I often see people claim that Modern Monetary Theory is increasingly influential. I see no evidence for that claim.
One problem is that people use the term MMT is two very different ways. In some cases, MMT refers to a theory of how the monetary system works. It’s a model. In another context, MMT refers to a bundle of policies such as combined fiscal/monetary stimulus, the belief that Congress (not the Fed) should control inflation, job guarantees, a “Green New Deal”, etc. As an analogy, the term ‘monetarism‘ originally described the views of people like Milton Friedman on monetary policy. But during the Thatcher years, I often saw people use that term to describe a pro-free market ideology. Those are two very different definitions.
The monetary model version of MMT has virtually no support among influential economists, on either the right or the left. The right is almost unanimously opposed, and on the left the supporters are primarily little known economists at smaller schools. That doesn’t mean MMT is wrong (I’m a little known economist who taught at a smaller school), but it does suggest that MMT is not influential. People like Larry Summers, Paul Krugman, Janet Yellen, Greg Mankiw, etc., tend to be highly skeptical of MMT.
One problem is that the MMT theoretical model is pretty incoherent. Unlike most economists, I spent many hours reading a major MMT textbook, and I saw almost nothing in the model that would appeal to mainstream economists. (See here and here.) Consider the following thought experiment. In 1998 (when the economy is booming), the Fed suddenly does a big enough open market purchases to cut interest rates from 5% to 0%. The MMT model implies that this has almost no impact on the economy, as you are just swapping one government liability (base money) for another (T-bills). Mainstream economists will never accept a model that produces that sort of implausible claim.
A slightly more plausible case can be made for MMT having boosted the case for combined fiscal/monetary stimulus. But even here, I don’t see much support for the claim of influence. In 1999, Ben Bernanke recommended this policy to the Japanese. Paul Krugman has discussed this option. Indeed, when the economy is at the zero lower bound, combined fiscal/monetary stimulus is a fairly mainstream policy recommendation.
MMT is almost universally viewed as a left-wing theory. In that case, what should we make of the policy views of Donald Trump? He presided over what was at the time perhaps the most recklessly expansionary fiscal policy in US history, which dramatically boosted the size of the budget deficit when the economy was already booming (in 2019). In addition, he appointed Jay Powell to be chair of the Fed, and then complained that Powell’s policies were not expansionary enough. And yet I hardly ever see people claim that Trump was an MMTer, instead they warn of MMT influence within the Biden administration. But if MMT is to be defined as combined fiscal/monetary stimulus, then why wasn’t President Trump an MMTer?
In the end, the false perception of MMT influence comes from lazy reasoning. Real interest rates on government debt have been trending downward for 40 years. Not surprisingly, governments have responded by increasing their borrowing, and economists have raised their estimates of the maximum safe level of debt as a share of GDP. That’s just an empirical judgment, it has nothing to do with the acceptance of a radically different model of monetary economics.
Now that inflation has become the number one problem, MMT seems to have faded away. All of the focus is on what the Fed will do to bring inflation back to 2%, or lower. But in the MMT model the Fed has no ability to control inflation; only Congress can do so (with tax increases or spending cuts.) So the renewed focus on the Fed’s need to control inflation is an indication that MMT never seriously challenged mainstream economics. It was just a fad, like the brief mania for price controls during the 1970s.
READER COMMENTS
Jerry Brown
Jan 20 2022 at 12:40pm
I disagree with you. The fiscal policy responses by the federal government to the pandemic in 2020 and 2021 were completely in line with what MMT says is possible. MMT also recommends regulation on bank loans as a way to control inflation which you did not mention.
And do you really think the increased inflation we are experiencing is the number one problem we are going through at this point in time? I mean we do have a fairly serious pandemic affecting our people and causing illness and death and all kinds of supply issues stemming from that.
And I find MMT to be quite coherent and a lot easier to understand than some of your speculations on the ‘stance’ of monetary policy which only seems to be discernable after the fact most of the time.
