The essential claim of MMT is sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained. This paper analyzes the macroeconomic arguments behind that claim and shows they are suspect. MMT underestimates the economic costs and exaggerate the capabilities of deficit financed fiscal policy. Those analytic shortcomings render it poor economics. However, MMT’s claim that sovereign governments are financially unconstrained is proving a popular political polemic. That is because current distressed economic conditions have generated political resistance to fiscal austerity, and MMT fits the moment by countering the neoliberal polemic that government lacks fiscal space because it is akin to a household.
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Archive for the ‘Economics’ Category
What’s wrong with modern money theory (MMT): macro and political economic restraints on deficit financed fiscal policy
Wednesday, October 21st, 2020Do current times vindicate Keynes and is New Keynesian macroeconomics Keynesian?
Saturday, February 8th, 2020Thomas I. Palley, Esteban Pérez Caldentey, and Matias Vernengo, Review of Keynesian Economics, January 2020.
Professor Robert Rowthorn delivered the second annual Godley-Tobin lecture in New York City on March 1, 2019. The title of his lecture was “Keynesian economics: back from the dead?” and it is published in this issue of the Review of Keynesian Economics. The lecture was attended by a large audience and the Question & Answer session provoked a stimulating discussion. Prompted by that discussion, we thought it would be interesting to invite some leading (Keynesian-leaning) economists to independently address Professor Rowthorn’s lecture topic. This symposium is the outcome of that invitation.
We are living in a time which many believe has a distinctly Keynesian character. That is captured in the belief that many economies appear to suffer from aggregate demand shortage or, at least, a proclivity to demand shortage. It is also captured in the revival of the concept of “economic stagnation” which was an idea that had much traction in the 1930s and 1940s, but then fell away in the 1950s with the post-war boom and the non-reappearance of depression-like conditions.
A Stock Market Boom is Not the Basis of Shared Prosperity
Wednesday, January 22nd, 2020The US is currently enjoying another stock market boom which, if history is any guide, also stands to end in a bust. In the meantime, the boom is having a politically toxic effect by lending support to Donald Trump and obscuring the case for reversing the neoliberal economic paradigm.
For four decades the US economy has been trapped in a “Groundhog Day” cycle in which policy engineered new stock market booms cover the tracks of previous busts. But though each new boom ameliorates, it does not recuperate the prior damage done to income distribution and shared prosperity. Now, that cycle is in full swing again, clouding understanding of the economic problem and giving voters reason not to rock the boat for fear of losing what little they have. READ MORE
The economics of negative interest rates: editors’ introduction
Thursday, December 19th, 2019Thomas Palley, Louis-Philippe Rochon, Guillaume Vallet , Review of Keynesian Economics, April 2019.
The Great Recession (2008/9) triggered by the financial crisis of 2008 has had considerable impact on the conduct of monetary policy. Before the recession, monetary policy was largely based on a New Consensus-type macroeconomic model and it targeted inflation via a Taylor interest rate rule. The belief was that policy engineered changes in real interest rates had strong and predictable effects on output and inflation.
Based on that understanding, in the immediate wake of the financial crisis, central banks were quick to lower their policy interest rate to zero or near-zero. The expectation was for a speedy and robust V-shaped recovery, an expectation which was reflected in Federal Reserve Chairman Ben Bernanke’s comments in March 2009 about seeing “green shoots” of economic recovery.
