Good criticism of MMT

The TD Bank Financial Group, authors of Modern Monetary Theory: A Primer, make some fairly serious mistakes in their criticism of MMT. Still, given the deluge of misinformation about MMT, it looks to be written in the best faith we can hope for. With all good luck, I will devote some attention to a more detailed examination of the report in my copious free time.

Yet another good MMT article

We're making some progress.

National Debt No Big Deal? More Economists Unconcerned With Trillion-Dollar Government Deficits

Old Time Religion

In his two part article, In The Fed We Trust – Part 1 and In The Fed We Trust (Part 2): What Is Money?, Michael Lebowitz preaches that Old Time Religion with the vigor and enthusiasm of tent-revival Christianity... and all the attention to truth and evidence, logic and reason, the genre is known for.

The capitalist ruling class is running scared! <evil grin>

Another decent MMT article

It's superficial, but at least it avoids the most egregious bad-faith arguments, and it's good press in a mainstream magazine.

Alexandria Ocasio-Cortez is a fan of a geeky economic theory called MMT: Here's a plain-English guide to what it is and why it's interesting

Happy (belated) Columbus Day!

Spreading the gospel

Osita Nwanevu has a great article about MMT in The New Republic: Spreading the Gospel of Modern Monetary Theory

I had to sigh a bit reading the closing line, "Those speaking up in defense of the assumptions MMT assails would do well to consider that the hearts and minds of the public are rarely won on technicalities." The author is most certainly correct. Still, the technicalities do matter, at least to me, and the assumptions that MMT assails are actually incorrect and are indefensible not only on political grounds but also on technical grounds.

Professionals and the PMC

In Professional-Managerial Chasm Gabriel Winant offers a long and very sharp explanation of the professional-managerial class (PMC) and its role in capitalist society. I myself have spent some time studying the PMC, and I agree with pretty much everything Winant has to say about it. But Winant wants to reform the PMC; but the reform of the PMC as a class is impossible. Socialists can certainly appropriate some of the attributes and ethos of the class, and we are definitely taking many of its former members, but the class itself is irredeemable.

Winant correctly notes that the PMC is bleeding members into socialism:

Spend time in the forums of socialists who’ve long been loyal to Sanders and critical of “identity politics”—Jacobin readers, say, or in the listeners of Chapo Trap House—and you’ll see “PMC” everywhere, a sociological designation turned into an epithet and hurled like a missile.

The trouble, of course, would appear to be of the glass-house variety. While the anonymous millions of Sanders supporters do appear to come from lower on the social scale, the ideological cadre driving the Sanders movement features a huge proportion of activists who are credentialed meritocrats in their own right, or descended from them. The famous self-applied moniker of Chapo Trap House’s hosts and listeners, after all, is “failson”—the downwardly mobile, disappointing male offspring of complacent baby boomers. Go to a DSA meeting and see if you can count the grad students on two hands; throw in the coders or the teachers, and hands and feet together won’t be enough. PMC? De te fabula narratur.

But that's not any kind of trouble, any more than Engel's position as a capitalist was "trouble" for Marx's analysis of capitalism. Winant correctly notes later that a class is not the kind of people it's made of, but the role those people take. The phenomenon Winant observes does not seem much different from the proletarianization of the petty-bourgeoisie.

The role of the PMC in the United States (and China, if you take the Chinese Communist Party as an exemplar of PMC control of state power) is to act as an intermediary between the proletariat and the bourgeoisie through the exercise of state power. In China, the Party has much more successfully subordinated the bourgeoisie; in the United States the bourgeoisie has thoroughly subordinated the PMC. (In Russia, the Party tried to eliminate the bourgeoisie, but failed to effectively manage their society. Why? There are a lot of opinions out there, but I don't know, and you don't either.)

The PMC could have, perhaps, eliminated the American bourgeoisie, but they chose not to do so. Instead, they chose to prop up capitalism, to rescue and preserve the bourgeoisie; the capitalist class was rather less than grateful. But today? It's hard to see the American PMC having the will to try again; they merely wish to restore their old position in the 1950s, wielding state power to again rescue and preserve capitalism, whis is, of course, what Elizabeth Warren actually says she wants to do. But if she were to win (which she won't), she would fail.

The most likely danger is the one that Winant actually notes, that Warren will turn out to be just another Obama or Clinton, passive, bewildered captives to a hostile capitalist class. Winant acknowledges the strength of this claim, but argues that "it oddly holds the PMC constant, imagining that it continues to smoothly carry out the function for which it developed a century ago." But why smoothly? How could difficulty somehow rescue the credibility of the PMC? We merely have to imagine that the PMC wants to retake the function of reproducing and managing a capitalist society, with its concomitant exploitation of the working class, in no small part because that's all they know.

Winant mistakes the class for the people, observing, "The PMC is not the ruling class, it merely serves it, deliberately or inadvertently." Fair enough, but goes on to conclude that therefore, "professionals do share something with the working class, . . . the lack of ultimate control over their conditions of labor." The reasoning here does not work: just because someone is a "professional" does not mean they are a part of the PMC as a class. Winant observes the proletarianization of a lot of lower-level professionals, which by itself does not make a basis for compromise or alliance between the PMC and the working class; it just means the working class is getting people with more college degrees. Yes, the PMC as a class does serve the capitalist ruling class, but by choice, not force, and the members of the PMC as a class do have "ultimate control over their conditions of labor."

