Yves here. Now that MMT is getting mainstream attention and has become the regular object of blistering, and typically very much off-base attacks, it’s hard to understand what the vitriol is about. One issue is that MMT offends the aesthetics of a lot of economists, who fetishize elegant models even when their real world applications are highly restricted at best.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives
Number 2A in the MMT Series
Introduction
The second article in this series deals with Modern Monetary Theory’s (MMT) predictive and policy successes. The article has three, separately published, parts. Part 2A deals explains why predictive ability and policy success are so critical – and notes that MMT’s critics have been conspicuously unable to provide a record of predictive failure by MMT scholars.
Part 2B deals with MMT successes in microeconomics. The MMT work on microeconomics constitutes a powerful refutation of the ‘microfoundations’ of ‘modern macroeconomics.’ The key characteristics that the MMT theorists have demonstrated dramatically superior predictive ability, particularly in the most important microfoundation issues of the last 70 years. In the microfoundations context, MMT scholars have also demonstrated exceptional policy success.
Part 2C deals with macroeconomics. Again, MMT scholars’ predictive success has been excellent. Equally important, MMT scholars have demonstrated their predictive successes in the most important macroeconomic issues of our lives.
Predictive Success is how Economists Agree We should Test Theories
With the exception of ‘Austrian-school’ economists, who sometimes believe that laissez faire ideology is self-evidently true, virtually all economists agree that the way one should test the validity of theories is their predictive success. Paul Krugman and the other prominent orthodox economists who have attacked Modern Monetary Theory (MMT), all agree with this proposition. The obvious question, given their disdain for MMT, is why none of these prominent orthodox economists was able to point to predictive failures by any MMT scholars. Given the tone of the orthodox attacks on MMT and MMT scholars, dismissing it and us as nonsense, and the length of our work (roughly 25 years in ‘macro’ and 35 years in microfoundations) it should be simple for our critics to point out a dozen major predictive failures. Nonsense theories produce nonsense predictions. One can be lucky predictively for several years, but not for a quarter-century. Krugman and Larry Summer’s instinctive approach to refuting MMT must have been to check out our predictive record. Why does no attack on MMT mention even a single predictive failure? Why, instead, did they rely on inventing strawmen claims they attributed to MMT scholars that they knew we rejected? Why did they rely overwhelmingly on ad hominem attacks on unnamed MMT scholars? We do not have to guess whether Krugman would have attacked our predictive failures had he found them, for he just wrote a column denouncing a foe on the basis of his repeated predictive failures.
Here is How Krugman Criticizes Economists with Poor Predictive Records
Krugman wrote a column on March 25, 2019 that demonstrates my point. He denounced President Trump’s decision to appoint Stephen Moore to the Fed. Krugman argued that Moore’s terrible predictive record proved that he was a terrible economist.
About Moore: It goes almost without saying that he has been wrong about everything. I don’t mean the occasional bad call, which all of us make. I mean a track record that includes predicting that George W. Bush’s policies would produce a magnificent boom, Barack Obama’s policies would lead to runaway inflation, tax cuts in Kansas would produce a “near immediate” boost to the state’s economy, and much more. And, of course, never an acknowledgment of error or reflection on why he got it wrong.
Beyond that, Moore has a problem with facts. After printing a Moore op-ed in which all the key numbers were wrong, one editor vowed never to publish the man’s work again. And a blizzard of factual errors is standard practice in his writing and speaking. It’s actually hard to find cases where Moore got a fact right.
Krugman’s column attacking Moore demonstrates exactly how he would have attacked MMT scholars – if we had a record of predictive failure or made “a blizzard of factual errors.” If MMT were a bogus theory and MMT scholars were dishonest, he would have given three examples of major predictive errors and examples of repeated “factual errors.” Instead, Krugman – and every other ‘expert’ critic of MMT has failed to present even the “occasional bad call” or factual error by any MMT scholar. That is a devastating failure because it is universal and total. If any of our orthodox economics critics had been able to demonstrate even a few predictive errors by the weakest MMT scholar over the course of the last 25-35 years, you know that they would have done so with gusto. Such an attack, of course, would not have invalidated MMT or its strongest scholars, but it is revealing that Krugman and other orthodox critics could not even find a junior scholar’s predictions to pillory. What terrifies our orthodox critics is that MMT scholars have a superb predictive record on the most important economic issues of our lifetime.
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I think Bill Black is being too kind to Summers, Krugman et al . I don’t think their opposition, rejection of MMT is rooted in any lack of evidence . I think they reject it because it threatens their professional standing and puts a hole in the Neo-classical hegemony that is mainstream economics. And above all it lays open the possibility that the plebs will see through the whole charade of manipulation dressed up as management of the economy by the priesthood .
