Modern Monetary Theory, applied to a rentier economy, prints a wealth transfer to the people who already own everything and pushes open trading economies to the economics of empire.
This is an interesting analysis. I've attempted some analysis of MMT myself at https://www.futureeconomics.org/2019/05/is-lm-and-making-sense-of-mmt/ and I think using different approaches we follow similar paths. I have failed to consider land as an asset or the external exchange effects however, which would seem to add to the risks. So I share your conclusion that there are better policy angles to consider.
One mitigating argument in favour of MMT however is surely that it involves creation of money through spending on goods and wages rather than via financial mechanisms similar to QE. So workers and productive businesses would see this money before rentiers, although it would mostly end up with them.
Moreover, money is used in part because there there is an anticipated time gap between govt spending and tax liability, and between loan issue and the availability of the goods subsequently produced. In other words its store of value function is perhaps more intrinsic than you suggest - but of course this may make its value more rather than less vulnerable to a 'loose money' regime.
I'm just starting on Substack at https://diarmidweir861949.substack.com/ and will be discussing some alternative ideas to deal with the issues MMT wants to address. I'm interested to see what your take is.
You may be interested to know that I found your writing thanks to Jonathan Liew of the Guardian - there's clearly more to him than sport!
On the mitigating effect of MMT, I’d suggest the cantillion effect still hits. Those receiving the new money, are concentrated to those directly employed by the state (the limiting case being a full control economy Stalin would have loved), with that being said, those workers would genuinely get some benefit, with the resulting inflation occurring after it is spent. This creates a very interesting cantillion driven incentive system. Working for the state your wages may be the same but you get paid prior to the rippling inflation, working private, you get paid after the rippling inflation, which is a very very weird incentive structure by design.
Lastly, these agents are still subject to ‘the gravity’ of property. Any savings or gains are more harshly pushed into hard assets from the idea the currency is debased, and the perfect one is simply property in the UK essentially accelerating its effects I would propose.
On the store of value, I’d say you are right within a bounded regime, specifically not in the binary case of ‘full MMT print baby print’ or ‘no MMT’ there are continuous degrees of how much MMT adjacent policy there is I suppose, but in the text i focus on the limiting case it would seem it’s proponents push for.
A guardian reporter passed on details about Me? That’s crazy! I didn’t realize how big this was getting that’s quite cool!
Thought provoking, and I need time to digest your critique with the risks of inflationary spirals and currency devaluation - and refresh my understanding of MMT! I notice that you haven't paid any significant attention to the proposed MMT role of taxation in addressing inflation?
What would be most interesting are your suggestions of mitigations for MMT distortion effects???
I touched on it lightly, but with its edge case identified. The idea of cost push inflation from imports on a currency depreciation. In such a case that’s the lightbulb that goes off when they are supposed to start taxing, which is mad!
Otherwise MMT in a closed economy, in pure theory, without trade, taxing to slow down the growth of the economy. Again just hits a wall in reality, look at the UK and how it reacts to new taxation…or the French firstly, deploying taxes are very difficult and politically unpopular, they’re also as said here, deployed only after the fact. No economist can truly derive the capacity of the economy in its full extent, so with MMT they wait for inflation to show up, then try to get taxes through, but by the time they do that, it’s too late, expectations are set, demanded rates of return are elevated etc.
Overall it seems really just like someone took the accounting identity which is valid, then ran with it with no regard for any other functions of an international economy generally.
That’s a really insightful analysis, thank you. It’s probably important to distinguish between MMT which provides a more authentic description of how fiat money economies actually work, and policies based on exploiting what seem to be MMT’s removal of constraints imposed by austerity theory policies which attempt to contain government deficits. Both would appear to encourage policy extremes aimed at addressing the wrong problem, both would seem to lead to the same end, namely an increasingly rentier dominated economy which creates growth in inequality rather than goods or services.
A further twist to the false or absent signals on the MMT policy maker’s dashboard is that as risk in the currency’s store of value increases, money will move into land and property (domestically and from increasing foreign holdings) which then gives rental values a further twist. The increased imputed rent from freeholders in the GDP calculation will then make GDP higher despite nothing extra having been produced, confirming the policy maker’s view that he is pursuing the right policy.
Your analysis demonstrates elegantly to me a number of things, foremost that there are more constraints on policies based on MMT than inflation. In particular the exchange rate is also an important consideration because it can create cost push inflation and interest rate rises, particularly in the UK’s case where critical imports including food may not be substitutable either in kind or sufficient volume; and consequently why the easy-to-explain “household budget” model works to a first approximation even though it is completely false.
The underlying lesson I draw from this is that without addressing the drift into a rentier economy by taxing land rather than capital and labour, no policy will survive contact with reality once it has entered the self inflicted tailspin in which the UK economy now finds itself.