But I am impressed that you actually read their book- which is a lot more than many other MMT critics bothered to do. It speaks well of you.
vince
Jan 20 2022 at 5:28pm
Scott Sumner wrote: “But if MMT is to be defined as combined fiscal/monetary stimulus, then why wasn’t President Trump an MMTer?”
Must be a rhetorical question. As Scott also wrote: “MMT is almost universally viewed as a left-wing theory. ”
Scott Sumner
Jan 21 2022 at 10:32am
My point was that Trump is not viewed as an MMTer, and hence MMT should not be defined as highly expansionary monetary/fiscal policy.
Scott Sumner
Jan 21 2022 at 10:31am
You said:
“I disagree with you. The fiscal policy responses by the federal government to the pandemic in 2020 and 2021 were completely in line with what MMT says is possible.”
Sure, but are you defining expansionary fiscal policy as MMT?
You said:
“And do you really think the increased inflation we are experiencing is the number one problem we are going through at this point in time? I mean we do have a fairly serious pandemic affecting our people and causing illness and death and all kinds of supply issues stemming from that.”
I meant macro policy problem. I agree that there are other more serious problems.
Jerry Brown
Jan 21 2022 at 7:07pm
“Sure, but are you defining expansionary fiscal policy as MMT?”
No, not at all. But maybe I don’t understand your question.
Scott Sumner
Jan 22 2022 at 12:10pm
I’m saying that this policy response doesn’t show that MMT is influential.
Jerry Brown
Jan 22 2022 at 3:47pm
Pretty obviously it has influenced me- not that I am important in the scheme of things.
But perhaps you would be interested in this – “What Is MMT’s State of Play in Washington?”- a report by L. Randall Wray. Wray is one of the authors of the MMT textbook you read.
What is MMT’s State of Play in Washington? (levyinstitute.org)
Brett
Jan 20 2022 at 1:50pm
I remember MMT advocates on Twitter getting really evasive when people tried to ask them about key tenets of their policy, such as using taxation to pull money out of the economy (never mind examining what kinds of taxation would be best for that purpose, probably because they’re left wing folks and the answer would be “Sales Tax”).
vince
Jan 20 2022 at 5:32pm
Jerry Brown wrote: “And do you really think the increased inflation we are experiencing is the number one problem we are going through at this point in time?”
With the recent Fed focus and stock market response, I have no quibble with the statement.
Rajat
Jan 20 2022 at 9:42pm
I haven’t read any books about MMT, so I take your word that it doesn’t offer a coherent new theory of macroeconomics. Certainly that accords with the little I have gleaned from other sources. But I’ll try to push back on a couple of points.
First, re the fall in equilibrium real interest rates, while mainstream economists may have “raised their estimates of the maximum safe level of debt as a share of GDP”, I understand MMT to go further and claim that with r<g, there is no maximum level of government debt per se, only an inflation constraint. So there is no need for governments to hold back on their society- and planet-changing spending plans: Taxes (or interest rates) can be raised to tackle inflation and government spending can continue to rise (effectively crowding out more and more private spending, I presume?). This seems to be is a normative position as much as a positive one, and a normative position normally associated with the socialist or ‘progressive’ Left.
Second, re Trump, he may not be avowedly left-wing, but he’s a populist and I feel pretty comfortable referring to MMT as a way of thinking supported knowingly by socialists and unknowingly by populists of all persuasions. AFAIK, Trump has never mentioned MMT, claimed to support MMT, or would knowingly want to be associated with advocates of MMT (being mostly on the Left), all of which makes it hard to label him as an ‘MMTer’, except as a slur, but then it would not be a slur applied by either the supporters of MMT or Trump! If, say, Jay Powell acts as though he is a ‘market monetarist’ but never uses that term or applies it to himself, would people refer to him as a market monetarist in the same way as they would to you?
Scott Sumner
Jan 21 2022 at 10:38am
On the debt issue, I agree that MMTers would go even further. My point was that the low interest rates make MMT seem superficially plausible. Some people cite increased deficits as a sign that MMTers have gained influence. But it doesn’t really show anything about the influence of MMT.
