Economics

A response to MMT criticism

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Economics writer David Llewellyn-Smith (Screenshot via YouTube)

An online criticism of two articles published by the ABC on the modern monetary theory has displayed ignorance on the subject. Stephen Williams responds to this.

I HAVE MENTIONED before about activist group GetUp’s relatively new economic policy – Future to Fight For – that embraces the ideas of modern monetary theory (MMT) and a government job guarantee.

GetUp recently brought one of the USA’s main proponents of MMT and the job guarantee, Professor Stephanie Kelton, to Australia, who participated in GetUp’s “Rethinking Our Economy” roadshow.

Somewhat surprising to me, ABC online has run two articles about MMT and Kelton’s visit to Australia: the first was by Patrick Wood on 21 November and the second was by business reporter Michael Janda on 23 November.

On my reading, both articles took a fairly neutral position on MMT, while correctly saying that MMT is far from mainstream. Unfortunately, the ABC writers made the common mistake of saying that MMT proponents believe the Government creates money by running the printing presses (prints money) evoking ideas of wheelbarrows full of notes (hyperinflation).

Actually, MMT says that governments like Australia create money simply by crediting bank accounts electronically, so there is no crazy running of printing presses. The Federal Government can credit bank accounts as much as it likes, regardless of tax receipts, regardless of the budget bottom line and without borrowing (selling bonds). It is obvious to everyone, however, that a government can contribute to inflation and even hyperinflation if total spending in the economy outstrips production.

Environmental sustainability is another constraint on spending, although that constraint is usually ignored.

Janda (in the second article) also makes the mistake of saying that MMT proponents believe that budget deficits “don’t matter”, as if the Government can spend like a drunken sailor. Of course they matter, just not in the way that most economists think they matter (for instance, the Federal Government is not a household that has to balance its budget at some point to avoid bankruptcy).

But now to a more serious problem.

David Llewellyn-Smith, writing as “Houses and Holes” for the online journal MacroBusiness, criticised the ABC on 21 November for the first (Patrick Wood) yarn on MMT.

The MacroBusiness headline is:

‘ABC goes gaga for Modern Monetary Theory.’

His opening line is:

‘Trust the ABC to like this idea.’

I’m afraid we’ll have to leave aside a debate about what the ABC likes compared with what Patrick Wood the writer likes and whether Wood even likes MMT at all. (How dare the ABC publish one article on MMT amongst tens of thousands of articles supporting orthodox economic theories!)

No, the real problem is Llewellyn-Smith’s failure to tell his readers what MMT is and what is wrong with it, despite the fact that he has all the space in the world on his own website.

Most of Llewellyn-Smith’s article – about 75 per cent – is simply a copy-and-paste job of the ABC yarn. But why repeat all that at the expense of actual analysis? Maybe to quickly fill up space?

Llewellyn-Smith may well be a fine fellow with lots of knowledge on certain subjects, but he gives almost zero evidence of knowledge of MMT in his thin criticism, which amounts to three points:

  • going all-in on MMT would collapse the currency;
  • it [MMT?] destroys the principle of meritocracy; and
  • the opportunity for corruption is beyond belief.

That’s about it in terms of detail. If you have any idea what Llewellyn-Smith is talking about you are more telepathic than I am. For instance, it is impossible to know if he disagrees with MMT or the job guarantee or both, in part or in whole. Either way, he doesn’t explain what is wrong with either, but just makes sweeping statements without any evidence or analysis.

For instance, he doesn’t seem to realise that MMT is not a set of policies. Rather, MMT claims to describe macroeconomics as it functions today, whether we realise it or not (so a government cannot bring in MMT). A government job guarantee – as part of MMT – is a kind of exception, but that is not crucial here. Llewellyn-Smith gives no evidence that he understands what an MMT government job guarantee would be and to what extent it has worked in other countries.

On his last point – corruption – I would say that corruption is avoided by good regulation and enforcement, as the current banking Royal Commission demonstrates. We do not jettison the financial sector because the “opportunity for corruption is beyond belief”. Moreover, something urgently needs to be done about the shocking level of unemployment and underemployment in Australia, affecting close to 2 million people, which is destroying many people’s lives. The acceptance of the current situation is a disgrace when we have alternatives that could be tried, if only for a trial period. (Governments used to panic in the Gorton-McMahon period when the official unemployment level edged up towards 2 per cent.)

Llewellyn-Smith then confuses us even more by saying:

‘That is not so say it is all bad. It’s not. At base it is right and it is likely to get greater currency as the world struggles to deleverage its immense debt stock.’

So “at base it is right”. What the hell does that mean?

And does he mean government debt or non-government debt? There is a world of difference.

Perhaps Llewellyn-Smith, after his initial put-down, has then stumbled upon Professor Steve Keen’s view that MMT is basically correct.

My provisional conclusion is that on the subject of MMT, Llewellyn-Smith is out of his depth, although I would be happy to be proved wrong. If he has read the MMT textbook (2016) co-authored by Professor Bill Mitchell, he gives no indication of it. Or Dr Steven Hail’s excellent book on MMT (2018). Or Professor Bill Mitchell’s other book on MMT (2017). It would be interesting to know what primary sources, if any, Llewellyn-Smith has read.

I challenge Llewellyn-Smith to list the main principles of MMT and tell us, at reasonable length, which ones he agrees with and why, also which ones he doesn’t and why. (I will then pass this analysis on to Professor Mitchell for comment.) Only then would Llewellyn-Smith be doing his readers some kind of service. A “nudge-nudge, wink-wink” kind of analysis (“we all know MMT is crap, so why bother explaining?”) does not help.

On a side note, an expanded MMT textbook is due out in March 2019.

Stephen Williams writes mainly about politics, economics and the environment.

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