This is an interesting analysis. I've attempted some analysis of MMT myself at https://www.futureeconomics.org/2019/05/is-lm-and-making-sense-of-mmt/ and I think using different approaches we follow similar paths. I have failed to consider land as an asset or the external exchange effects however, which would seem to add to the risks. So I share your conclusion that there are better policy angles to consider.
One mitigating argument in favour of MMT however is surely that it involves creation of money through spending on goods and wages rather than via financial mechanisms similar to QE. So workers and productive businesses would see this money before rentiers, although it would mostly end up with them.
Moreover, money is used in part because there there is an anticipated time gap between govt spending and tax liability, and between loan issue and the availability of the goods subsequently produced. In other words its store of value function is perhaps more intrinsic than you suggest - but of course this may make its value more rather than less vulnerable to a 'loose money' regime.
I'm just starting on Substack at https://diarmidweir861949.substack.com/ and will be discussing some alternative ideas to deal with the issues MMT wants to address. I'm interested to see what your take is.
You may be interested to know that I found your writing thanks to Jonathan Liew of the Guardian - there's clearly more to him than sport!
Thank you I’ll take a look!
On the mitigating effect of MMT, I’d suggest the cantillion effect still hits. Those receiving the new money, are concentrated to those directly employed by the state (the limiting case being a full control economy Stalin would have loved), with that being said, those workers would genuinely get some benefit, with the resulting inflation occurring after it is spent. This creates a very interesting cantillion driven incentive system. Working for the state your wages may be the same but you get paid prior to the rippling inflation, working private, you get paid after the rippling inflation, which is a very very weird incentive structure by design.
Lastly, these agents are still subject to ‘the gravity’ of property. Any savings or gains are more harshly pushed into hard assets from the idea the currency is debased, and the perfect one is simply property in the UK essentially accelerating its effects I would propose.
On the store of value, I’d say you are right within a bounded regime, specifically not in the binary case of ‘full MMT print baby print’ or ‘no MMT’ there are continuous degrees of how much MMT adjacent policy there is I suppose, but in the text i focus on the limiting case it would seem it’s proponents push for.
A guardian reporter passed on details about Me? That’s crazy! I didn’t realize how big this was getting that’s quite cool!
Thought provoking, and I need time to digest your critique with the risks of inflationary spirals and currency devaluation - and refresh my understanding of MMT! I notice that you haven't paid any significant attention to the proposed MMT role of taxation in addressing inflation?
What would be most interesting are your suggestions of mitigations for MMT distortion effects???
Thank you!
I touched on it lightly, but with its edge case identified. The idea of cost push inflation from imports on a currency depreciation. In such a case that’s the lightbulb that goes off when they are supposed to start taxing, which is mad!
Otherwise MMT in a closed economy, in pure theory, without trade, taxing to slow down the growth of the economy. Again just hits a wall in reality, look at the UK and how it reacts to new taxation…or the French firstly, deploying taxes are very difficult and politically unpopular, they’re also as said here, deployed only after the fact. No economist can truly derive the capacity of the economy in its full extent, so with MMT they wait for inflation to show up, then try to get taxes through, but by the time they do that, it’s too late, expectations are set, demanded rates of return are elevated etc.
Overall it seems really just like someone took the accounting identity which is valid, then ran with it with no regard for any other functions of an international economy generally.
Keynes: if we can do something, then we can afford to do it. Sometimes wrongly taken to mean we can do, and afford to do,.anything.
That’s a really insightful analysis, thank you. It’s probably important to distinguish between MMT which provides a more authentic description of how fiat money economies actually work, and policies based on exploiting what seem to be MMT’s removal of constraints imposed by austerity theory policies which attempt to contain government deficits. Both would appear to encourage policy extremes aimed at addressing the wrong problem, both would seem to lead to the same end, namely an increasingly rentier dominated economy which creates growth in inequality rather than goods or services.
A further twist to the false or absent signals on the MMT policy maker’s dashboard is that as risk in the currency’s store of value increases, money will move into land and property (domestically and from increasing foreign holdings) which then gives rental values a further twist. The increased imputed rent from freeholders in the GDP calculation will then make GDP higher despite nothing extra having been produced, confirming the policy maker’s view that he is pursuing the right policy.
Your analysis demonstrates elegantly to me a number of things, foremost that there are more constraints on policies based on MMT than inflation. In particular the exchange rate is also an important consideration because it can create cost push inflation and interest rate rises, particularly in the UK’s case where critical imports including food may not be substitutable either in kind or sufficient volume; and consequently why the easy-to-explain “household budget” model works to a first approximation even though it is completely false.
The underlying lesson I draw from this is that without addressing the drift into a rentier economy by taxing land rather than capital and labour, no policy will survive contact with reality once it has entered the self inflicted tailspin in which the UK economy now finds itself.