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Why Modern Monetary Theory is a dicey bet for liberals

A couple of weeks ago Alice Marshall responded to some of the criticisms I made of Modern Monetary Theory (MMT) a few months back. Her post is a good summary of both what I agree with about Modern Monetary Theory and my reservations. In fact, these few sentences put both in a nutshell:

Taxes do not finance government expenditure at the federal level. That alone is reason to embrace MMT. If it explains the world as it is, and I put it to you that it does, than we should use it as a basis for public policy.

I agree 100% with the first two sentences, which cover the monetary theory part of Modern Monetary Theory. Modern Monetary Theory can and should be used against those who call for austerity because we (allegedly) have no money. As I wrote earlier, though, I don’t think a successful effort would end the call for cuts in government spending:

The people who oppose policy like a job guarantee do not do so because they haven’t been introduced to a sufficiently persuasive economic model. They do so because they are ideologically opposed to federal social programs, and if you take away their current argument (“because no money”) they will just substitute it with the next handiest one (“because inflation”). But that’s not a legitimate problem, you say? No it isn’t. Neither is insolvency. Has that deterred them so far?

Still, succeeding would make those who used the “we’re broke” excuse look foolish, and that would have political consequences. As I concluded before, that seems like a tall enough order by itself.

So far, so good. It’s the extension of Modern Monetary Theory beyond monetary theory where I start to have reservations. Using Modern Monetary Theory as the basis for public policy is tricky because in addition to justifying liberal priorities like funding safety net programs or a job guarantee, it can also be used for neoliberal ends like slashing taxes and eliminating the minimum wage. When Modern Monetary Theory stops being a monetary theory, vague notions like “public purpose” and “productive capacity” come into play. Marshall admits we already have Modern Monetary Theory for big banks, as evidenced by the bailout and other extraordinary measures. Who is to say public purpose hasn’t been served by that? Who’s to say there isn’t an abundance of productive capacity bottled up in our entrepreneurial job creators just waiting to be unleashed by the elimination of the capital gains tax?

Nothing about Modern Monetary Theory is inherently just or equitable. It is, as Alice says, just a description of the way the world works - which is why I don’t really understand liberals putting a whole lot of time or energy into it. If one’s priority is the establishment (or protection) of just and equitable policies, Modern Monetary Theory is a terrible place to start. Every bit of time and effort getting it broadly accepted will get you precisely zero percent closer to those goals.

There isn’t a single founder of Modern Monetary Theory or a canonical text. Everything beyond that initial monetary theory is up for grabs. I’ve cited people presented as authorities on the subject only to be told they weren’t really MMT. But since there isn’t a single definitive source on how Modern Monetary Theory defines its non-monetary theory terms, that can be an argument against any objection. No one is MMT - or everyone is.

Those on the left tend to fall back on a sort of “MMT plus” formulation, as Alice does: “Speaking only for myself, I consider increasing taxes on the rich as necessary for preserving democracy.” Right, because Modern Monetary Theory can be used to justify cutting taxes, and whoever wins the battle for the soul of MMT will get to decide just how liberal - or neoliberal - it will be in practice. Which side would you bet on, particularly if it starts to be taken seriously? Political and economic elites have a pretty good track record of co-opting movements. One that has the enormous wiggle room of Modern Monetary Theory’s non-monetary theory components could be immediately put in their service, without even a brief period of progressive utility.

That’s why I think it is better to make the case for liberal policy up front, instead of obscuring it behind a Rorschach test presented as a monetary theory. Make the case for a job or income guarantee, or better funding of social programs, or what have you, make that case directly. If anyone asks how to pay for it, MMT. But lead by arguing in terms of justice and equity. Modern Monetary Theory is the details, and details belong in the background.

Reader Comments (6)

About your first quote and agreement: it's silly to say taxes don't fund government expenditure.

A government which has tax rates of 5% can't spend as much if taxes were 20%.

September 27, 2014 | Unregistered CommenterRamanan

Ramanan, the austerity narrative is what that's referring to. It's nonsensical to say, for instance, "we can't send out Social Security checks until the tax money to pay for them arrives." The government simply creates the money and pays for it.

Now, inflation is a thing - even MMTers acknowledge that, though they tend to describe it in terms of aggregate demand. Over the long term taxes and revenue need to be roughly equal. But in the context of austerity budgeting that's a long way from saying taxes fund spending.

September 27, 2014 | Registered CommenterDan

I think this is a timely reflection.

While I myself honestly, genuinely, sympathize with MMT and with many of its proponents (particularly those with a credible academic trajectory), the truth is that I have serious doubts, too.

And the more I read comment threads, and rather popular bloggers, and see THEIR understanding (let's call it, the popular understanding) of MMT and of society, the more my doubts grow.

It's these people, not the serious scholars, who will enter into the "promised land", if ever someone enters it.. The old-timers, like Moses, will not make it.

It's nice to see I may not be alone in that. Thanks for the post.

September 29, 2014 | Unregistered CommenterMagpie

Thanks for the kind words, Magpie. I've written a few posts on the subject and gotten pretty strenuous pushback from supporters, but I too like how it debunks the austerity argument and see some really great potential for use in policymaking.

I consider myself a proponent of a specifically liberal implementation of MMT, and would love to see such a thing consciously promoted. The liberal MMTers I've engaged with seem to think everything is fine as it is, though - no need to offer a single, agreed upon progressive implementation of MMT. See links here! And here! And here!

Oy.

September 29, 2014 | Registered CommenterDan

Taxes do fund public expenditure, in the sense that they stop those who pay those taxes from spending money, so that government can spend it instead!

That's a more accurate description of the MMT position than the usual "Federal Taxes don't fund anything" line which some of the more over-zealous of MMT advocates might use.

There are instances where MMT dictates less spending by government than is received in taxes ie when the economy is running a net export surplus, for example, of if the private sector is de-saving.

The essential point to consider is inflation. If it's low and there is insufficient economic activity to ensure full employment, then government can safely spend more than it receives in taxes.

"it [MMT] can also be used for neoliberal ends like slashing taxes and eliminating the minimum wage. "

There's nothing wrong with cutting taxes. Especially if you live in a country with 20 + % VAT!

If there is a JG there is no need for a minimum wage. The terms of the JG define that.

February 23, 2015 | Unregistered Commenterpetermartin2001

Thanks for the comment Peter. The most appealing description I've heard from an MMTer about taxes is to think of them as a drain in a sink (where the faucet is government spending). They keep the sink from "overflowing" as it were.

So a country with a 20% tax rate can turn the faucet on higher than one with 10%, because it drains the money faster. If you cut taxes you essentially constrict the drain, and MMTers generally won't acknowledge as much. So yes, I think there's definitely something wrong with cutting (particularly income) taxes, especially in a country like the US that has a supply side narrative. That might be different in VAT countries, but it seems the general belief among Western elites has been for austerity because "we're broke." Frankly, I see them more likely to grab hold of the cut taxes part of MMT, ignore the rest, and make things even worse. "There's nothing wrong with cutting taxes" seems, in the current environment, a neoliberal argument.

As for the JG and minimum wage, I address that here:
http://www.pruningshears.us/pruning-shears/2014/5/29/mmts-job-guarantee-oasis-or-mirage.html

Thanks again for stopping by to post.

February 25, 2015 | Registered CommenterDan

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