And when MMTers start saying that Trump is implementing their policies, I’ll start regarding combined monetary/fiscal expansion as MMT.
Colin Haller
Jan 21 2022 at 8:41am
I agree that it’s not influential. More’s the pity, since Monetarism is such an empirical disaster.
vince
Jan 21 2022 at 1:37pm
Why have a monetarism disaster, when we can have a fiscal disaster? 😉
Henri Hein
Jan 21 2022 at 3:02pm
Assuming your comment was not meant to be sarcastic: Not so.
David S
Jan 21 2022 at 1:07pm
Hopefully, this is the last time this year that you have to address MMT in any context. As you note, it’s incoherent, so it lacks a simple marketing slogan like “cut taxes” or “raise the minimum wage.”
I have a ten dollar bet with myself that you’ll write at least one, but no more than two, blog posts on digital currency this year.
Andrew_FL
Jan 21 2022 at 3:35pm
MMT has not been influential among economists and not obviously influential in policy (it would be hard to tell if it were, since much of what MMTers want to do are things people want to do anyway) but it has been influential in the sense that many Democrats increasingly profess to believe in it.
Cranmer, Charles
Jan 23 2022 at 11:06am
Thanks for the article! I’m glad to know I’m not the only one who’s spent hours fruitlessly puzzling over MMT. (There must be a pony in here somewhere.) But I think you are underestimating the extent to which MMT has infiltrated the Zeitgeist on the left, even if it has not officially been adopted as gospel. It gives them a great theoretical pretext for unrestricted spending.
Even among moderates, MMT has attracted attention. I have attended several conferences hosted by the Levy Institute. One of the regular presenters has been Jim Bullard, of all people.
Here is a selection from my blogpost Debt: MMT promise or MMT Threat?:
“First off, let me say that I have a soft spot in my heart for MMT. Orthodox economic thought is so calcified and is so clearly off base that we should all try to encourage alternative views. MMT may offer promise, although I think there are serious issues with the theory as it now stands. My main problem is its opaqueness regarding the limits of government spending and the onset of inflation. By the time inflation – and inflationary expectations – gain a foothold it is probably too late to stop it absent heroic measures.”
Donald Trump, abetted by Jerome Powell, jumped into MMT with both feet, even if neither they nor their advisors would ever admit it (and probably didn’t even realize it.) The ensuing inflation is, to me, the death knell of MMT. See my post Ain’t Nothin’ but a Party
Incidentally, Hyman Minsky, the godfather of MMT, was briefly my advisor at Wash U. That explains my long time interest in the Levy Institute and MMT.
Cranmer, Charles
Jan 23 2022 at 11:15am
Thanks for the article! I’m glad to know I’m not the only one who’s spent many hours fruitlessly puzzling over MMT. I think you are underestimating the extent to which MMT has infiltrated the Zeitgeist on the left, even if it has not officially been adopted as gospel. It gives them a great theoretical pretext for unrestricted spending. MMT has also gained interest among moderates. I have attended several conferences hosted by the Levy Institute. One of the regular presenters has been Jim Bullard, of all people.
Here is a selection from my blogpost Debt: MMT promise or MMT Threat?:
“First off, let me say that I have a soft spot in my heart for MMT. Orthodox economic thought is so calcified and is so clearly off base that we should all try to encourage alternative views. MMT may offer promise, although I think there are serious issues with the theory as it now stands. My main problem is its opaqueness regarding the limits of government spending and the onset of inflation. By the time inflation – and inflationary expectations – gain a foothold it is probably too late to stop it absent heroic measures.”
Donald Trump, abetted by Jerome Powell, jumped into MMT with both feet, even if neither he nor his advisors would ever admit it (and probably didn’t even realize it.) Our ensuing inflation is, to me, the death knell of MMT. See my post Ain’t Nothin’ but a Party
Incidentally, Hyman Minsky, the godfather of MMT, was briefly my advisor at Wash U. That explains my long time interest in the Levy Institute and MMT.
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