I do agree that the historical "failure" of the PMC to ally itself with the proletariat "did not invalidate the concept" of such an alliance. But this failure definitely does seriously undermine their credibility, and I would prefer an argument stronger than that it's not completely impossible for the PMC as a class to turn itself around.

Winant again observes correctly that there is a lot of hostility among professionals toward the PMC, noting that

Those who wield the epithet 'PMC,' then, do so not against strangers, but against the most familiar enemies: the ones who made it, for whom good luck or preexisting advantages paid off, and who maintained their ultimate loyalty to the existing order.

But Winant argues that this hostility misses the point, which is "not to abandon the PMC, but to turn it against its masters." I can certainly see turning low level proletarianized professionals against their capitalist masters; I don't see how the class as it sees itself is so easily reformed.

The question is partly whether Warren is a part of the PMC just because of her education and profession. She's not just a professional, she's a law professor, and a highly successful one at that. I can be fairly confident that she has not experienced any "lack of ultimate control over [her] conditions of labor." But a more important question is how she sees her role in the capitalist system. Does she see herself as someone there to challenge the power of the capitalist class, or to simply help the capitalist class use its power more effectively? Again, the PMC sees its role as the latter, not the former, as confirmed by the most successful representatives of the PMC such as Barack Obama and Hillary Clinton (not to mention most of my colleagues, who are professors of economics).

We don't need the rich

Rich people have a gazillion dollars hidden away in offshore bank accounts. "Alas!" the progressives wail, "Think of all the good we could do if we could get just the taxes on that money!"

Hold up. We don't have to get the taxes. If there a 10% of a gazillion dollars worth of things that we think are worth doing, we can just "print" that money. If something is worth doing, it's worth printing the money to get it done: people will, you know, do stuff if you give them money to do so.

"But if we print the money, we will cause inflation! Inflation is Really Bad, right?"

Inflation is not the worst thing in the world, but just printing and spending money by itself will not cause inflation. The proximate cause of inflation is not too much money, it's too much money in circulation (and too much money in circulation in the wrong places). As long as the gazillion dollars just sit quietly hidden in these offshore accounts, we can print exactly as much as we would have collected as taxes, and we will have exactly as much or as little inflation as we would if we didn't print it but instead took it from taxes levied on this money. The rich cannot hold the government hostage by hoarding money; money is useful only when it's spent.

"Ah, but if we print the money, and then rich people spend their money, we will have inflation!"

Excellent, grasshopper! Now you're thinking with portals!

The key, then, is to not to find and levy taxes on the hidden money before, but make it so that it won't cause inflation unless the rich reveal the money. It's the difference between trying to break into the bank or just posting a guard outside the door catch withdrawals. The second is a hell of a lot easier than the first.

I mean, if they want to (snicker) act in the public interest (chortle) and voluntarily (snort) repatriate their money... sorry, I can't stop laughing long enough to complete the sentence.

I'm not an expert in tax law, but it seems like it's a lot easier to force the rich to keep hiding their money than it is to find it and tax it.

MMT Misconceptions part 3b

Continuing with Doug Henwood's essay, Modern Monetary Theory Isn’t Helping, and his treatment of taxes and government revenue.

Misconception: Taxation transfers resources

[O]ur public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones.

Well, no. It's not anything like that; it can't possibly be anything like that. Henwood is not getting MMT wrong here; he's getting basic logic wrong. Henwood is at best speaking imprecisely; we could just attribute this imprecision to a desire for concision, but speaking carefully would completely undermine his point.

Generally, the word resource refers to something real: labor, raw materials, capital equipment, intermediate goods, etc. But of course it's nonsensical to suppose — and I don't think Henwood believes any such thing — that rich people have vast warehouses full of machines, equipment, parts, and raw materials, and dormitories full of people they are withholding from the labor force.

Taxes take money away from people who have it. Money is not a resource; it is the social permission to access society's resources. This isn't the 11th century; the government does not impose a tax by taking the food I grow. When I pay my taxes, I am not giving any resources to the government; the government is taking away some of my social permission to access society's resources.

Absent theft and robbery, ordinary people, households and firms, must get money by persuading someone else who already has money to give it to them, eventually in return for real resources. That's just how money works, n'est ce pas? But governments are just not at all like that.

Money is a social system, and someone, some collection of institutions (spoiler alert: the government), has to create and manage money. The government has to create the money, ensure that people want to use it as a medium of exchange and store of value. The government must ensure there's enough money overall to grant the social permission to access all of society's resources, but not so much that people think they have the social permission to access resources that we cannot produce.

No other institution except the government* can manage the money system. We can't just leave money to "the market". Even if you grant that markets have some value, they suck at delivering the kind of rigidly broad uniformity we want from money; governments are terrific at being rigidly uniform. Government does not have to get social permission to access society's resources. Government has this social permission just by virtue of being the government.

*I suppose e could go back to the gold standard, but almost a century ago, Keynes realized the gold standard was a Bad Terrible Idea, and we abandoned its last vestige in 1971.

