Comments On Chris Dillow's Review

Chris Dillow wrote a review of Stephanie Kelton's The Deficit Myth. It was a fairly positive review, but I wanted to discuss some of his commentary on MMT. In my view, the aspects of the book that Dillow questioned are probably the reasons why the look is a best seller.

One of the concerns was originality of ideas. From my perspective, this is just a question of academic turf wars. Unless you can get some really spicy details, normal people are not interested in arguments over priority of ideas. Rather, they sensibly want to know how the economy works.

Bond Yields

Dillow writes:

For this economist, though, it poses a problem. I remember writing a research note for Nomura back in the early 90s arguing that increased government borrowing would not increase gilt yields because the same increased private saving that was the counterpart of government borrowing would easily finance that borrowing. Nominal gilt yields, I said, were determined much more by inflation than by government borrowing. But nobody accused me of originality.

As someone who started writing fixed income research in the 1990s, I rapidly gravitated to the view that the rate expectations was the key determinant of bond yields. That was not original, pretty well all of mathematical finance is predicated upon that description.

That rate expectations (or the central bank reaction function) is the key driver of bond yields is also the MMT story. Is this "original"? No. What makes MMT different is that it seems to be the only school of thought to take that story seriously.

On paper, rate expectations is also the core belief of neoclassical economics. However, despite that theoretical purity, the record is filled with well-known neoclassicals worrying about bond vigilantes, tipping points, etc. This highlights that the issue is not originality, rather it was being internally consistent.

If we turn to the question of default risk, it was very easy to find analysts who poo-poo'd the notion of Japan defaulting in the late 1990s to early 2000s (I was one of them). The problem was that nobody had a good theory backing this up; at most, hand-waving about "money printing." MMTers were the first group I ran into that provided a clean explanation of the matter.

Political Strategy

Chris Dillow also questioned the political strategy behind Kelton's writing. He invokes Kalecki's "Political Aspects of Full Employment", and then states:

Which is a big gap in Kelton's analysis. In treating public finances as merely a technocratic matter, she is ignoring the fact that capitalist power sometimes precludes good policy. She is making the error Kalecki warned us against: [quoting Kalecki] "The assumption that a government will maintain full employment in a capitalist economy if it only knows how to do it is fallacious."

I grew up in Winnipeg, site of the General Strike of 1919. Urban ridings were dominated by the NDP, a social democrat party. By North American standards, about as fertile a ground for left-wing politics as could be imagined.

Even so, the two Marxist-Leninist parties (they hated each other) only managed to get a couple dozen votes each in a typical riding, being well back of The Rhinoceros Party (sample policy: "Providing higher education by building taller schools"). I am a political realist, and I follow the examples of groups that actually win elections.

All welfare state policies were opposed by free marketeers; you had to make the argument that not only did they meet a moral imperative, they made the mixed economy we actually live function more efficiently. Arguing that we need to abolish Capitalism in order to have a Job Guarantee is not how I would market a programme that makes industrial capitalism more fair, and more robust.

European politics are different; Marxist parties actually get votes. But one should not expect an American tied to the Democratic Party to market to those voters.

Currency Sovereignty

In a final footnote, Dillow asks:

She neglects another historical question: if monetary sovereignty is as good as she claims, why were European nations (with the support of both public and economists) so keen to abandon it in the 1990s? One answer, I suspect, is that countries lacking the US's "exorbitant privilege" had less effective sovereignty. Whereas demand for Treasuries and dollars is so great as to give the US room to borrow, demand for drachmas, escudos and lira was not so great - and the dumping of such currencies meant their governments faced a tighter inflation constraint than the US.

The reality is that thinking is very different on this side of the Atlantic. Canada has had a free-floating currency during almost all of the post-1950 period. We are a small, resource-dependent economy, with massive cross-border trade. The only people who want to peg the Canadian dollar are a few crackpot business owners or business press writers who pop up every five years to call Canada to adopt the U.S. dollar.

Given the travails of the euro periphery, it is a hard sell to say that the European elites made the right call.

(c) Brian Romanchuk 2020