Wednesday, February 22, 2012

MMT in the House! "Rouge" school of economics gets mainstream press in the Wash Post!

After a long hiatus I had to come back and post about this much deserved attention recently given by a mainstream US media organ, The Washington Post, to heterodox economics - specifically the Post Keynesian and MMT (Modern Monetary Theory) schools!

This is potentially a big moment and could signal an opening for launching "rogue", "maverick" and "non mainstream" heterodox thinking into the "mainstream"!

Pasted below is a great chart from the article outlining the “family trees” of the Post-Keynesian, the “mainstream” Keynesian and Neo-Classical schools.

The fact that MMT even received this kind of attention in the mainstream media is itself now becoming a story. FT Alphavile had a few great posts here and the major Post Keynesian blogs from the Univ. MO Kansas City, Levy Institute and Naked Capitalism – all blogs we have links to on the side bars – were mentioned in the article and all reacted quickly to the watershed moment

Wash Post journalist Dylan Mathews should be credited for doing this piece on a niche school of thought that has shown considerable recent growth in the blogosphere and significant indirect impact through its influence on some mainstream economists, no doubt because of its unmatched track record of predictive success over the last decade. . Of course, the piece could have been much better, but often when a mainstream journalist writes about an unfamiliar niche topic they will miss pertinent - even basic - facts, along with bringing a pro-mainstream bias. 

I'm sure Mathews is being inundated with advice and criticism on "what he should have written" and  I too will indulge in giving him some advice! If I had to pick a single point about MMT’s basic contribution that Mathews completely missed, it would be the Sector Financial Balances Equation below:

Public Surplus + Private Surplus + Current Account Surplus = 0

Whether or not one agrees with the general policy prescriptions of the MMT community, this is an immutable fact of 800 years of double bookkeeping accounting, summed up beautifully in the chart below from UMKC, I’m guessing its from Randall Wray or Stephanie Kelton:

As I understand MMT (and my understanding is fairly rudimentary), this would explain why countries like Canada and Australia run both private and public sector surpluses; they run Capital account deficits(Current account surplus). Effectively, their domestic public and private surpluses allow them to "vendor finance" their export industries. In the US during the late 90s, the booming private sector was financed by attracting global direct investment and public surpluses. The private / business sector made debt (and equity) investments during the build out of the Internet backbone, thus generating tax revenue and allowing the government to run surpluses, though I gather some MMTers would argue that those surpluses were a waste because they took net financial assets out of the population's hands. Perhaps others argue that the surpluses were needed to keep the economy from overheating during the Internet bubble. Conversely, the over-indebted US private sector of today is going through a much needed debt purge and de-leveraging and has been (generally) accommodated by a public sector willing to run deficits. As this blog has frequently commented, outside of a massive debt forgiveness / reset / default program, it’s impossible for the public and private sectors to de-leverage simultaneously, at least without a massive currency depreciation, and it's impossible for all countries to depreciate their currencies simultaneously. 

One can accept the undeniable basic accounting identify of the sector financial balances but still debate the driving factors behind them and the efficacy of various policy prescriptions at any given time. Furthermore. a wider awareness of the sector financial balances would lead to a far more informed debate, whether from the "Left" or "Right". For instance, Ed Harrison of the fantastic Credit Writedowns blog has done some fantastic analysis in part because he is highly informed on the MMT world view and financial sector balances, even though he tends to be somewhat right-leaning and even Austrian in his personal policy biases.

As i've said before, many of the most precienct forecasters of the economic turmoil over the last several years were either Post Keynesian, or they were major mainstream figures like economist Nouriel Roubini and Fmr Pimco exec Paul Maaculay who themselves were heavily influenced by Post Keynesians like Hyman Minsky. Finally, I think it’s notable how even mainstream economists, both Keynsians like Paul Krugman and others, have belatedly recognized and even adopted certain elements of the MMT worldview with regards to sovereign currencies and private sector deleveraging, even if they choose to do so within their existing IS/LM or other models. 

