynes’s The Economic Consequences of Mr. Churchill – caused Depression level unemployment, massive labor unrest etc there before the Great Depression. There just isn’t any reason to not float, even for major countries. Some MMT recommendations suggest limiting speculative, gambling fx trades that have nothing to do with real commerce. This is a sensible idea.
Bill Black shouldn’t say MMT scholars would add two additional constraints, a freely floating currency and national borrowing only in the sovereign currency to produce what I call a “fully sovereign currency.”
Calling floating a “constraint” is bizarre, upside down terminology. Floating means unconstrained to any particular fx value. It is like calling “not being in a straitjacket” a “constraint”.
In this simile, foreign borrowing is like having a leash around you. Sometimes can be loose and meaningless – it might just keep you from wandering too far from your nanny 😉 – but it can get around your neck and somebody might grab the other end and pull it taut, and then you’re in trouble.
By “constraint”, Black probably means a constraint on the over-broad statement “Any government that issues its own currency can always pay its bills.” It’s not the whole truth, and by mentioning those conditions around floating currency and low foreign debt we can make it more accurate.
Hit pieces against MMT are the flavor-of-the-month lately, and often built around some clever mis-statement of an actual MMT point.
The smears seem to be coming from all kinds of people. I wonder if Larry Summers is going around giving his pep talk about Insiders and Outsiders? Or maybe somebody else is copying it?
Calgacus, the vast majority ( >= 80%) of FX trades are speculation. There’s no need for any of that. International trade is largely balanced. When a country has balanced trade does it need FX market exchanges??? Ministries of finance/treasury departments can handle the negotiations. No need for FX markets. =>the government is a bank, and can clear all FX requirements, without any private, so called markets.
Under MMT, countries have no need of international finance capital flows, no need for international/external finance capital investment. A sovereign state can create all the finance necessary for it’s own development.
An MMT world, with public sector (sovereign state) banking, would look very different than today’s world.