When that V-shaped recovery failed to materialize, expectations shifted to a U-shaped recovery, and then in turn morphed into L-shaped recovery and talk of secular stagnation. READ MORE
Central Bank Independence: A Rigged Debate Based on False Politics and Economics
Saturday, September 7th, 2019The case for central bank independence is built on an intellectual two-step. Step one argues there is a problem of inflation prone government. Step two argues independence is the solution to that problem. This paper challenges that case and shows it is based on false politics and economics. The paper argues central bank independence is a product of neoliberal economics and aims to institutionalize neoliberal interests. As regards economics, independence rests on a controversial construction of macroeconomics and also fails according to its own microeconomic logic. That failure applies to both goal independence and operational independence. It is a myth to think a government can set goals for the central bank and then leave it to the bank to impartially and neutrally operationalize those goals. Democratic countries may still decide to implement central bank independence, but that decision is a political one with non-neutral economic and political consequences. It is a grave misrepresentation to claim independence solves a fundamental public interest economic problem, and economists make themselves accomplices by claiming it does. [READ MORE]
The Fallacy of the Natural Rate of Interest and Zero Lower Bound Economics: Why Negative Interest Rates May not Remedy Keynesian Unemployment
Thursday, May 9th, 2019This paper provides a critique of zero lower bound (ZLB) economics which has become the new orthodoxy for explaining stagnation. ZLB economics is an extension of pre-Keynesian economics which attributes macroeconomic dysfunction to rigidities and market imperfections. The ZLB is the latest rigidity in that pre-Keynesian tradition. The paper argues negative nominal interest rates, even if feasible, may be unable to remedy Keynesian demand shortage unemployment, and might even aggravate the problem. That is because there exist non-reproduced assets whose return dominates that of investment, and saving may also increase in response to negative rates. Consequently, there may be no natural rate of interest. READ MORE
What’s Wrong With Modern Money Theory (MMT): A Critical Primer
Wednesday, April 10th, 2019Recently, there has been a burst of interest in modern money theory (MMT). The essential claim of MMT is sovereign currency issuing governments do not need taxes or bonds to finance government spending and are financially unconstrained. MMT rests on a triad of arguments concerning: (i) the macroeconomics of money financed budget deficits, (ii) the employer of last resort or job guarantee program, and (iii) the history of money. This primer analyzes that triad and shows each element involves suspect economic arguments. That leads MMT to underestimate the economic costs and exaggerate the capabilities of money financed fiscal policy. MMT’s analytic shortcomings render it poor economics. However, its simplistic printing press economics is proving a popular political polemic, countering the equally simplistic and wrong-headed household economics of neoliberal austerity polemic. READ MORE
Macroeconomics vs. Modern Money Theory: Some Unpleasant Keynesian Arithmetic and Monetary Dynamics
Thursday, April 4th, 2019The last decade has witnessed a significant revival of belief in the efficacy of fiscal policy and mainstream economics is now reverting to the standard positions of mid-1970s Keynesianism. On the coattails of that revival, increased attention is being given to the doctrine of Modern Money Theory (MMT) which makes exaggerated claims about the economic costs and capability of money-financed fiscal policy. MMT proponents are now asserting society can enjoy a range of large government spending programs for free via money financed deficits, which has made it very popular with progressive policy activists. This paper examines MMT’s assertion and rejects the claim that the US can enjoy a massive permanent free program spree that does not cause inflation. It also shows the proposed MMT fiscal program entails economically implausible debt and money supply dynamics that will likely trigger financial instability. READ MORE
The Fracturing of Globalization: Implications of Economic Resentments and Geopolitical Contradictions
Tuesday, January 15th, 2019The last forty years have witnessed a third wave of globalization which can be termed “neoliberal globalization”. Now, there are indications that the era of neoliberal globalization might be drawing to a close, as evidenced by the trade war between the US and China. This paper argues the fracturing of neoliberal globalization reflects the growing impact of economic resentments and geopolitical contradictions. The paper presents a simple analytical framework that constructs the global economy in terms of a core consisting of the US, China, and the EU. It then examines how globalization creates economic resentments and geopolitical tensions within and between members of the core, thereby fracturing globalization. The rise of US – China geopolitical competition promises to twist the character of the global economic order, which stands to be shaped by strategically motivated economic integrations and recalibrations rather than generalized global economic integration. The paper then extends the analysis to non-core country blocs and examines how they are impacted by globalization and the rise of US – China geopolitical competition. READ MORE
Recovering Keynesian Phillips curve theory: hysteresis of ideas and the natural rate of unemployment
Monday, October 29th, 2018Economic theory is prone to hysteresis. Once an idea is adopted it is difficult to change. In the 1970s, the economics profession abandoned the Keynesian Phillips curve and adopted Milton Friedman’s natural rate of unemployment (NRU) hypothesis. The shift was facilitated by a series of lucky breaks. Despite much evidence against the NRU, and much evidence and theoretical argument supportive of the Keynesian Phillips curve, the NRU hypothesis remains ascendant. The hypothesis has had an enormous impact on macroeconomic theory and policy. 2018 is the fiftieth anniversary of Friedman’s introduction of the NRU hypothesis. The anniversary offers an opportunity to challenge, rather than celebrate it. [READ MORE]