This is what I meant previously by looking at the control system; it's important to understand how the control system works so we can effectively use it.

This is how money actually works: The government creates money and puts in the hands of the private sector by buying things like airports and bridges, loaning it to banks to manage the payment system, or buying real or financial assets with it. So that people will actually accept and use the government's money, the government imposes taxes that must be paid in the money it just issued, that could not have been be paid unless the government had first issued the money. Because the government wants some of this money to stay in circulation for private transactions, they collect in taxes less money than they issued.

The government takes these taxes and "burns" them. The government does not need your tax dollars; the government imposes taxes in part so that we need them.

Once the money economy gets rolling, the government continually creates money and puts it into the private economy; it collects taxes to destroy excess money.

The government does not borrow money; they offer people interest to take money out of circulation and "store" it in a government "bond". The government does not offer people real resources in return for the "bond", and the government has no need to give anyone real resources to get the money they promise to repay. They not just can but they have not choice but to print the money when the "bond" matures.

I don't care at all how you or anyone else, left, right or center; capitalist, socialist, or anarchist, feels about the above. That's how money actually works. Again, this is not MMT; this is fundamental monetary economics.

Capitalists fucking hate that money works this way. They would much prefer the gold standard, which gives the rich total control of the money system. The only reason they tolerate the fiat money system — and they have no choice but to tolerate it — is that the last time the bourgeoisie tried the gold standard, the peasants started gathering torches and pitchforks.

The bourgeoisie and their loyal ally? unwitting stooge? useful idiot? Doug Henwood absolutely do not want the unwashed masses to understand how the money system actually works. They want you to believe that the rich have the resources we need to run our society, and that the citizenry must either humbly beg them for these necessary resources or fight a long and vicious battle to take those resources away from them.

Neither is true. The rich have nothing but money, social permission, created by the government. We absolutely should take away most (all?) of that social permission, not because we need it, but because fuck you, that's why; we do not want them to have it. If they want to hide their money, let them. Hidden money is out of circulation and useless. If they want to defend their money — and the government really should be careful and legal about how they take anyone's money — that's fine; the government can just freeze the money while the litigation drags on; again, frozen money is no money at all.

The rich may have something we do not want them to have, but they have nothing we need.

MMT Misconceptions part 3a (taxes)

Finally, Doug Henwood's essay, Modern Monetary Theory Isn’t Helping, gets to the crux of the biscuit, taxes and government revenue.

Misconception: Taxation transfers resources

MT’s lack of interest in the relationship between money and the real economy causes adherents to overlook the connection between taxing, spending, and the allocation of resources. We have [all sorts of bad things] because the public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones, with at least the potential for them to be spent on more humane pursuits.

Long sigh. This is a complicated and persistent misconception. It's complicated because economics is complicated; it's persistent because the illusion that taxes transfer resources serves the interests of the capitalist class.

Please bear with me as I draw an extended analogy.

Consider an ordinary automobile. One way (certainly not the only way) to think about a car is to divide it conceptually into the physical system, the user interface, and the control system. The physical system consists of the engine, which physically makes the car go, the tires, which physically turn the car, and the brake pads, which make the car slow down and stop. The user interface is what you, the driver, use to control the car: the gas pedal makes the car go, the steering wheel makes the car turn, and the brake pedal makes the car stop. Finally, the control system connects the user interface to the physical system. Pushing the gas pedal down (U) causes a cable to open the throttle in the carburetor, which sucks more gasoline and air into the cylinders, (CS) and the car goes faster.

This is more or less what MMT does (or at least how I read MMT): divide the economy the same way as above. The physical part, the real economy, comprises factories, workers, capital, natural resources, etc. The user interface is money our ordinary experience of money, receiving a paycheck, spending money to buy stuff, paying taxes, etc. The control system is the banking system, including the central bank and the Treasury, which connects our ordinary experience of money to the real economy.

There are a lot of other useful ways to divide the economy, and a lot of other economic topics worth studying; MMT scholars choose to focus mostly on the control system, i.e. the banking system. Moreover, they claim to have discovered (or advanced our understanding of) how the control system works; moreover, they claim the control system does not work the way capitalist economists tell us it works.

(These claims are either true or false. If they are true, they are true even if we don't like that they're true; if they're false, they are false even if we want them to be true. It is instructive that Henwood never analyzes whether or not MMT scholars' claims are true or false, only that they are undesirable, and MMT scholars are ugly and their mothers dress them funny. Of course, I think Henwood is fractally wrong.)

Back to the car analogy. Max Max has a turbocharger on his V8 Interceptor. He has a pull switch installed on the gear shift lever that engages the turbocharger. He pulls the switch and the car goes faster. We would justly consider someone misguided who objected, "Max can't just push a button and make the car magically go faster. Pushing on the gas pedal makes the car go faster." We would consider them willfully ignorant if, when we tried to explain, they retorted, "Don't confuse me with all that 'physics' and 'engineering' bullshit. I know how a car works, and you make it go faster by pushing the gas pedal. If we could just push a button and make the car go faster, then why can't we just put in a button that makes the car go 1,000 miles per hour? Checkmate atheists engineers!"

