Comments on Meadway's Criticisms of MMT

James Meadway recently published "Against MMT" (Modern Monetary Theory), in which he lays out a number of criticisms of the theory. Although it might have helped my readership numbers, I really did not want to get drawn into the mudslinging around MMT that erupted this January. One of the public relations problems MMT faces is that it seems that MMTists are in continued arguments with seemingly everyone. The negative tone of these arguments distract from the constructive aspects of the theory.

This latest Meadway article illustrates the problem. Although some of my contacts on Twitter believe that this article has interesting points to address, I do not find them particularly novel, nor where they given a fashion that is designed to get a polite response from MMTists.

For example, I do not know who is responsible for the article summary: "Modern Monetary Theory disorients the Left by peddling simplistic monetary solutions to complex problems of political power."; it could either be Meadway or an editor. Nevertheless, this is not a summary that is designed to invite a friendly response.

(In this article, I mention the MMT textbook Macroeconomics by Mitchell, Wray, and Watts. For those of you who have not heard - they managed to sell out the first print run, which is a good sign. Affiliate link.)

Not a Critique of Theory?

Meadway argues that he is not focusing on the theory, rather practical questions.

Others have dealt with MMT’s weaknesses as a theory of economics, including Doug Henwood in the latest edition of Jacobin. I don’t want to rehearse those arguments here, although it is worth keeping in mind that MMT’s greatest theoretical failing — to provide any account of power and the state, or even (like neoclassical economics) to provide a reason why it doesn’t need one — underlie the issues discussed. This article aims to concentrate instead on the practical and political implications, why they are wrong — and why Labour’s own economic programme makes more sense. 

Of course, he immediately goes to make some rather questionable theoretical claims. I will return to those at the end of the article. I will first discuss the discussion of fiscal policy, which is the only part of the article I might take seriously.

Fiscal Realpolitik

The following paragraphs from the conclusions are the heart of the argument.

The problem with MMT for a genuinely transformational government is not that it is too radical. Quite the opposite: it is nowhere near radical enough. It substitutes a belief in the unlimited capacity of a sovereign government to spend money for the hard reality of the political fight needed to rebuild and transform our society. It is the expression of a deeply conservative faith in the benign nature of our economic institutions. In an increasingly class-divided society, with institutions from the Treasury to the Bank of England to the City that have failed systematically to deal with crisis after crisis, we cannot simply flush away our social problems on a tide of government-printed money. 

Worse yet, in a country so profoundly and obviously overstretched internationally, with a major financial centre that we know to be a major vulnerability, MMT promotes a blasé indifference to the real relationships of power and patronage that sustain the world economy. To the extent that it disorientates activists, peddling simplistic monetary solutions to complex problems of political power, it is a barrier to a genuinely transformative Labour government. We need to build an organised and educated mass movement that can see the problems such a government might face. MMT cannot help us do this — in fact, it will hinder us in that mission.

One immediate point is that one needs to care about the prospects of the British Labour Party for this critique to matter. As a Canadian with eccentric political views (Prairie Populism), I am not actually in that camp. From my outsider perspective, the British Labour party is a bit of a shambles; it is an Establishment party that doesn't know whose interests they represent. Say what you want about the Conservatives, at least they know who they are looking out for. 

Firstly, the charge that MMT is promoting "a blasé indifference to the real relationships of power and patronage that sustain the world economy" is questionable. There is a good-sized MMT literature on financial regulation. Admittedly, the literature may not be tailored to the specific problems of the United Kingdom - which were partly created by the decision of Gordon Brown (of the Labour Party) to dismantle the remaining adult supervision in the financial sector in a bid to build up London's profile as a financial centre.

Secondly. although he argues that "alliances are central," his complaining about a lack of discussion of "power relationships" is mysterious. All I can guess is that he wants MMTers to sound like third-rate crypto-Marxists. (And for those of you keeping score at home, Marx has 10 index entries in Macroeconomics.) It may be that such word choices are a savvy move politically in the United Kingdom, but you probably could not get elected dog catcher in North America spouting lingo like that. In Canada, we have wildly popular Democratic Socialists, but they tended to be preachers, not hippie professors. 

