Yet Another Strawman Attack On MMT

The number of bad takes on MMT have slowed down, but they are still arriving. I have a section on MMT critiques in my manuscript (the formatting of which I am supposed to be finishing off instead of ranting), but we have yet another data point to back my assertion that it is not worth responding to most MMT critiques, since they are terrible.

Yesterday on Twitter I was "entertained" by a thread which contained the following assertion*:

But MMT ran with it: central banks could "print money" to pay for any amount of spending. At the limit, they had a motto: there is no constraint on how much the government can spend. This is an absurd limit, wrong and backwards: CB reserves are just another form of borrowing
8/13

— Ricardo Reis (@R2Rsquared) February 18, 2021

Unlike the AW Phillips Professor of Economics at the LSE, I have almost no formal training in economics (undergrad courses engineering economics, and environmental impact economic analysis). Nevertheless, even an ignorant shnook like myself was able to understand the Functional Finance concept that the constraints on a currency sovereign are real, not financial. We cannot point to a dollar amount and say: "this is the limit to spending!" And if you disagree with that, the response is very simple: what is the limit, then? The belief in such limits was the driving force behind The Widowmaker Trade.

One can debate how any particular MMT text explains the concept, but I have never seen a text by a credible MMT academic that was inconsistent with the above explanation if we take context into account. (One could presumably strip a quote out of context to find examples.) There is no way of characterising the Reis assertion as being done in good faith. If mainstream economists dislike heterodox economist assertions about "mainstream" economists, here is yet another example of a highly credentialed economist making some obviously non-scholarly comments about other academics' work. Enough of these incidents, one might begin to suspect that this represents a systemic problem within the profession.

I will now turn to other tweets in the thread (I will just quote the text):

MMT starts from a likewise correct result in monetary macro: as central banks now satiate the demand for reserves, govt spending can be paid for by issuing CB reserves. This increase in M0 per se has no impact on interest rates, inflation, nor does it crowd out investment.  

The (approximate) irrelevance of the size of the central bank's balance sheet has only been true post-QE. So it may not be as widely understood. But it is still standard: a boring economist laid it out in Jackson Hole back in 2016 with no controversy.

I would note that I managed to write a handbook on MMT that managed to largely skip over this subject, so despite the attention lavished upon it, it is not the sole theoretical novelty. I am not a money bug, and so my eyes glaze over when these discussions come up. I feel that these discussions come up in three contexts.

1. How do operations work now? Money is spent into existence by the central government. This is the study of operations, and although interesting, just a statement of facts, and obviously not a policy stance.
2. Using operations to explain why mainstream discussions of financial constraints are incorrect. Neoclassicals have been dragged towards the position that currency sovereigns are immune to involuntary defaults, but the conversion towards the MMT stance is not safely described as a consensus yet.
3. The only policy recommendations revolve around abolishing the government bond market, and locking the overnight rate at 0% by legislation. (A less extreme version is the trillion dollar coin proposal, which leaves the Federal Reserve as-is, but eliminates institutional constraints on spending.)

Neoclassicals pride themselves on their mathematical expertise, and their analysis of the credibility of policy commitments. There is no excuse for confusing the following two situations:

1. an "independent" central bank right now purchasing government bonds because its reaction function implies a negative spot overnight rate;
2. legislation committing to the end of government bond issuance, and locking the policy rate at zero.

If you want mathematics: do you really think the probability distribution for future nominal policy rates are the same under those scenarios?

I will let the reader go through the rest of Reis' arguments.

Footnote:

* Since the link to the tweet could break, I will quote the text from Ricardo Reis here: "But MMT ran with it: central banks could "print money" to pay for any amount of spending. At the limit, they had a motto: there is no constraint on how much the government can spend. This is an absurd limit, wrong and backwards: CB reserves are just another form of borrowing." This was the 8th tweet of a 13 tweet thread.

(c) Brian Romanchuk 2021