Thoughts On My MMT Conference Panel Talk

I will be presenting in the panel "MMT: Who is Listening?" on September 27th, with Bill Mitchell, Glen Hadden (missing from preliminary agenda), and Alexandra Scaggs at the Third International MMT Conference. (Link: https://mmtconference.org/.)

The following is the outline of the points I expect to cover. I will be presenting last, and my discussion will most likely overlap with that of other speakers, so I expect that my live presentation will require reacting to previous points.

Two Worlds: Academia and the Real World

There's two groups of interest in discussing Modern Monetary Theory (MMT):

1. academics;
2. real-world users of macro theory.

Of course, an individual can fit into both groups, but concerns are quite different. The focus of the panel is presumably on the real world, but we still need to keep in mind the academic leg of MMT.

The next thing to keep in mind is that we need to differentiate "economics" from "macro theory." There have been tons of generalisations about "economics" in post-Financial Crisis debates, but what people often mean is "macroeconomics." There are a lot of areas covered by "economics" that have nothing to DSGE models (for example), and if we look at the statistical techniques coming from econometrics, the reality is that both heterodox and mainstream economists will often use the same statistical analysis techniques. Returning to MMT, I am not aware of a "MMT school of econometrics" (although I assume that there is an overlap with post-Keynesian arguments about econometrics).

People Use Macro Theory in the "Real World"? Seriously?

The argument that people use macro theory in the real world might raise some eyebrows. The following categories are what I am thinking about.

• Central banks and other policymaking institutions, as well as think tanks. Not exactly what many people think of as "the real world," but the policies that come out of these institutions affect everybody. Obviously, an overlap with academia.
• Finance, particularly rates trading. (Glen Hadden is a bond trader, so his presentation will probably fill that point in.)
• Any citizen that is concerned about macro policies and their effects.

That last category includes a lot of people, and explains why MMT has managed to generate a large online presence. 

Before I became an analyst for a fund manager, I wrote market commentary aimed at institutional investors. I currently write popularisations of economic theory that is at roughly their leading level. However, if I wanted to make serious money as a writer, I should be aiming at the larger audience that is less interested in the details of theory. It is trickier to hit both audiences than it might appear, unfortunately. That said, this reality gives me a good perspective on the differing needs for selling MMT.

Why MMT?

The following topics are why MMT has made a breakout into wider consciousness.

• The "where did mainstream macro go wrong?" debates that erupted after the Financial Crisis. In my view, that story is pretty much tapped out, but it was a wave that MMT rode on. Of interest to professionals, and did catch a wider audience.
• Fiscal policy. The austerity debates, as well as the importance of government debt were also quite big in the post-crisis period, but currently somewhat overshadowed by other concerns. Always important for fixed income investors, and of topical interest for the wider audience.
• Interest rate policy and the mechanics of monetary operations. This is niche topic that never goes away, courtesy of Monetarists and Austrians, and brought to a wider audience due to Quantitative Easing and Bitcoin. Right now, seems to be a negative interest rate story.
• Various hot button political economy topics that generated a wave of terrible critiques (which have largely died down relative to earlier this year).

As my little survey suggests, a lot of the big areas of debate have become fairly quiet. Another reason for debate to die down is that there has been considerable convergence towards the MMT policy views in these matters. Interest will probably rise when the next recession hits, since these macro issues will once again rise in prominence. That said, the professional audience for MMT will always have an interest in these topics.

I would note that it was not just MMT that rose to prominence within the "heterodox" world.

• Hyman Minsky's reputation rose, as did some similar thinkers (Steve Keen and his collaborators on financial stability oriented models).
• The Austrian school - always a presence in finance - probably expanded, although probably most of the growth is the cryptocurrency area.

However, my highly subjective view is that "traditional post-Keynesians" made less headway (at least on this side of the Atlantic). The issue is that they sounded much less distinctive than MMTers; nobody in the real world is deeply concerned about ergodicity or whatever.

The Thorny Issue of Political Economy

The two audiences for MMT have a very different perspective on political economy.