The Fiscal Rule

Running around spouting off Marxist slogans is not going to endear you with international bond investors, the business press, nor a good portion of the economist profession. Meanwhile, placating those groups is exactly the premise for Meadway's support of Labour's "Fiscal Credibility Rule."

This rule is a triumph of bowing to mob pressure over economic common sense. It accomplishes  nothing, since there is no risk of default. Since "investment" and crises are excluded from the rule, there is no reason to attach the rule itself any credibility. Incredibly, Meadway worries about "bond vigilantes" with a straight face. Rather than having a bogus rule to deal with these largely non-existent problem, all that needs to be done is modify operating procedures to make default impossible.*

However, there is a large cost to the policy: by setting up the fiscal balance as a totem that is to be worshiped, the fiscal conservative narrative is reinforced. After all, the Tory austerity policies were justified on exactly those "fiscal prudence" grounds.

The reality is that the business press and bank economists dislike Labour, and they will shamelessly misrepresent its policies. Adopting a "fiscal rule" is not going to change that outlook.

Is There a Point to This?

If we step back from the dubious points in Meadway's arguments, there is perhaps a practical point: how should Labour present its policies? 

This is where my eccentric views come in. From my perspective, you do not go into politics for the sole objective of having "your team" win -- like it is some football game. Rather, you go into politics because you have a specific objective, and the Establishment (who are playing the football game as a lifetime occupation) refuses to implement it. So there is no problem presenting your fiscal policy: you announce that X is a problem, and policy Y will solve it.  And most of the time, policy Y will be related to fiscal policy.

Therefore, you do not bore people with lectures on the monetary system, or offer stories about bond vigilantes.  You argue that X is a social evil, and that only knaves would refuse to implement policy Y to combat it. You only bring up the concept of inflation risk when people ask the hard questions about feasibility. In other words, I would not talk about theory, and hence not sound like an internet MMT primer.

Conversely, making a "Fiscal Credibility Rule" your policy centrepiece is something that only makes sense to a political careerist who wants to be part of the Establishment. It is an absence of policy: it accomplishes nothing, and most likely is a distraction from your other goals. The fact that Meadway focuses on the business press, economists, and bond investors as the audience for the fiscal rule is telling: voters did not make the list. This is quite different than the Trump campaign -- which actively deranged the intelligentsia. However, he crushed his hapless Establishment opponents from both the Republican and Democratic parties in the primaries and the Electoral College.

This discussion explains why it is not straightforward to just open Macroeconomics and "apply MMT": the policy perspective in each country is different. The Job Guarantee and Green New Deal might be the only set of policy stances that are multi-country in scope; pretty much everything else depends on local circumstances. As an example, the medical system in the United States presents the worst of both capitalism and socialism in one package; reform would raise the standard of living immensely. Canada largely dealt with the problem decades ago (thanks to Prairie Populists...), and now the challenge is a question of maintenance and resource allocation. In other words, there could not be a single policy "solution" that fits both countries' political situation.

Misrepresenting MMT's Stance

The following passage by Meadway offers a rather bizarre misrepresentation of the MMT position.

The MMT solution has another problem, especially in relation to democratic politics. The implication of using taxes to control inflation is that governments will see prices rising and then choose to raise taxes as well. But only a government unconcerned with elections could possibly tell the public, ‘prices are rising so we are going to raise VAT too.’ This fact was tacitly acknowledged by three pro-MMT academics writing recently in the Financial Times, who called for an ‘administrative agency’ to take responsibility for managing inflation via ‘aggregate demand’. So whilst the mainstream wants central banks to be ‘independent’ of democratic government when setting the interest rate, MMT expects an ‘administrative agency or agencies’ to do the same thing when setting taxes. Either way, democracy misses out.