Henwood makes the same mistake by confusing taxes (user interface) for resource transfers (control system) and exhibits the same willful ignorance by dismissing MMT scholars nerdy wonks talking about boring and mathy topics like accounting and finance. Henwood already knows how the economy works. I mean, he's at least skimmed "Wage Labor and Capital"; what more do we need to know?

In the next installment, I'll dig more deeply into what economists teach undergraduate economics students about macroeconomics (I am an expert in this topic, or at least a professional, because I am paid to do just that) and how Henwood badly mangles even conventional macroeconomics; I will follow with the changes that MMT scholars (as I understand them) propose to conventional macro.

MMT Misconceptions part 2

Let's push on looking at the misconceptions Doug Henwood's essay, Modern Monetary Theory Isn’t Helping.

Note: For clarity, I've added the label "Misconception:" to the boldfaced titles.

Misconception: MMT is about American Exceptionalism

Another serious problem with MMT is its embeddedness in a rich-country perspective, and in particular American exceptionalism. . . . MMT’s unacknowledged dependence on the exorbitant privilege of the United States —Mitchell is about the only high-profile MMTer from abroad — is almost completely unaddressed by its proponents.

American economists study the American economy. Quelle surprise. Granted, the US is indeed an exceptional economy. So what? How much does MMT rely on American exceptionalism, which really is singular, rather than its monetary sovereignty, which is not universal but more broadly shared? As Henwood later mentions, other countries such as "Canada, Japan, and Britain, though to a lesser degree" have monetary sovereignty. Henwood does not, however, compare how MMT applies to those countries which do have monetary sovereignty but not the United States' singular privilege. Instead, he jumps right to Allende and Chavez:

But less privileged countries have to worry about foreign investors dumping their bonds and driving down the value of their currency, which would jack up interest rates and inflation. Salvador Allende’s government greatly increased spending and raised the incomes of the poorest in Chile in the early 1970s; that worked nicely for a while, but then inflation took off. Allende wasn’t operating from the MMT playbook, merely resorting to policies pursued by many progressive governments facing political opposition and resource constraints. But such experiments rarely end well, and similar problems would face a poor country trying to stimulate its way to prosperity today, as we see in Venezuela now.

Wait, what!? Am I reading Jacobin or The Economist? Such experiments rarely end well not because they are economically inept but because the United States sends the CIA or the Marines to put a stop to it.

Misconception: MMT should address International Trade and International Political Economy

Those countries need, for example, to import things priced in dollars, like oil, and the value of their currency has a direct effect on living standards that Americans are insulated from because we can print the currency in which that oil is priced. Brazil, in turn, has even less freedom; it needs harder currencies like dollars and euros to import commodities and advanced manufactured goods; and poorer countries like Bolivia or Ghana have even less. To buy essential imports, these countries often have to borrow in those hard currencies. To pay off the loans, they need to earn foreign currency through exports.

MMT has little helpful to say about that situation.

I will note that not only do MMT scholars say little about IPE, they say nothing whatsoever about the heartbreak of psoriasis. So what? MMT is a theory about domestic monetary and fiscal macroeconomics.

Misconception: Advocates present MMT as a socialist panacea

MMTers show a strange lack of interest in the specificity of capitalism — how production and distribution are organized, how demand for credit arises in the course of commerce, how people earn their living and under what conditions . . . Through the fantasy of effortless keystroke money, all those relations of necessity and power supposedly get wiped away.

Supposedly? Supposed by whom? I've never seen any MMT scholar say that MMT will wipe away capitalist economic relations.

I will grant Henwood that a socialist will not find a complete plan for socialism in MMT. Anyone who thinks MMT is a socialist theory is both dumb and not a legitimate MMT scholar. But Henwood hardly needs however many thousands of words to get there. Just call L. Randall Wray and ask him, Is MMT a socialist theory? To which I imagine Wray would reply, What, are you high or just stupid? MMT is about how to run a capitalist economy. Boom! I could have saved Jacobin however much money they paid Thomas Friedman Doug Henwood. (Sorry, I keep getting those two confused.)

That's enough singing for today, lads. More on the weekend.

MMT Misconceptions part 1

I will skip the pure bad faith propaganda in Doug Henwood's essay, Modern Monetary Theory Isn’t Helping: As the saying goes, "Never wrestle with a pig. You both get dirty and the pig likes it." However, Henwood reproduces many misconceptions about MMT (and basic economics). Whether he reproduces them out of ignorance or bad faith is irrelevant; my task here is to link correct the misconceptions.

Note: For clarity, I've added the label "Misconception:" to the boldfaced titles.

Misconception: "Cool[ing] things down" means "creat[ing] a recession".

Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes.

Strictly speaking, this statement is a misconception not about MMT but about basic economics.

I don't know what Henwood actually means by "cool things down"; it's not a precise economic term; Henwood is paraphrasing without a citation, so I can't look at what Wray actually said. It is certainly the case that raising taxes is neither synonymous with creating a recession nor do tax increases necessarily or even usually cause recessions. Tax increases are contractionary, but contractionary fiscal policy is recessionary only if long-run economic growth is near zero. In standard undergraduate macroeconomic theory, when actual output exceeds potential output, some people are working harder than they want to, and they demand more for their loss of leisure than they are producing. The economy will (and should) contract (the short-run rate of growth will at least slow) no matter what the government does; all raising taxes does is to change how the contraction takes place. Without taxes, the contraction will take place through an increase in the general price level; with taxes, the government just takes the excess money out of the economy.

