An Omnibus Reply to MMT Critics

Randall Wray and Éric Tymoigne just released a new working paper that rounds up and responds to various critiques of Modern Money Theory (MMT); critiques they organize into five categories:

One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment.

As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.

You occasionally see MMT loosely described as being “pro-deficit,” but Tymoigne and Wray explain that their theory is neither “for a fiscal deficit, nor is it for a fiscal surplus or a balanced budget”:

MMT is agnostic regarding the fiscal position of a monetarily sovereign government per se. As Abba Lerner’s “functional finance” approach insists, the fiscal position of the government is not a relevant policy objective for a monetarily-sovereign government. Price stability, financial stability, moderate growth of living standards, and full employment are the relevant macroeconomic objectives, and the fiscal position of the government has to be judged relative to these goals instead of for itself. If there is inflation that is demand-led, the fiscal position is too loose (surplus is too small or deficit is too large); if there is non-frictional unemployment, the fiscal position is too stringent. Also, if financial fragility grows due to negative net saving by the domestic private sector, the government’s stance is probably too tight.

Download the paper here.