1. MMTers are disdainful of "aggregate demand management." For example, on page 202 of Macroeconomics, the authors argue "The point is that we should not view these D [aggregate demand] and Z [aggregate supply] curves as conceptual devices that we can shift about in a mechanical fashion to 'fine tune' the economy." In fact, the FT article itself has the statement "there are a range of sources of inflation that aren’t caused by the general state of demand and aren’t best regulated by aggregate demand policies."
2. The Job Guarantee -- a centrepiece of MMT, which is ignored by Meadway -- is an automatic stabiliser.
3. Unless I missed something in the FT article, I am unaware of any MMT literature that advocates taking taxing power away the legislative authorities, in contrast to Meadway's assertion. (One may note that a fiscal rule is an attempt to constrain elected representatives; as prairie populist, such a rule appears specifically designed to thwart populist movement, hence my instinctive dislike.)

The remainder of this article discusses some of the questionable theoretical statements.

Only in the United States, You Say? Pity!

Meadway:

 This has happened particularly under the Republican governments of Reagan, Bush Sr and Jr, and now Trump to allow the huge expansion of US military spending while slashing taxes for the wealthy. That should alert us to the reason why the dollar retains its privilege. It is backed, ultimately, by the most powerful state and military on the planet. For as long as this power holds, the dollar will hold — and an MMT-compatible policy will be viable in the US. It should be no surprise that MMT was developed [emphasis mine] and has its deepest roots there. It makes most sense as a theory of how to exploit US power, via the dollar. If you can’t issue the dollar, MMT isn’t going to work.

The statement that MMT was "developed" in the United States is flat-out incorrect; even a cursory internet search tells us that Bill Mitchell -- one of the leading early developers of MMT -- is an Australian. This is an embarrassing and shoddy argument.

Meadway is part of a group of post-Keynesians who are bugs on the external constraint. His observations are hardly novel (nor interesting), and I will just link to some articles where I already discussed this critique.

• My response to assertions by Frances Coppola from last November.
• My 2014 comments on Palley's assertions.
• "Why Rich Countries Should Float Their Currencies."

I am Canadian, and lie to point out: the Canadian dollar has been floating for almost all the post-1951 period (there was a brief fixed currency period in there). Canada is a small, open economy, highly dependent on cross-border trade with the 800-pound Gorilla that is the United States. If we can do it, our old Imperial masters should be able to suck it up and do the same thing.

Meadway:

 Countries running a deficit on their current account (meaning, broadly, that they import more than they export, counting goods, services, and flows of income) like the UK — which has a deficit funded from abroad — will always be vulnerable to demands for foreign currency that they cannot immediately meet. This is a significant impediment to sovereignty.

Australia: G'day, mate!

(Re-used the figure from the November article; not up to date.)

Pointless and Obviously Wrong Statements About Bank Money Creation

Meadway:

Unfortunately, however, MMT’s reassertion of a number of macroeconomic truths has been swamped by its distinctive contribution to theory — which is a rehabilitation of what is known as chartalism. Chartalism holds that money receives its value fundamentally as a result of its use to pay taxes — that, in the words of leading chartalist Georg Knapp, ‘money is a creature of law’. This is dubious as a historical claim, since money has existed in many different forms throughout history, and only some of those forms have arrived with the stamp of the state — and dubious as a description of reality today, since most money is created by private banks when people take out loans, whose relationship to the state is (at most) indirect.

1. MMTers are neo-Chartalists: they do not uncritically accept what Knapp had to say. They have done their own research on the history of money, and will be very happy to tell you all about it.
2. The fact that bank deposits are the bulk of the money supply is not news to anyone half aware of national accounting data. (For example, this is noted on page 558 of "Macroeconomics".) The MMT argument is that banks are essentially regulated utilities, and that government money is the base of a monetary pyramid (or whatever). This is a much better description of reality that the assertion that "relationship to the state is (at most) indirect." 

Concluding Remarks

It may be that James Meadway has some useful points buried in that article, but it is hard to appreciate them given its obvious problems.

Footnote:

* Default for the U.K. may already be impossible, but I do not want to debate that point here.

(c) Brian Romanchuk 2019