(Of course, if someone doesn't use a word, and Henwood explicitly says that Wray "shies away" from using recession (because contraction is different from recession), basic honesty generally requires some evidence for the imputed usage. The evidence is definitely not to be found in basic macro.)

Misconception: Reserve accounting is irrelevant

Much of the MMT literature is an elaboration of the arithmetic of bank reserves . . . Reserve accounting is important if you’re a financial economist or a central banker, but it’s of limited relevance to anyone concerned with big-picture economic questions.

Wait, what? Central bankers are most definitely concerned with big-picture economic questions. Any intro macro textbook will tell you that reserve accounting is the foundation of orthodox monetary policy. In my principles class, I spend an entire 110 minute lecture on reserve accounting. And it's not that hard; mostly just arithmetic and a little simple algebra, but it does scare some people with deficient education.

More importantly, MMT scholars want to prove that money does not work in the way we think it works, so they have to talk at length about how it actually works. Perhaps they're not correct, but a blithe math-is-scary dismissal is not a critique.

Misconception: MMT should be a theory of everything

Absent from Kelton’s paper, Wray’s book, and much of the subsequent MMT literature, is any sense of what money means in the private economy, where workers labor and capitalists profit from their toil and compete with each other to maximize that profit, a complex network of social relations mediated by money.

Nor does MMT literature address the heartbreak of psoriasis. So what? MMT is not intended to be a theory of everything, to rethink how a capitalist economy works at a fundamental level. Why should it be? Marx already did most of that work.

Misconception: Fiscal policy is impossible

[Abba Lerner's] proposed doctrine of functional finance held that “government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.” In other words, if unemployment is rising, loosen policy (boost spending, cut taxes, lower interest rates), and if inflation is rising, tighten policy (the reverse). On first glance, this sounds completely reasonable. But on second, it’s a lot more complicated.

For one thing, it often takes time to understand what’s going on in the economy, and it takes even more time to change policy — and sometimes, like in the 1970s, unemployment and inflation are both rising, and it’s not obvious what policy should do in response. Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision.

MMTers extend this hubris about the precision and power of policymaking

A lot to unpack and explain here. Please bear with me. Note that I'm going to hold off talking about macro stabilization techniques, both mainstream and MMT, until later.

First, Henwood commits a subtle non sequitur fallacy. They're not completely unrelated, but there's a big gap between how we should measure or evaluate policy goals, and the specific techniques we use to achieve those goals. Saying that we should evaluate policy by its results rather than its soundness does not by itself entail that any specific policy measures, i.e., "if unemployment is rising, loosen policy, . . . if inflation is rising, tighten policy." Henwood's use of "[i]n other words," is absolutely dishonest, as if he were rephrasing Lerner instead of drawing a conclusion.

I'm not saying socialists should never talk about fiscal policy lags, but this trope is such a pro-austerity conservative laissez-faire bourgeois talking point that an honest socialist must handle it with full hazmat gear. Indeed, Henwood's use of hubris, plus the connection of functional finance to policy lags to hubris, is a direct invocation of bourgeois arguments against socialism: it is hubris to believe that the government could have any role in managing anything as complicated and subtle as a market economy. I'm a socialist, so that's not an argument that I want to get anywhere near my own lips.

Fiscal policy is indeed difficult, which is why principles of macro by itself (where I teach my students about fiscal policy lags) is not a sufficient qualification for holding the Fed chair. But thinking that a lot of smart well-educated people can do something merely difficult is hardly hubris.

Although taxes do work reasonably well as an "fine tuning" automatic stabilizer, literally no economist anywhere — including MMT scholars — thinks that using conventional fiscal policy (building bridges, airports, etc.) is an effective tool for fine tuning an economy for exactly the reason that Henwood lifts out of a dimly remembered or badly garbled sophomore economics class. So what? That's not the argument that anyone is having, and that has nothing to do with functional vs. sound finance.

I can tell a lot about a firm (or a household) just by looking at their books and not their real business. Specifically, I'm looking at things such as cash flow, net profit, and debt to income ratio. I know what those numbers should look like, and if they don't look the way they should, the firm is in real trouble.

Sound finance says that to some degree or another, we can tell how a government is doing just by looking at its books, or at least that we should pretend that ordinary accounting criteria that are important to households and firms are just as important for a government.

Functional finance says that we can tell very little, if anything at all, just by looking at the government's books; instead, we must look at the real economy, i.e. at GDP, inflation, employment, investment, etc. to determine how well the government is doing. If a firm is running up a lot of debt, that's troubling by itself. For a government, we don't know: is the debt causing inflation? If not, well, the government is all right for now. If a firm has positive cash flow, that's great. For a government, we don't know: is the positive cash flow causing unemployment? If so, the government is in trouble. Functional vs. sound finance is about what we should look at to determine what to do; neither offers a specific prescription on what to do about what we see.

