July 14, 2012

A Qualified Critique of Popular MMT Soundbites

"With Great Power" (of making fiat currency unlimitedly) "comes Great Responsibility" (of creating it against POSITIVE VALUE)
-- Uncle Ben in "The Spiderman"

I just posted a critique of Modern Macroeconomic Theory showing the hazards in using it in any significant measure. The key points are:



Even as money may not have much significance for the Government that can create it at will (i.e. does not have any need to "earn money before it can spend it"), it does have to forever ensure that households do have to EARN money to spend it or save it up. An Economy needs people to attach meaning to, and their ability to hold on to, money - to incent them to work / produce value for others for it. If they can simply be handed money out to keep the economy going and growing, and any amount can be taxed off their earnings for the cause of 'inflation control', who would want to work for it?

Under MMT, the retirees are on the mercy of the Government, economic conditions of the time, and what suits overall Government economic policy, when they retire. The money they themselves had been saving up all the while they were working could get taxed away before they retired - on the need of withdrawing money from the economy “to curb inflation” caused by prior period of too much having gotten created.

It is not practical to assume that Government will simply be able to tax the excess money back as needed.

Potential Economic actors cannot be GIVEN (handed out) money for doing nothing (except some modest survival payments), or worse, for doing things that rob value from other people. New Government money can, however, be added into the economy (and/or this spending be covered by some practicable tax reorganization and/or cuts in value-robbing Govt areas) to create public value adding jobs such as delivering education (in all its aspects including music, drama, arts and literature) with low students/teacher ratios and delivering usable infrastructure.

MMT is a long way off from being a whole and complete perspective-set to drive policy - until then it can only sparingly cast a shadow over it, as it already does.

The full comment is below and should also be accessible here (awaiting moderation by site administrator):

Whereas it is true that a Gov sovereign over the currency its economy uses won't technically ever go bankrupt, that it does not need to either tax or borrow in order to spend, the downstream tenets of MMT wrt running an economy on this seductive truth have some gargantuan problems:

1. "The Gov can always just tax back extra currency circulating to curb inflation when it strikes...or sell Gov securities to do this purge" - Once you earn the money, it's not easy for the Gov to suddenly tell someone, "Hey! we are seeing too much inflation - so now we will tax you at 60% and not 30% anymore." If it gets as simple as that, you will see a fall in economic activity. Economy needs people to attach meaning and their ability to hold on to money. At best you can let some of it's value chip away due to inflation and tinker little bit with tax rates when increasing them. If you actually are able to sell to the people MMT - that money does not mean anything, you will kill the economy, and not be able to even apply MMT sparingly.

If the Central Bank is going to sell Gov securities instead to curb inflation, first off, you're already back to giving money meaning - i.e. I get to keep the money I saved in a safe haven called Treasury secruties. If there's a lot of money Gov wants to mop up from the economy, it'll have to offer higher interest rates on the securities it is tring to sell forth.

2. the MMT World of ~'money as points that Gov can dilute or withdraw at will upon need to do so' is totally insensitive to the societal aim of people having the opportunity to retire with dignity on the money that they themselves saved up. MMT will pay retirees based on the need of the overall economy at that hour - to keep growth.inflation on target, and might have taxed away what the guy had saved up because there were bouts of inflation in periods prior to his retirement.

3. Whereas it is true that Gov does not have any need to "earn money before it can spend it", it has to forever ensure that households have to EARN money to spend it or save it up - they cannot be GIVEN (handed out) money for doing nothing (except some modest survival payments), or worse, for doing things that rob value from other people. e.g. the extensive taxation bureaucracy and litigation machinery exists to administer the complex tax code that makes life difficult for people. THAT is no good way to expand the economy and embed jobs. New Government money can, however, be added into the economy (and/or this spending be covered by some practicable tax reorganization and/or cuts in value-robbing Govt areas) to create public value adding jobs such as delivering education (in all its aspects including music, drama, arts and literature) with low students/teacher ratios and delivering usable infrastructure.

I believe MMT is a long way off from being a whole and complete perspective-set to drive policy - until then it can only sparingly cast a shadow over it, as it already does: Neither the US nor EU nations would have deficit levels that they are at if hard-money policies ("Gov has to earn or tax before it can spend") were firmly in control.

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