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The Senate Resolution To Condemn MMT: Here Are Some Better Candidates For Condemnation

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I can hardly believe that I am typing this. A resolution has been forwarded in the Senate to condemn an economic theory:

“Recognizing the duty of the Senate to condemn Modern Monetary Theory and recognizing that the implementation of Modern Monetary Theory would lead to higher deficits and higher inflation.”

I guess on the one hand that we should be happy that anyone is even aware of Post Keynesian economic theory. Scholars in this area have toiled largely in vain for going on a century (marking Keynes’ General Theory in 1936 as the starting point). So maybe there’s no such thing as bad publicity???

But, to suggest that MMT is anything radical or dangerous–especially to the point of requiring an official Senate condemnation–is just plain bizarre. The resolution references the work of a number of mainstream economists in support of the condemnation, but I’ve already addressed that elsewhere. Instead, I’d like to suggest a few more candidates for inclusion in this new movement:

1. Milton Friedman’s Monetarism: How about the school of thought that supported the policies that led to what is still the highest rate of unemployment (nearly 11%) since the Great Depression? The October 1979 Monetarist Experiment at the Fed caused officials to believe that it would be a good idea to raise the Federal Funds rate, which is essentially the wholesale price of money that banks charge each other, to over 17%. The prime rate that banks offered to their very best customers was over 20%. And all this based on a theory that completely misunderstands how the financial sector actually works. I have always found it kind of amusing that in Friedman’s classic exposition of the theory (the one where the helicopter drops money out) he actually engages in fiscal and not monetary policy! The helicopter does not change the form in which people hold their assets (monetary policy), it raises their income (fiscal policy).

THIS is a dangerous theory, as we have already been shown.

2. Trickle Down Economics: Trickle is right. The idea that helping the rich helps the rest of us is just slightly off. But a little rewording fixes it: helping the rich helps the rich. Trickle down economics is based on the idea that the wealthy are somehow the engines of growth, that they invest and consume and that helps everyone else. False. They save, which doesn’t help everyone else. Sure, they do some of that saving in the form of buying stocks and bonds, but none of that truly helps firms get the finance they need. Banks fulfill that role and they don’t need anyone’s savings to do it. Furthermore, firms don’t want to invest unless they think someone will buy what they are making. That’s what the poor and middle class do. In 2012, for example, the top 20% of income earners spent 60% of their income; the bottom 80% spent 90%. It’s the latter who really drive the economy and that's one of the reasons we are struggling now. Condemn it!!!

3. Neoclassical Macroeconomics: You know all those economists cited in the Senate resolution? They are Neoclassicals. They assume that the economy automatically fixes itself and they believe that the financial sector is sufficiently unimportant to leave out of formal models. I feel like people must think I’m lying when I say that because it seems so insane. But let me give you just a couple of examples. Christina Romer, former head of Obama’s Council of Economic Advisors, writes in a piece on business cycles:

“The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy theoretically could stay forever.”

In other words, the system is stable and it automatically tends to create a job for every willing worker. Don’t worry, be happy. Any problems we encounter are due to random shocks (more on that below!). But, even then, the economy acts like one of those inflatable punching bags with the weight on the bottom: it bounces right back. And here’s another Nobel Laureate from a paper after the Financial Crisis where they are trying to address the fact that their models typically omit a financial sector:

“Given both the prominence of debt in popular discussion of our current economic difficulties and the long tradition of invoking debt as a key factor in major economic contractions, one might have expected debt to be at the heart of most mainstream macroeconomic models– especially the analysis of monetary and fiscal policy. Perhaps somewhat surprisingly, however, it is quite common to abstract altogether from this feature of the economy (emphasis added).”

What a horrific but totally accurate confession. He and his coauthor then go on to assume that banks loan out people’s savings. They don’t (well, they do, but it’s minor), they create new money via credit. That is a much more fascinating and dangerous process. Neoclassicism omits it, but Post Keynesianism and MMT do not.

How about we condemn theories that omit financial sectors?

4. Real Business Cycle Theory: This popular Neoclassical theory is so bad that even a recent Neoclassical Nobel Laureate condemned it (and, apparently, received a lot of flak for doing so). Paul Romer (no relation to Christina) writes that Real Business Cycle Theory attributes

“fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes.”

In other words recessions are caused by "stuff." He calls this “Post-Real” economics, because economists are past worrying about how the economy really works. And he goes back to Friedman to assign blame for how our discipline justifies such an approach (see "positivism"). I’m all for condemning this one, too–anyone else?

If the Senate is going to get into the condemning-economic-theory business, I have some much better candidates for them. These have already caused real and serious damage. How about attacking them rather than theories aimed at increasing the welfare of the average American by employing models that reflect how the real world actually operates?