There's a deeper economic philosophy in play. Sound finance is the position that the government should be (or should pretend to be) part of the market economy, subject to the same market discipline that capitalists apply (or pretend to apply) to themselves. Functional finance says that the government is not part of the market economy, it manages the market economy. Naturally, the capitalist class prefers sound finance.

(Yes, as a socialist, I'm against markets in general. The socialist point here is that I argue that positioning the government as not a part of but the manager of a market economy is a useful step towards socialism. And there is an argument that a capitalist government cannot effectively manage a capitalist economy not because that task is too difficult but because it is a capitalist government. Henwood does not make this argument.)

Misconception: Monetary policy is just like fiscal policy

To extend (in bold) the ellipses at the end of the last quotation:

MMTers extend this hubris about the precision and power of policymaking to the realm of interest rates . . .

Wait! Stop! Monetary policy, i.e. interest rates, is completely different from fiscal policy, and is subject to fewer and very different lags. Conventional macro already holds that the central bank can fine tune the economy.

Misconception: MMT holds that monetary policy can fine tune the economy

To finally complete (in bold) the ellipses above:

MMTers extend this hubris about the precision and power of policymaking to the realm of interest rates, which they think the central bank is completely in control of and should be kept as close to zero as possible.

Sigh. One of the points I learned to look for when I debated religion (and especially creationism) on the internet was when a writer contradicted him- or herself in the same paragraph. Henwood manages to contradict himself in a single sentence. If MMT economists want to keep interest rates near zero without qualification, then they do not want to use interest rates for fine tuning.

And indeed MMT scholars argue not that we should not but that we cannot fine tune the economy with interest rates. MMT scholars argue that businesses' expectations of profit determine most investment; interest rates by themselves do very little. Moreover, because people hold bonds for income, interest rates have the opposite effect on consumption than they do on investment.

Misconception: MMT economists do not understand interest rates

Although MMTers tend to talk casually of “the” interest rate, in fact there are many. Long-term government bonds, for example, are almost always going to carry higher rates than short-term ones, because so many more unpredictable things can happen before the bond reaches maturity. And either is going to yield less than a bank loan of similar maturity to an oil wildcatter or the corner bodega, because of the higher risk of default.

Thank you, Mr. Henwood, for explaining to a bunch of people with PhDs in economics what I teach my sophomores about interest rates. I'm sure they are most grateful for lesson. </snark>

Talking about the imaginary singular interest rate is endemic among economists in general, for a lot of boring technical reasons, sometimes just laziness. For one, risk- and maturity-adjusted interest rates should all be about the same, because that's how markets usually work. But because people are exceptionally bad at judging risk (not to mention uncertainty), markets don't always work the way they're supposed to.

When MMT economists talk about the interest rate, they usually talk explicitly about the Federal Funds rate, the rate at which banks loan each other reserves overnight, which is indeed singular and which the Federal Reserve can indeed completely control, and which does indeed influence other interest rates at least a bit. If any MMT economist has said that all interest rates should be near zero regardless of risk or maturity, I would like to see a citation, because that economist should be stripped of their PhD and forced to repeat their sophomore principles classes.

Misconception: MMT scholars don't understand inflation

MMTers are coy about [inflation] — they never say how much is too much, and they profess great confidence in their ability to control it.

Ok... How fast is too fast? It depends. On what? A lot of things; I can't put it in a soundbite for you. But let's proceed.

In a paper criticizing MMT, the left-Keynesian economist Thomas Palley says he’s heard a “leading” MMTer say inflation less than 40 percent is “costless.”

Objection! Hearsay! Sustained. Move on counselor.

<snip long discussion about hyperinflation> Weimar Germany may be an extreme case, but since it’s often brought up by critics of MMT — “won’t all that keystroking lead to inflation, like Argentina or Weimar?” — it’s one for which they need to have a good answer. Wray’s reluctance to face head-on the risks of printing money makes you wonder how confident he really is of his own theory.

Printing "too much" money is only the proximate cause of hyperinflation, in just the same sense that turning on the heat is only the proximate cause carbon monoxide poisoning. It's a bugaboo, moreover a bugaboo hysterically promoted by capitalist economists against Allende Chavez socialism. Hyperinflation is just not a risk in a country with an otherwise well-functioning government that can effectively collect taxes; if its government is dysfunctional, the country has worse problems than just hyperinflation.

MMT scholars talk how to control inflation all the time. It's really not that difficult. You suck money out of the banking system and the economy by selling bonds, or you (gasp! horror!) raise taxes.

But raising taxes is hard! No shit, Sherlock: economics is hard. Running a government is hard. People go to school for years just to start to learn how to do it.

(Maybe they should just go to journalism school and write dishonest hatchet jobs. Hell, it works for David Brooks and Thomas Friedman, maybe it'll work for Henwood; perhaps he'll go all James Burnham on us and join the AEI.)

But people hate taxes! Really? You don't say! Do they love recessions? Because that's how to control inflation without raising taxes.

Actually, people don't hate taxes, capitalists hate taxes, and they tell the people what to think. Henwood approves of taxes, and good on him, I do too, and so do MMT scholars.

