4 things MMT explains badly
My opinions on some MMT flaws, and how it is often incomplete and misleading.
Note: this post has been edited and revised several times from the original version.
1. When and where does MMT apply?
MMT is a theory about “Modern” money. But what, exactly, does this word “Modern” mean? Fequently, this is described as referring to currency issuing countries that no longer have a gold-standard and don’t follow any other fixed exchange arrangements. But MMT analysis actually depends on many specific assumptions about financial relationships, not all of which are universal, and aren’t explicitly articulated. If we don’t adequately describe what constitutes a “Modern” money system, analysis will be flawed from the start.
Is MMT exclusively concerned with analyzing the world’s “modern” nation-states that have overwhelmingly adopted central banking systems? Or does it apply to any society using “modern” information technology systems to perform accounting? Does it require a society with “modern” supply chains that can adapt production to changing demand levels, thereby avoiding inflation? Or is it focused on societies with “modern” legal systems, which are sufficiently mature and established, that their authority is generally accepted without question? To me, at least, the answers to these questions are not completely clear.
Regardless, it sounds like the word “Modern”, might involve an underlying normative bias, suggesting that the current paradigms of finance and accounting are somehow virtuous, admirable, praiseworthy, necessary, or uniquely effective.
The MMT community shares greatly simplified narratives, to better engage with a popular audience. This mass presentation glosses over many critical details and important conceptual nuance. MMT rhetoric accepts the democratic and political rationale of public institutions at face value, always emphasizing that Fiscal spending is appropriated by congress, and the Fed is only implementing the directives of congress in managing our money systems.
Even if we accept the established narratives of our institutional arrangements without question, MMT discussions neglect a tremendous opportunity to explore the underlying determinants of political, legal, and financial processes. Culture, status, influence, and power, all have a huge impact on the outcomes of these processes.
One controversial perennial topic is the role of the Federal Reserve, and the degree to which it truly operates as a public institution and serves our best interests. Prominent MMTers may be highly critical of the policy preferences of central bankers, but they tend to dismiss the notion that these bad policy choices are a direct result of fundamentally compromised institutional arrangements.
2. The Real Problem With Monetary Policy
Monetarism, and the monetary policy tools it has crafted, have both the benefit and disadvantage of “short-circuiting” complex federal political processes. Once you set an interest rate, at which banks can universally “borrow” money, you have given banks the power to issue money and establish domestic financial programs among the populace. In practice, these programs are used to expand neocolonialism, impose worker serfdom, encourage consumption and endebtedness, and support the domination of natural resources and social institutions for financial advantage through perpetual preferential treatment of the wealthy and connected. Credit scores don’t directly consider any real social issues involved in lending. Is that the primary criteria we should be usuring to allocate our credit as a society?
Banks must merely accept the requisite political conditions of operation, of which, the ostensibly “overnight” interest rate, is only one detail. Because money is inherently a virtual construct, it doesn’t matter that bank balances aren’t “real” dollars, the important matter is that banks have protected and prioritized access to the process whereby public money is issued. As long as banks play by the “rules”, they will always be given all the money they need to operate. As such, private banks are established issuers of public money under central banking systems, and the public is legally compelled to patronize banks, if they need any basic level of financial services. Meanwhile, public institutions are relegated to auctioning off bonds, which are promoted much less to the general public, but still eagerly hoarded by those with large amounts of cash on their balance sheets who are risk averse. This perpetuates the myth that public financial operations depend on the approval of wealthy financial elites, when precisely the reverse is true. It serves to shame public institutions whenever they run a deficit or otherwise exercise their powers in appropriate ways that challenges broken narratives or threatens unfair and unjustified financial advantages enjoyed by many special financial interests.
Instead of evaluating merits of monetary policy in earnest, MMTers go around trumpeting a Job Guarantee, sometimes with much hand waving as to how these programs will be implemented. They expect everyone to embrace the idea of adapting our federally contolled, top-down financial system to directly put people to work, instead of redesigning it to empower people from the bottom up. While public job programs have great merit, under MMT’s JG proposal, these programs would be established federally and administered locally, instead of empowering local polities to implement their own programs using their own independent financial powers and resources.
While a federal job program on the scale of a Job Guarantee would be a huge accomplishment, it does not reflect the political values of a large segment of society, and presents many other challenges. We should be eagerly exploring solutions that can be implemented locally without federal intervention.
The real problem with monetary policy, is that it gives authority to bankers to be the managers of society and the economy. Meanwhile, giving bankers this power, creates a burden on the federal government impose the effective political rules on the banks, so that they will fulfill this job properly and not abuse society to the point of social and financial meltdown. Instead of recognizing the need to upend and replace our flawed banking system, most MMTers have softer suggestions like imposing more balance sheet, “asset-side” regulations on banks, to control their badhavior. Warren Mosler, for example, has presented ideas along these lines.
If national or international economies really need a single standardized currency asset, there are ways to do this that don’t involve signing away your firstborn to Rumpelstiltskin. Instead, the processes of creating a standardized currency should empower real political institutions such as the member states of the EU, or states and cities in the U.S. that are crumbling. Better yet, empower local polities to issue their own assets subject to their own sovereign terms, even if that creates some redundancy and/or overlap.
Suffice it to say, no one gives a complete account of inflation, because such an account simply cannot be given.
Money is a symbol used among social peers. Just like we can’t enumerate all the factors which might determine the next hit song or fidget spinner craze, there’s no way to consolidate all of our price setting processes into simple explanations.
Thus, MMT’s account of inflation is incomplete at best. In the following video, Stephanie Kelton describes 2 basic inflationary causes: “Demand Push”, and “Cost Pull”. While these ideas are a good starting point for exploring price phenomenon, if you were looking for a complete explanation, you will be disappointed.
Inflation is a trap for well-intentioned economic thinkers. The problem comes from the tool we use to measure inflation. Price digests take many numbers as input and generate a single number as output. We then look at the output, and try to describe what it is doing, and why. This is as futile as describing patterns of waves as they land on the beach. Price digests decrease the apparent complexity of a phenomenon, while simultaneously increasing the underlying complexity, simply because more variables are involved. But whereas waves exhibit long-run regularity due to tidal phenomenon, there is no comparably consistent phenomenon in social dynamics, cliodynamics included.
We see the flaw in thinking we can always predict a stock price or commodity price, even though we don’t deny the importance of some the fundamentals. But for some reason, when it comes to inflation, we think these limitations no longer apply and society is certain to use this social symbol in accordance to our preconceived narrative.
4. It’s not about being the currency issuer
The truth is, federal governments have good deal financial flexibility simply because, in many respects, their assets demonstrate proper financial engineering that permits continuous price adjustments to changing outlooks(ie no nonsense like bank runs), even when they reflect problematic political design.
Being a “currency issuer” has nothing to do with it. Every financial entity issues their own assets, which, depending on legal and contractual arrangements, can achieve the full financial flexibility MMT only attributes to “Monetary Sovereigns”.