• For the professional class, the Overton window for discussions of political economy matches that of the main political parties. One may note that the common complaint that there is very little distinguishing the establishment Republicans and Democrats when it comes to economy policy. (Admittedly, that may be ending.) For most market participants or who work in institutions like central banks, they cannot take partisan political stances. This is because the market participants want to sell their customers something, and getting into heated political arguments with a customer is not exactly a great selling point. Even if the economic divisions between a Clintomite Democrat and a Bush Republican may seem small, the parties are in a vicious struggle on cultural politics, so there is animosity between Team Red and Team Blue. The only exception is that one can safely be pro-free market, but even then, Austrians are typically pushed to things like precious metal funds or hedge funds where they can target a libertarian clientele. 
• Conversely, the broad public is mainly interested in the political economy debates.

This makes writing for both audiences awkward. Mainstream economists typically dodge this by presenting their arguments as being the result of "scientific laws," and so politics is not involved. For anyone arguing that economic theory is the domain of uncertainty, this is not an internally consistent stance.

Why Rates Traders?

I worked in firm that produced financial/economic research, and also worked on the management side. One of the things that is not obvious to outsiders is that very few people in finance make money positioning for the next directional move in interest rates. This is despite that this is the only discussion of interest rates that makes the business press. Why?

• The level of risk-free rates is a non-issue for equities, and credit investors are worried about default risk (or doing quantitative strategies in investment grade credit). Their typical story is to "analyse a (floating currency) sovereign like a corporation," a concept that any competent rates analyst finds hilarious.
• Emerging market specialists are obsessed with the travails of countries that do not resemble the developed floating currency sovereigns.
• "Most" fixed income funds outperform based on being overweight credit, or via relative value. They might take duration risk, but its rarely a significant source of outperformance. (That "most" is my assessment of the industry, heavily based by my knowledge of Canadian fund managers when I was in that line of the business.)
• Investors who manage portfolio allocations are interested in getting bond absolute return forecasts correct, but the reality is that pretty much all added value comes from their equity stance.

Why bring this up? Modern Monetary Theory has a lot of interesting things to say about the government bond market. However, the vast majority of the people working in finance do not really care about the government bond market. Therefore, we need to be careful about arguments that "MMT is taking over finance!"

The other natural audience for MMT are market economists. However, a belief that MMT is highly political will limit the uptake for these professionals, who are more in the marketing business than managing money.

Academic Side

I am an ex-academic from another field of academia (control systems engineering). I was an old school academic purist, and not particularly happy with trends in modern academia. From my vantage point, economics as a discipline is seriously dysfunctional, and the growth of MMT represents a reaction to that dysfunction.

I do not think we can ever reach some Nirvana where everyone agrees with each other about economic theory. However, we should not be in a position where the acknowledgement of a school of thought happens in op-eds, blogs, or tweets. There is no real debate that this sad state of affairs was the result of hardball exclusionary tactics by the so-called "top" economics journals.

In a perfect world, that exclusion would end. More realistically, science will advance one funeral at a time, and there might be an organic growth in cross-references between the various schools of thought. At which point, academic debates ought to return to where they belong - in journals that nobody reads.

I am not holding my breath waiting for a convergence between MMT and neoclassicals. However, it would great if some of the intra-post-Keynesian sniping were pushed into the background. Unfortunately, the prominence of MMT in social media means that such sniping generates a lot of attention.

From my perspective, the solution would be to push sterile theoretical debates to the academic journals, and journal editors and referees should clamp down on the amount of theoretical sniping making its way through peer review. That is, insist on having some constructive theoretical content in a paper; it is not enough to critique another theory in broad terms.

Conclusions

The growth of MMT is going to be driven by building a better theoretical mousetrap. The issue is that the marketing of that mousetrap depends upon the audience. To what extent the desire is to make inroads in institutions filled with boring technocrats, boring technocratic language is the way to go. I have my doubts that is what a young activist will want to hear.

(c) Brian Romanchuk 2019