Damn! This is getting long, and we're only about a third of the way through Henwood's mess. Let's take a break here and pick up where we left off in a day or so.

MMT and socialism

It's always depressing to read "socialist" polemics against Modern Monetary Theory, and Doug Henwood's essay, Modern Monetary Theory Isn’t Helping in "socialist" Jacobin magazine follows the trope: nothing but bad faith and a Gish gallup of ridiculous capitalist propaanda.

It's clear Henwood is arguing in bad faith. With suitable elisions, Hemwood more or less accurately presents a core concept of MMT:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” . . . Since there is a risk that too much government spending would spark inflation, the government might need to cool things down . . . by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

This seems like a straightforward presentation of an idea that is admitted as true by most economists, even if they don't really want the general public to know about. Let me add back the elisions in bold:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” You might be wondering where income earned on the job fits into all of this, but the world of production doesn’t play a large role in the theory.

But having tempted us into thinking that taxes were dispensable, Wray pulls a bait and switch. Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

I don't know what is more depressing, Henwood's shameless hatchet job, or how transparently he tries to manipulate his readers. Henwood seems to think that Jacobin readers are as gullible as Fox News viewers. I hope he's wrong.

It's not really useful to go into Henwood's article point by point; instead, I want to highlight a specific capitalist talking point Henwood reproduces, which implies that a popular government — i.e. a socialist government — cannot responsibly manage a fiat currency. The idea starts with the half-truth that MMT theorists think government creating money will magically cure all our problems. According to Henwood, MMT theorists claim, "A few computer keystrokes and everyone gets health insurance, student debt disappears, and we can save the climate too, without all that messy class conflict." The most obvious problem, of course, is inflation. MMT's answer is that taxation (fiscal policy), rather than central bank manipulation of the Federal Funds rate* (monetary policy), is the correct way to curb inflation. The question is, will taxes rather than interest rate manipulation work to control taxes?

*The rate banks charge each other to borrow reserves overnight.

On the one hand, Henwood appears to like taxes: "Taxation may not be full expropriation but it’s the next best thing in this fallen world. It is a form, however mild, of socialization — transforming private investment and consumption into public expenditures. [link original]" I concur, as do many notable MMT scholars. However, Henwood casually insults the "naïve belief in the curative powers of fiscal policy" (i.e. taxes). And Henwood claims the government is far too cumbersome to manage an economy with fiscal policy, "Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision." Henwood doesn't answer the question about who should fine-tune the economy. The central bank? The capitalist class? A socialist drum circle? I dunno.

The dead giveaway, however, is the considerable ink Henwood spends on the dreaded bugaboo of hyperinflation, invoking "[t]he extreme inflation of Weimar Germany in the 1920s." He also condemns the fiscal policies of many peripheral states, including Venezuela (!), Chile under Allende (!!), Venezuela, Turkey, and Greece. (Henwood has at least enough sophistication to talk about Greece before the euro.) Hyperinflation is one of the favorite monsters-under-the-bed unsophisticated capitalist propagandist love to invoke. Only the capitalist class can prevent the government from handing free stuff out to everyone. If the capitalist class does not impose the illusion of government fiscal discipline, a socialist government will eventually spend its way into hyperinflation and economic collapse.

Now very economist knows this illusion, this superstition, for what it is: the government does not have a real fiscal constraint. Paul Samuelson himself admits on camera (long before MMT) that the idea that taxes fund government is a superstition. A useful superstition, to be sure, but a superstition nonetheless.

An ordinary person such as myself has a fiscal constraint: I must obtain money through revenue (my paycheck) or borrowing (a bank loan) before I can spend it. Thus, I must persuade someone who already has the social permission to spend — my employer, my bank, or my friends — to give that permission to me before I can actually draw on the social product. The same is true for firms: they must persuade someone to buy their product (generating revenue), lend, or invest before they can spend money.

We like to pretend that the government is the same: it must obtain money by taxes (revenue) or by issuing bonds (borrowing) to obtain the money before it spends that money on public goods and services, and if the government cannot get the money, they cannot spend it. But this constraint is nothing more than pretense. The government can, if it chooses, spend money before it obtains it from others. For me, spending money I don't yet have is impossible; for a government, it might or might not be wise, but but it is possible.

Fiscal constraints differ from real constraints. If there are no cars available (real constraint), I can't get a car, no matter how much money I have. However, if I can't get money (fiscal constraint), I can't get a car, even if there are a thousand sitting on the lot. The trick is to get all these individual fiscal constraints to match up with the overall real constraints.

One point that MMT scholars make is that the present capitalist-managerialist system has already abandoned fiscal constraints in reality, but the system tries its best to bury this fact and make sure that deviations benefit the only capitalist class. One reason MMT scholars dig deep into the accounting is to try to uncover this buried truth. Again the capitalist story is clear: the government can deviate from its fiscal constraint for the benefit of the capitalist class without causing (too much) economic chaos, but do it for the people and bam! we're in Venezuela.

