I recently had to voice my opposition to the burgeoning Modern Monetary Theory (MMT) economic school and its offshoots, such as Monetary Realism (MR). I wanted to record my comments here, because these valuable debates often get buried for eternity in a long comment thread.
For background, Cullen Roche, curator and proprietor of the wildly successful Pragmatic Capitalism blog, has been a major proponent of the MMT movement. Cullen subsequently co-led the transition to MR, which is a tweaked derivative of its MMT predecessor. I won’t delve into the mechanics of the theories herein, for which you can reference Google and the webosphere.
“I think the problem in modern macro is that it is driven largely by ideology and confirmation bias. A plane does not fly because of ideology or personal biases. It flies because we know, for a fact, that an object can generate enough thrust to overcome its weight resulting in lift. Obviously, [flying a plane is] more complex than that, but it’s not something that’s theoretical or in need of experimentation. This common understanding of flight creates a basis for understanding within the engineering community…
“In macroeconomics, we do the opposite. There is no firm set of agreed upon understandings. No one agrees how the plane flies. Instead, we mostly just debate the optimal way to fly. We’re basically just throwing sheets of metal into the sky without actually working from an agreed upon foundation for why that piece of metal may or may not fly…
“Modern macro needs a firm set of understandings from which to base future experiments. And yes, the experiments are fine so long as they’re based on a firm understanding of the actual monetary system and how it operates [which MR accomplishes].”
Here’s my response to Cullen, for whom I have tremendous respect, by the way, as our conversations through the years have spawned a lot of intellectual evolution. That being said, I wholly disagree with his utopian intimations and his inflated self-confidence in the unequivocal veracity of MMT/MR, both of which I address in what follows:
“I disagree with you here Cullen. Your comments come off as naive, although from my trackrecord here at PragCap, I obviously don’t think you’re so obtuse. (Don’t mean to sound as harsh as that comes off…)
“First, part of the problem with macro is that there are many ideologies–as in politics–so good luck getting people to agree [on a basis of understanding]. We’re of a bipartisan Congress, and they have scarcely been able to untangle the gridlock. You can serve them MR, but you’re really just asking them to acquiesce to a rational theory, when they all believe they have their own rational theories (backed by much more data & academia). Second, in reality, it’s to hard to model human behavior using the sciences known to man today, hence so many economic theories have been carted out, then carted off, throughout the ages. (Sylvia Nasar’s Grand Pursuit: The Story of Economic Genius is a good place to start, for those interested.) MR feeds on the same confirmation biases as do all its predecessors.
“I guess this comes down to my personal problem with MR: it does correctly characterize the monetary system (as other theories fail to), but that’s of little use in practice. Specifically, sure deficits aren’t necessarily a problem to a sovereign currency issuer (100% agree), and history says issuers don’t default sans an exogenous shock (e.g. war or reparations), but the absence of evidence is not
evidence of absence. [While MR clearly and correctly articulates the mechanics of our monetary system, it makes the wild, baseless, unscientific, and biased claim that deficits don’t matter or sovereign issuers can’t default. Using that as a ‘basis of understanding’ leads us to implement experimental economic policy on top of theoretical assumptions.] Yes, a sustainable debtload isn’t subject to some arbitrary 90% debt/GDP figure–especially not for a currency issuer and even more especially not for the world’s reserve currency. Britain was in such a fragile state coming out of WWI, after which its role in the global economy was usurped by America. Sure, the British have had a decent standard of living since, but they were financed by America for American interests. That’s an awfully dependent state to hang your hat on. Maybe BOE should’ve left the gold standard before 1931 and/or launched QE, but it’s a zero-sum game: their choice was between tax by inflation or tax by disinflation. The US is in such a position today. Not all that dissimilar from 1920s UK, the US is dealing with issues from a dearth of secular innovation, sustainable growth rates & demographics. Is that not the case? How does MR resolve any of that?
“There comes a point when federal debt excess hinders growth, as in Japan, because private debt always gets crammed up to the federal entity, as today’s social engineers won’t let zombies die. Japan is in an extremely fragile state, wherein a material rise in interest rates would send the federal government into a death spiral [in which debt service rivals national income] (don’t say literal currency printing isn’t a problem with their age demographics), so the alternative to such inflation is ZIRP, wherein savers feel the equivalent pinch as in inflation–not good for a modern welfare state with that many retirees. There are always losers, and MR doesn’t change that, right? [Having reached its sustainable growth rate, the US is basically a stodgy blue chip now, with steady cash flows and little growth. Accept that, and stop pushing so hard. If Natural Gas or alternative energy end up proliferating into magnanimous growth opportunities, then so be it, but stop forcing the defibrillators on an old man just because he’s not running as fast as he used to. Deficits are perfectly suitable for application after economic calamity wrought by the excesses at the peak of the business cycle. But, they’re intended to temporarily nurse an economy back to health after the dead bodies have been carried out via writedowns & bankruptcies. That assures a few things. First, the yield off deficit spending is maximized, not eroded by keeping zombies on life support. Second, deficits are temporary, ephemeral, not death spirals, and less susceptible to exogenous shocks.]
“Finally, you cannot argue that a country marred by deficit is not in a more vulnerable state than one in surplus. De facto, there will always be countries with trade deficits and others with surpluses. Some countries should run fiscal deficits too. But were a war or natural disaster to befall that nation who’s already running a deep deficit, is that nation not financially vulnerable? The best way to prepare for disaster is to always be prepared for disaster. Instead of having thousands of economists & econometric models trying to predict the business cycle and preempt geopolitics, just be prepared for all weather. Sure, run a budget deficit when the private sector needs help, but realize that monetary policy is a zero-sum game, a bridge over troubled water, and real growth requires natural resources, demographics, or innovation. MR will not attain any of those inputs, right?
“For MR to make a difference, it needs to jump a shark. It doesn’t need to become political or ideological, but it needs to make some concrete [policy] recommendations. At this point, MR is a foundation of understanding. It will need a set of prescriptions if it will ever make a difference in our world, and when an economic theory makes recommendations, how is that not ‘experimental’?”