Some Broader Considerations re MMT Logic

As the MMT debates continue, James Galbraith recently weighed in as well with a less technical perspective. Even though I cringed a little while reading the article, his "nothing to hide" approach makes it easier for laypeople such as myself, to reflect on what's at stake. From the Boston Globe:

MMT is built on the work of John Maynard Keynes and Hyman Minsky. A core insight is that money in "modern states" - meaning, as Keynes wrote, for the past four thousand years at least" - is defined by government. Money is created (mostly) by public spending and bank loans. Money is not something "out there" that the government must borrow from the public in order to function. It is created as government functions; only afterward, those who take payment may then trade the cash for a bond.  

MMT is about the way the world actually works. It explains why big deficits do not drive up interest rates or "crowd out" private investment, and why big governments in big countries don't go bankrupt. Such countries can support big public debts if they have to. Contrary to mainstream wisdom, there is no "threshold" beyond which public debts produce financial disaster.

Like many who have been influenced by market monetarism, I believe MMT logic puts the cart before the horse, so to speak. It takes for granted what have at times been fortunate sequences of events from market outcomes, but does so without a closer consideration of real economy sources for productive economic complexity. Despite the impressive spectrum of achievements which governments have been able to achieve via fiscal policy; by no means is the present scenario, one that today's successful governments should expect to be able to maintain over the long term. There are simply too many demands on fiscal policy today, for even a portion of those demands to be successfully juggled in the decades to come.

Government redistribution in the U.S. for instance is quite recent. It's easy to forget that national income taxes were only established a century ago. Before this level of taxation became reasonable for most citizens, they needed sufficient exposure to income which could benefit from gains in scale. What guarantee does anyone have that most individuals will have jobs in the near future, which can tap those gains in scale to a degree that governments have sufficient revenue to redistribute at their desired levels? Only consider for instance that services are approximately 80 percent of the economy, and a substantial amount of service activity does not benefit from traditional scale.

Even though governments were once directly engaged in tradable sector activities which generate output on traditional terms, advanced economies have become closely aligned with time and place based activities that scale in terms of individual participation. Yet citizen participation in these areas has been minimized, so that governments and private interests alike could capture additional gains. Since much of government redistribution has been rerouted to the support of high skill endeavour, nations are becoming ever more dependent on debt to fund applied knowledge, and much of this accumulated debt will be rolled over for future generations. What comprises today's safety nets is structured in ways which create long term problems beyond what already exists. If it had already seemed that no one wanted to address the structural realities which contributed to the Great Recession, MMT is a further extension of the wishful thinking that all is well and nothing needs to be done.

While MMT is currently promoted by Democrats in the United States, by no means is this a single party reference point. Alas, both parties stand to gain in the short run from an MMT approach as it makes their policy preferences appear more reasonable. Much of the earlier concern regarding government budgetary burdens has receded into the background, since the Great Recession. There could be a stronger alignment between conservatives and progressives for an MMT framed fiscal policy than is generally recognized, since both groups maintain strong vested interests in how governmental redistribution takes place.

One difference for conservatives, however, is the fact they have more incentive to preserve non tradable sector strongholds at local and state levels, in contrast with a more national framing favoured by progressives. Perhaps this helps to explain why some conservatives are having a negative reaction to "The Third Pillar" by Raghuram Rajan. After all, Rajan's advocacy of greater local community control for economic outcomes, runs counter to the local control which conservatives have exercised with plenty of reinforcement from Washington. Indeed, my own advocacy for new wealth creation in local communities, would exist as an economic alternative which individual states could either allow or disallow.

MMT is another means to claim control over a pie which - even if not shrinking - is no longer growing as in the recent past. For instance, David Wessel in a recent Brookings email, cited a paper from Robert Gorden and Hassan Sayed, and noted that

long term declines in productivity growth in Europe and United States look very similar in terms of size, industries affected, and source of the decline. The common cause, they say, is a decline in the pace of innovation. The authors show that industry composition and drivers of the productivity slowdown have shifted in the last decade in both places. While the slowdown was concentrated in goods rather than service industries until 2005, since that time it has been observed across both sets of industries. And where lack of innovation used to be the dominant driver of low productivity growth in the U.S. and Europe, they show that since 2005 low investment has played an equally important role. This indicates that common factors across industries and countries are now reducing global productivity gains.

Note particularly that despite the growing prominence of services formation (especially in the last half century), its expansion in relation to tradable sector activity is now essentially at a standstill. For that matter, central bankers are still scrambling to manage the fallout. This, even though millions of citizens do not participate fully in these aspects of the economy at local levels, whether via supply side production or consumer demand. How can anyone reflect on this circumstance and assume there's nothing wrong?

Possibly my biggest concern about MMT, is what appears as an implicit assumption that it's okay to create and maintain permanent divisions of skill levels in populations. Chances are the "guaranteed jobs" of MMT advocates would be little more than workplace leftovers which no one with meaningful work would even accept. If that weren't enough, arbitrary skills divisions would be funded by long term debt which becomes rolled over so extensively, future generations inexplicably bear responsible for the lucky ones and "good life" of the present. This is no way to create a sustainable and hopeful future. Do we really want to close the door on full economic participation, especially for the intellectual challenges of our time? We can do better.