Abandoning even the pretense of a government fiscal constraint does make life more difficult. If we pretend that government has a fiscal constraint, it's easy to put an upper bound on how much the government should spend: only as much as it can convince the citizens to cough up in taxes or are willing to lend. If we drop the pretense, then the upper bound is much more difficult to determine. If we abandon the imaginary fiscal constraint, we have look at what the spending does rather than just ensuring expenditure does not exceed revenue. We want to spend — and spend appropriately — until we have full employment and are at potential output. One way of determining whether we're at full employment is by looking at inflation. If the price level starts rising, either stop spending or increase taxes. Henwood has a point: the above task is much easier said than done. Then again, so is the task of transforming a capitalist-managerialist country such as the United States to socialism.

Socialists face two main dangers. The first danger is that it might not be possible to run a socialist economy with anywhere near the level of comfort and convenience afforded by a capitalist economy. This danger is mitigated by the fact that capitalism-managerialism is lowering standards of living for all but the rich at an accelerating pace. The second danger is that capitalists, who will certainly fight back, will defeat socialism. We cannot avoid these dangers except to abandon the struggle. Socialism is not a Sure Thing: if we fight, we have to accept the possibility that we will fail. We can either admit defeat before we start, or bit the bullet and proceed despite the dangers. Fundamentally if someone believes a government not controlled by the capitalist class cannot effectively manage the economy, then they have no business calling themselves a socialist.

It would be nice to have an economy that doesn't use money, where we had so much that no reasonable person would want more than social product could afford them, where everyone contributed to the social product not to have more of the social product but out of a spirit of self-actualization, altruism, and civic duty. I don't think such an economy is utopian, or at least not impossibly utopian. But we're also not there today, and we won't get there tomorrow. We have a money-mediated market economy today, so we have to start pushing that economy towards our utopian ideal. And MMT is a good place to start pushing.

The objections against MMT are important, but not dispositive. MMT economists (Kelton, Wray, et al.) are not socialists, and MMT is thoroughly left-managerialist, not socialist. Just putting Kelton in charge of the Fed and Wray in charge of the Treasury will not usher in a socialist utopia. So what? Either MMT ideas are true or false; socialists should use the true ideas, regardless of the political orientation of their proponents. MMT scholars make errors, some grievous, and disagree on important points. So what? No one should propose making prophets of Kelton, Wray, etc. following to the letter the dictates of a nonexistent MMT scripture. We should not treat anyone (not even Marx!) as a transcendent authority; we should subject all ideas to ruthless critical scrutiny, not calumny. Like everything else, some of MMT is bullshit, but much of MMT really is true, admitted even by mainstream economists.

MMT is better-developed than Henwood would have us believe: MMT even has its own textbook. If MMT scholars are sometimes vague, well, the details really are complicated. How high should taxes be? How much inflation is acceptable? Where should we spend our money? The answer is the same as any economist would give: it depends. How fast should you go? It depends: are you in a car? a plane? A rocket ship to the Moon? Are you driving a Mercedes on the autobahn or a dynamite truck on an icy mountain road? The details are very different, but the framework, physics, is the same. MMT scholars are first and foremost proposing a framework for answering these questions.

The United States has no reason to worry much about hyperinflation. Wiemar Germany, Chile, Venezuela, Turkey, even Zimbabwe, are very different from use, and facile comparisons have no value. We do have the real capacity to make everything we want in the United States. We can and should worry about countries on the periphery, countries without our economic, social, and military privilege, but that's a different issue, and one we cannot even begin to address without first further advancing the cause of socialism.

The above notwithstanding, MMT gives us important weapons in the fight against capitalism. The first is that we do not need the money of the rich. We should definitely take their money, because they're the enemy, and money is their weapon, but we don't need it. As long as we hold on to the superstition that we need their money to fund socialism, we give the rich leverage: we must appease them, at least to some degree, to get their money. Why give that power away? Don't give the rich the power to hoard their money and crash the economy; instead, create our money to spend on what we need while we're clawing their money away. It's a subtle distinction, but one that is crucial to advancement of socialism.

The other big advantage of MMT is the job guarantee. Sure, a job guarantee (JG) could be implemented poorly, or the capitalist class could force it to be implemented poorly, but it can also be implemented well. The JG is straightforward, has theoretical and empirical support, and can act as a powerful automatic macroeconomic stabilizer. As Henwood admits, it begins to erode the most important tool to maintain capitalist power, the threat of the sack. The JG is not perfect, it does not solve every or even most of the problems facing the working class. But in this case, the perfect is the enemy of the good. The JG is not the end of the journey, but a step in the right direction.

A fishy proof

We wish to show that $e^{iπ}+1=0$. Let $y = \cos θ + i \sin θ$. Differentiating, ${dy} / {dθ} = - \sin θ + i \cos θ = i(i\sin θ + \cos θ)=iy$; therefore, ${dy}/y = i dθ$. Integrating, $\ln y = iθ+C$; thus, $y=e^{iθ}e^C$. Let $θ=0$, so $y(0) = \cos 0 + i \sin 0 = 1$; therefore, $1=e^{i0}e^C=e^C$, $C=0$, and $y=e^{iθ}$. Observe that $y(π)=\cos π + i \sin π=-1$, so $e^{iπ}=-1$, and $e^{iπ}+1=0$. Q.E.D.

From Math with Bad Drawings.