Haven’t read this myself, but I have been told that de Toqueville wrote that if the people of US ever figured out that they had the power, through their elected representatives, to vote themselves appropriations, they would do so without restraint and would ruin the public treasury. That concern made sense in his era of “convertible to specie” currency.
I wonder whether the VSPs among the mainstream critics of MMT may still be mentally shackled by “gold standard” thinking (in addition to their intellectual dishonesty)
The best form of defence is attack.
Why do they get things so wrong?
2008 – “How did that happen?”
It was a black swan.
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png
Bankers are inflating asset prices with the money they create from loans leading to Minsky Moments in 1929 and 2008.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
The status quo benefits very powerful and influential people and this is why they are so resistant to change.
How did we get here?
Something is wrong, but no one knows what.
Everyone assumes our current knowledge has built up over time as we learn from past mistakes.
With economics and the monetary the system there is too much to lose from allowing knowledge to develop in the normal way.
Our knowledge of privately created money has been going backwards since 1856.
Credit creation theory -> fractional reserve theory -> financial intermediation theory
“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner
http://www.sciencedirect.com/science/article/pii/S1057521915001477
If you know how the system works and no one else does, think of all the money you could make.
Everything had been going well for 5,000 years and then the classical economists turned up. Those at the top had been living in luxury and leisure, while other people did all the work.
The European aristocracy were just the same, they lived in luxury and leisure while other people did all the work.
The Classical Economists realised they were being maintained by the hard work of everyone else.
The Classical economist, Adam Smith:
“The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”
Economics was always far too dangerous to be allowed to reveal the truth about the economy.
How can we protect those powerful vested interests at the top of society?
The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.
They took the focus off the cost of living that had been so important to the Classical Economists to hide the effects of rentier activity in the economy.
The landowners, landlords and usurers were now just productive members of society again.
Our knowledge of economics and the monetary system are fundamentally flawed.
Capitalism has two sides, the productive side where people earn their income and the parasitic side where the rentiers live off unearned income.
In 1984, income from rent, interest and dividends over-took earned income in the US.
The Americans are on the wrong side.
Putting things into perspective.
Economics, the time line:
Classical economics – observations and deductions from the world of small state, unregulated capitalism around them
Neoclassical economics – Where did that come from?
Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics
Neoclassical economics – Why is that back?
We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.
On bringing it back again, we had lost everything that had been learned in the 1930s, by which time it had already demonstrated its flaws.
Our knowledge of privately created money has been going backwards since 1856.
Credit creation theory -> fractional reserve theory -> financial intermediation theory
The US and UK tried Milton Freidman’s monetarism.
He used “fractional reserve theory” and thought bank lending and the money supply were controlled by central bank reserves.
No one in the US or UK knew any better, so they tried it.
It didn’t work as bank lending and the money supply are not controlled by central bank reserves.
Things then got worse and the new accepted theory was “financial intermediation theory”, which is even further away from the truth.
Ben Bernanke used “financial intermediation theory” in his work on the Great Depression and this is why he couldn’t understand debt deflation.
No one else had got a clue either and so no one could see the problem with his work.
Ben Bernanke’s flawed work on the Great Depression made him the ideal FED Chair after 2008.
Obviously not, but no one knew any better.
Understanding the things that have gone wrong with privately created money reveal the necessity of MMT in the near future to maintain the money supply.
The money supply ≈ public debt + private debt
The MSM lauds the Fed as the savior of our economy.
60 Minutes interviewed Fed Chair Jerome Powell (who Trump doesn’t like) on 3/10/19. The Federal Reserve, 10 years after the Great Recession. https://www.cbsnews.com/news/the-federal-reserve-10-years-after-the-great-recession-60-minutes/
The segment ends with Powell’s quote, “There’s no reason why this economy can’t continue to expand.”
If printing money is the equivalent of life support for a dying economy, how should quantitative easing be done differently after the next crash, with MMT in place? And how will MMT tame a consumer-based economy and GDP that doesn’t account for greenhouse gas emissions?
Libertarians see how banks screw us. But they also argue the following at Cloud of Doubt in “An Analysis of Quantitative Easing Since the Great Recession.”
Clearly laissez-faire and neoliberal approaches will fail with the triple threats of empire, environmental and economic crises looming.
Japan holds many of the answers.
Richard Werner was in Japan when things went wrong in the late 1980s and he saw a very stable, successful economy ruin itself. He looked into the before and after to see what went wrong.
