Understanding MMT

I’ve mostly completed my study of MMT, although I have a few more papers to read. But I feel like I know enough to draw a few conclusions about how MMT relates to the broader field of economics.

When reading the Macroeconomics textbook by Mitchell, Wray and Watts, I was frequently struck by how MMT is almost the exact opposite of Chicago school economics, particularly the monetarist version I studied in the 1970s. On a wide range of issues, MMT is on one end of the spectrum, the Chicago school is on the other end, and the mainstream is somewhere in between.

Here on some examples:

1. Chicago economists believe that the supply and demand model is extremely useful for a wide range of markets, even markets that don’t meet the classical definition of “perfect competition”. Mainstream economists believe the S&D model is quite useful, but worry more about imperfect competition. MMTers are highly skeptical of S&D models, viewing the model as only useful in a very limited number of cases.

2. Chicago school economists believe that free market policies are almost always the best. Mainstream economists believe that free market policies are often optimal. MMTers are highly skeptical of what they call “neoliberalism”, viewing it as almost a religion.

3. Chicago school economists don’t believe there is much value in talking to bankers when trying to understand how monetary policy works. MMTers believe that knowledge of the nuts and bolts of the banking industry is highly important when trying to understand monetary policy.

4.  Chicago school economists believe that the concept of opportunity cost is extremely important, and applies to almost all policy debates.  That’s a bit less true of Keynesians, whereas MMTers assume that in many if not most cases the economy is well below full employment, and there is no opportunity cost to additional government expenditure.

5.  Modern Chicago economists are extremely skeptical of the “Phillips curve” approach to macroeconomics.  Earlier monetarists such as Milton Friedman thought there was a short run tradeoff between inflation and unemployment, but no long run trade-off.  Mainstream economists sort of agree with Friedman, but also argue that there might be some long run trade-off due to hysteresis.  MMTers seem to be most enthusiastic about the claim that boosting aggregate demand can boost employment over the long run, highly skeptical of natural rate models that say that AD doesn’t matter in the long run because money is neutral once inflation expectations adjust.

6.  Chicago school economists tend to favor relying on monetary policy to determine AD, and are highly skeptical of the efficacy of fiscal policy.  Mainstream economist favor of mix of the two, whereas MMTers prefer fiscal policy and are skeptical of the efficacy of monetary policy.

7.  Chicago school economists argue that it is most useful to treat money as exogenous, i.e. under control of the central bank, at least under a fiat money regime.  Mainstream economists treat money as endogenous in short run models with interest rate targeting, and exogenous in long run models trying to explain large changes in the trend rate of inflation.  MMTers treat money as being almost completely endogenous.

8. Chicago school economists believe that changes in interest rates primarily reflect the income and Fisher effects.  Thus falling interest rates are usually an indication that money has been tight in the recent past.  Mainstream economists view interest rates as being heavily influenced by monetary policy (the liquidity effect), but also reflecting the income and Fisher effects, especially in the long run.  MMTers see interest rates as almost entirely reflecting monetary policy, at least under fiat money.  They mostly ignore the income and Fisher effects, and reject models of the “natural rate of interest.”

9.  Chicago school economists see investment being determined by saving rates.  Mainstream economists see investment as being determined by saving rates during normal times, but also worry about a “paradox of thrift” when interest rates are extremely low.  MMTers see the paradox of thrift as being the norm.

10.  Chicago school economists believe high inflation is caused by excessive money growth.  Mainstream economists see high inflation as being caused by a mix of monetary policy and supply shocks.  MMTers see high inflation as mostly reflecting aggregate supply problems.

Because I’m a Chicago school economist, the MMT model doesn’t have much appeal for me.  That’s especially true because their arguments are often confusing and unpersuasive, even to mainstream economists.  In my view, MMT may have some success promoting ideas such as aggressive fiscal stimulus, due to the worldwide trend toward low interest rates.  I doubt, however, that they’ll make much headway in convincing the profession that their theoretical model makes sense, unless they can find a more persuasive way of explaining their ideas.

BTW, I’d say the same about market monetarism.  I expect we’ll have some success convincing the profession that NGDP targeting make sense, but very little success in convincing economists that the monetarist approach to monetary theory has value.  But I’ll keep trying.

PS.  It’s not clear to me that all of the ideas in the textbook I read are MMT beliefs.  Thus there may be some MMTers who are more favorably inclined to free market policies.


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Saturday assorted links

1. Computer science rejects computer science. 2. A substantive management/corporate culture piece on the L.A. Clippers. 3. A new paper from Treasury suggesting the job effects of PPP loans were significant, WSJ Op-Ed version here. 4. New strain in South Africa?  Probably a red herring, but not entirely reassuring to read that it affects young […]

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