Not to get into an academic labeling fetish exercise, but Mathews also conflates “Post Keynesian” with “MMT”. I’d argue that the communities overlap considerably, but they aren’t identical. For instance, Hyman Minsky is definitely a Post- Keynesian, but I’m not entirely sure if he could be called “MMT”. Ditto Paul Davidson, and perhaps even Steve Keen. Maybe MMT is a subset within the Post Keynesians. All Post Keynesians  understand the importance of uncertainly (unquantifiable risk), endogenous instability of the financial system, dangers of over-leverage, self reinforcing vicious feedback loops and a disbelief that market systems have an automatic self correcting tendency towards short run / long run equilibrium, in direct contradiction to their “mainstream” Keynesian and Neo-Classical/Monetarist counterparts.

My thoughts? Well, I consider myself a Minsky “Post Keynesian”, I’m not sure I’d call myself fully “MMT”, but I definitely appreciate their broader contributions, especially with regards to sector financial balances (Public Surplus + Private Surplus + Current Account Surplus = 0)  basic accounting identity, the fallacy of the loanable funds models (that’s why QE has failed to do anything good for the real economy- pumping up bank reserves doesn’t necessarily do anything in a balance sheet recession), and the critical importance of a government to be an issuer of its own sovereign currency and debt. However, my slight and secret inner Austrian is concerned that (at least in theory) an over reliance on public spending, even while a balance-sheet-constrained private sector is going through much needed deleveraging, could lead to significant longer term mal-investment, and could distract from the more critical urgency of a mass debt writedown/relief/reset/default needed in balance sheet recessions. As always, readers beware, your humble scribbler is a non-economist.....

Related Articles and Posts:

FT: Why MMT is like an autostereogram

Multiplier Effect: Washington Post Goes Unconventional 

MMR: More on Savings and Investment

Randal Wray: What is Modern Monetary Theory?

Ed Harrison: Why Austrians and MMTers should be on the same side


  1. Maverick,

    Thought since you described yourself as a Maverick, I'll post this.

    The sectoral balances identity was discovered and widely used by another Maverick named Wynne Godley who was a successor of Hyman Minsky at the Levy Institute.

    Here's a fine Financial Times' obituary on him:


    "Maverick who endured with ideas undimmed"

    Wynne Godley, who has died at the age of 83, achieved fame for his stringent attacks on the monetarist doctrines of the Thatcherites - he once dismissed their policies as "a gigantic con trick".His dire warnings in the late 1970s that unemployment would rise to 3m in the 1980s earned him the title "Cassandra of the Fens" and were derided - until they came true...

    ...Yet he knew exactly. He would take a vast spreadsheet of numbers, study them for sometimes hours at a time and then pronounce: "That figure is wrong," stabbing at it with an elegant oboist's finger. He was invariably found to be right. How did he know? The explanation, via his econometrician colleague Hashem Pesaran, was that he had what amounted to a full macroeconomic model in his head, which, by some sort of subconscious process, he computed.

  2. Thank you very much for this highly substantive input! I didn't know that Wynne Godley studied under Hyman Minsky at the Levy Institute. I heard that Randal Wray was one of Minsky's students, but didn't know about Godley

  3. TEM,

    Not studied but successor as in: the Distinguished Scholar after Minksy died.

  4. Ramanan, can you please explain to me all the fuss I hear going on between MMR and MMT?? It seems to have blown up all of a sudden, I had no idea there was a dispute! I assumed you guys were all the same. Of course, i'm so new to this, so I may not really understand all of the nuanced differences between the groups. I've even seen your name invoked a few times! It's hard to follow, because I don't log in every day to see the back / forth develop

  5. TEM,

    There's a school called Post Keynesian Economics and it has a tradition from Keynes' days. The Post Keynesians have a nice coherent piece of work IMO.

    The MMTers are a part of PKE who use most methodologies of PKE in describing how economies work but argue that since the State has higher powers, it should be the employer of the last resort. There are various nuanced things here and they call it JG - Job Guarantee.

    Cullen Roche used to be open to MMT ideas and used to write about it a lot in his blog Pragcap. However, he didn't like many ideas of MMT and thought they were political in their views - especially regarding Job Guarantee. The MMTers argue that it is essential to MMT and hence Cullen separated out and has a new blog where he writes with two of his colleagues - Michael Sankowski and Carlos Mucha. They believe MMT mixes description and prescription and don't want to present it that way. MMTers didn't like the separation because Pragcap attracts a lot of readers etc and hence the hostile reaction!