Europe needed the Marshall Plan to reconstruct after WW2, Japan did it all by itself using the money creation of the central bank and private banks, and Japan was just as broken as Europe.
The BoJ cleared all the bad debts out of the banking system, fixing the banks to lend into the economy. Japan didn’t issue bonds until 1965, the BoJ created the money for the Government to spend.
Japan developed a very different capitalism after WW2 that was not dependent on investors and used bank money creation to lend into business and industry and this was tightly controlled by the BoJ using credit/window guidance.
This gave Japan a very stable money supply and economic stability.
Bank loans create money and the repayments to banks destroy money.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
Over 95% of the money supply comes from private bank money creation.
Things went wrong when the Japanese banks started lending into real estate and other financial speculation. The money supply expanded rapidly and the economy boomed, but this would lead to the inevitable crash from which Japan still has not recovered.
When asset prices collapsed, people started paying down debt on mass and the money supply started to shrink pushing the economy towards debt deflation. The only way to stabilise the money supply was with Government borrowing.
The money supply ≈ public debt + private debt
The public debt ballooned as Japan deleveraged from the debt fuelled boom of the 1980s.
Richard Koo was monitoring the situation in Japan during this phase, which he calls a balance sheet recession.
Richard Koo’s video shows the “New Deal” also worked by increasing the money supply, which had been shrinking in the debt deflation of the Great Depression.
https://www.youtube.com/watch?v=LCX3qPq0JDA
The money supply ≈ public debt + private debt
The “private debt” component was going down with deleveraging from a debt fuelled boom causing debt deflation (a shrinking money supply).
He actually shows the US money supply (8.30 – 13 mins):
1) 1929 before the crash – June 1929
2) The Great depression before the New Deal – June 1933
3) During the New Deal – June 1936
Once it was working, those that hate Government debt insisted that the debt be reduced and plunged the nation back into recession again. The enormous public spending and borrowing of WW2, eventually sorted things out.
QE can’t enter the real economy due to a lack of borrowers and the FED increased bank reserves in the Great Depression too (in the first 10 mins. of the video), but the private debt component of the money supply still kept going down. It was Government borrowing that increased the money supply.
A private debt problem becomes a public debt problem, unless you use Government created money and this is the conclusion Adair Turner has come to building on Japan’s experience.
Adair Turner explains:
https://www.youtube.com/watch?v=LCX3qPq0JDA
Richard Koo knew what would happen to the West after 2008 from his experience in Japan. He doesn’t know why we are expecting QE to fix things when it can’t get into the real economy due to a lack of borrowers.
Two Adair Turner’s and no Richard Koo – Bad Link.
Richard Koo:
https://www.youtube.com/watch?v=8YTyJzmiHGk
Up until the 1980s, everyone expected a future where robots did most of the work giving people much more leisure time.
Neoliberalism changed that and turned technology into a problem for the future.
Neoliberals don’t know where the real wealth in the economy lies, which is why we spend so much time inflating asset prices.
The real wealth in the economy lies in the goods and services available within the economy.
Alan Greenspan tells Paul Ryan the Government can create all the money it wants and there is no need to save for pensions.
https://www.youtube.com/watch?v=DNCZHAQnfGU
What matters is whether the goods and services are there for them to buy with that money.
Money comes out of nothing and is just numbers typed in at a keyboard.
Too much money and you get inflation (consumer price and/or asset price inflation), too little and you get deflation. If you have a huge excess of money, you get hyper-inflation and wheel barrows of the stuff won’t buy you anything. It has no intrinsic value, its value comes from what it can buy.
So, if robots do the work producing the goods and services, we just need to get money to the people to consume those goods and services.
Most people do like to work, although there are people who don’t like working, like our aristocracy.
We can always create jobs in leisure, infra-structure, education, health, social care, green energy, new research ….. etc …. to allow people to work while the robots produce the essential goods and services we need.
MMT gives us the future we should have rather than the bleak one neoliberals offer.
I’ve wondered about the black swan claim. I only got part way through Taleb’s ‘s book before giving up (due to a combination of how self-obsessed and just kind of an ass Taleb is, and my eyes glazing over at the statistics talk), but he seemed to make no allowance for fraud. He seemed to be modeling events as if they were more or less ‘natural’. My searches of the internet haven’t revealed anything from people like Bill Black on black swans.
The idea that no one saw it coming is nonsense. Not only did various people publically warn and predict, with varying degrees of detail and accuracy that it was all going to implode, but I’ve heard anecdotally that basically everyone in finance knew they were playing with fire. They didn’t know how bad it would ultimately get, but they knew the track would run out sooner or later.
yves, could you create a separate category in the “topics,” for MMT?
Yves, you saw Shiller’s take on this?
https://www.nytimes.com/2019/03/29/business/modern-monetary-theory-shiller.html
also found from link starting here: http://www.shillerfeeds.com/
Schiller totally ignores the key reality of fiat money created by a sovereign authority. He does demonstrate a more open attitude although he has not read, apparently, beyond the more popular presentations of MMT.
I hope an MMT scholar responds to this in the Times.
That was interesting. Schiller writes to communicate at the clearest possible level for a smart guy. I like that part. He’s a little puritanical, warning about profligate spending… but shit happens. MMT does not propose that we spend irresponsibly. So that’s just another straw man. Schiller could as easily be admonishing Paul and Larry about their mis-targeted spending preferences. Schiller says, “It only makes sense to deficit spend when the return on government investments exceeds the interest rate.” He misses the point that MMT advocates spending directly into the economy, bypassing debt service burdens that are untimely and socially destructive. Schiller also has a classic problem with the word “return”. Return is a complex gain; the return on MMT spending is social and environmental, not monetary, at least not immediately. MMT gains persist and stabilize the otherwise unbalanced forces of a capitalist economy. So by making this point about returns Schiller and other smart guys miss the point entirely; they just drive right past it. Good social and environmental health will balance the inequalities of a sick economy. But not if the Contards panic and crank up the arbitrary value of money and other austerities.
The resentment and resistance of the “grandees” of classical economics to MMT has another key source that is, to be fair, probably sufficiently repressed by Paul, Larry and the rest of the team that they can deny it without experiencing a massive extension of their olfactory apparatus. Spending directly into the economy removes the near-eternal influence of the banking world on the entire process. The banking world deeply influences what economic theories are accepted by the universities that are the homes of said Grandees. If the banks feel threatened by what you espouse, those tenured positions seem to magically shift away, to be granted to less abrasive thinkers. Historians (the good ones, anyway) are well aware of the need to resist the “big donors call the shots” influence on their field, and are automatically abrasive on several levels as a result. So Economics as a discipline tends to derive it’s support from a painfully eviscerated shadow of history and the real world.
Thanks, Susan- you helped me understand the potential of out-of-bank spending to be socially and environmentally powerful- and deeply disturbing to the old guard.
Other countries are a little less ossified in their economic thinking than our Krugmans and Summerses. Even the EU is selling “green bonds” these days. Green bonds are MMT. But to take a step like this requires that Krug and his ilk recant everything they ever said. The vanity of establishment economists is a very high price for the rest of the country to carry – it’s just another externalized cost, the cost of procrastinating because of professional embarrassment . Oh dear, they are so humiliated, we’ll all just have to politely suffer the environmental catastrophes a while longer. At least until their little egos are strong enough to face the truth.
In one of the chronologically earlier posts in this series (it may have been numbered higher than the present post), Prof Black expressed doubt that critics of MMT had actually read the key research publications in the MMT-oriented journal literature.
Maybe these people are hopeless cases, or maybe this has already been tried (and failed), but I wonder whether it could be fruitful to simply mail some reprints to the VSPs and invite them to discuss.
Oh sure, because Krugman and Summers and Shiller are unaware of how economics journals work….The fact that they never seem to actually cite, much less argue with, any peer-reviewed articles by the main MMT proponents just proves their intellectual dishonesty. And the fact that they continue to do so, when anyone with half a clue can see what they’re doing just shows how dumb they think the populace is.
Philip Mirowski gives the following answer:
After a brief flirtation in the 1960s and 1970s, the grandees of the economics profession took it upon themselves to express openly their disdain and revulsion for the types of self-reflection practiced by ‘methodologists’ and historians of economics, and to go out of their way to prevent those so inclined from occupying any tenured foothold in reputable economics departments …
Once this policy was put in place, and then algorithmic journal rankings were used to deny hiring and promotion at the commanding heights of economics to those with methodological leanings. Consequently, the grey-beards summarily expelled both philosophy and history from the graduate economics curriculum; and then, they chased it out of the undergraduate curriculum as well. – snip
Twenty-five years ago, Phil Mirowski was invited to give a speech on themes from his book More Heat than Light at my economics department in Lund, Sweden. All the mainstream professors were there. Their theories were totally mangled and no one — absolutely no one — had anything to say even remotely reminiscent of a defence. Being at a nonplus, one of them, in total desperation, finally asked: “But what shall we do then?” – snip
https://larspsyll.wordpress.com/2019/04/01/economics-becomes-more-precise-and-rigorous-and-totally-useless/