The Fight for the NHS/MMT economics

[matthewr]

Who is right? Well, I guess the fact that some (including Simon Wren-Lewis and other Keynesians) are still talking about MMT a few years after Palley's papers means that whatever blows he landed, they were not fatal.

Or rather SWL was talking about MMT in 2017 when it had it last had one of its every two years if there is a recession go round. He's engaged with the MMTers a few times over the years and he's broadly made peace with them, but Palley's analysis remains the consensus view of SWL and 99% of other academic economists.

MMTers are basically the left's version of Austrians.

 

[Joe Hutch]

Who needs experts? Just rejoice, rejoice.

 

[matthewr]

Another explanation of the NK view of MMT here where Nick Rowe attempts to work out and explain what the MMT model is in IS/LM terms.

https://worthwhile.typepad.com/wort...011/04/reverse-engineering-the-mmt-model.html

This is from 2011 and from around the time I first learnt about MMT because I was burying myself in economics (and droning on about here!) because the GFC, the endless Euro crisis, Greece, and the Austerity policy of the then new Tory government were so dominant I wanted to understand more.

This ISLM stuff is worth grappling with if you want more than a lay person understanding of both Keynsian economics and macro issues in the news and the simple line graphs mean you can get the ideas without the maths (although I am sure @IanW can do the maths standing on his head) . Beware though that you might fall into a massive rabbit hole of Ricardian Equivalence, downwardly sticky prices, pricing in, etc. etc. and start to bore people at fashionable dinner parties

 

[ks.234]

Or rather SWL was talking about MMT in 2017 when it had it last had one of its every two years if there is a recession go round. He's engaged with the MMTers a few times over the years and he's broadly made peace with them, but Palley's analysis remains the consensus view of SWL and 99% of other academic economists.

MMTers are basically the left's version of Austrians.

MMT is a version of Hayek?

 

[matthewr]

MMT is a version of Hayek?

No the complete opposite. What I meant is that both are heterodoxical theories that have very little academic support or use but are very popular in the wider internet because they appeal to people ideologically on the left and right respectively.

 

[laughingboy]

Or rather SWL was talking about MMT in 2017 when it had it last had one of its every two years if there is a recession go round. He's engaged with the MMTers a few times over the years and he's broadly made peace with them, but Palley's analysis remains the consensus view of SWL and 99% of other academic economists.

The funny thing about the 2013 Palley paper is that, when it leaves off knocking MMT for falsely claiming originality, three of its main critiques are things that have occurred to me over the years.

The first is that 'full employment' is not as simple as that: it must be sector-by-sector. That is to say 94% employment doesn't tell you whether doctors or plumbers are in the 6%. Both professions are unlikely to want just any job. Spending in order to get them back to work, therefore, is likely to be inflationary despite not being at full employment.

The second is the balance of payments constraint. Mind you, I do think that MMT acknowledges this.

Lastly, the idea of keeping interest rates at 0% has always seemed like fiscal fetishism to me. Why not use all the tools at your disposal?

So, I am forced to conclude that I am a Keynesian who came to understand these things partly via an MMT lens. And perhaps that's where a lot of people will end up. Which is why I won't be dismissing MMT as the Austrians of the left. I think the common ground is too valuable - I don't want it turned into a battlefield.

 

[matthewr]

Which is why I won't be dismissing MMT as the Austrians of the left. I think the common ground is too valuable

A fair point. MMT is mostly correct because it's basically conventional Keynesian macro rather than just being flat wrong about everything like Hayek and Schumpeter.

What I meant was MMT is like the Austrians in a social and political sense. They both get a level of coverage in the blogosphere and twitter and on op-ed pages because they are ideological catnip to their respective supporters. They both also get a boost in popularity in times of economic crisis and upheaval when we are at the limits of Keynesian economics and deficit spending and debt are very much in the national conversation.

I would also say that if MMT drives popular sentiment more towards active fiscal policy after most of my adult life being under a moneterist heel or can reframe the debate about funding progressive ideas, then more power to them.

The other thing that I think should be talked about a lot more given the experience of the last decade, is how has Keynesianism changed through this? In particular our understanding of the safe size of long run debt (Japan, etc) and the limits of fiscal power (because as much as it was vindicated, it also wasn't actually that effective).

 

[IanW]

It's worth remembering that MMT is a heterodox theory essentially outside of mainstream views in both academia and central banks, so you won't find many papers. And also because there it little to no actual new theory here and certainly no maths (MMT is famously maths averse) it's mostly not clear what would even go in such a paper.

FWIW here are a couple of papers with commentary on MMT from a mainstream Keynesian perspective, they are quite readable although going into the details will require at least a basic understanding of ISLM, Philips curves, etc.

"This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT’s construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT’s polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT’s oversimplifications of macroeconomic theory and policy."

http://www.thomaspalley.com/docs/articles/macro_theory/mmt.pdf

"Eric Tymoigne and Randall Wray’s (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT’s policy claims are based on unsubstantiated economics."

http://www.thomaspalley.com/docs/articles/macro_theory/mmt_response_to_wray.pdf

Thanks for the additional links. Whilst any maths presented is easy to follow I have a lot of new terms and concepts to learn.

Overall I am still seeing MMT as a description of how some things have been and could be. But as has been listed on here there are some constraints that are not really mitigated for. But the concepts of MMT and NK are great and it has been very interesting to read about all this.

I watched a Randall Wray talk on MMT to get a slightly different presentation. And a more basic video of how economies work by Ray Dilalio Economics 101: How the Economy Works (I am sure very basic stuff to anyone here with any expertise, but useful for me):

In modelling physical systems, the aim is to simplify the model as much as possible to represent the system accurately enough to make judgements. However, whilst the principle is a very good place to start, I am not sure how you would break down the requirement to model an economy (with human behaviour) such that you could try to assess sensitivities to fiscal levers etc. In continuing to look I have found a series of lectures, called the Minsky models:

Which I will go through and see if there is anything that I can use. Funny that the first statement is: "to not know that MMT exists you must be living under a rock"!

 

[IanW]

The funny thing about the 2013 Palley paper is that, when it leaves off knocking MMT for falsely claiming originality, three of its main critiques are things that have occurred to me over the years.

That seemed like point scoring and just made it harder to read.

The first is that 'full employment' is not as simple as that: it must be sector-by-sector. That is to say 94% employment doesn't tell you whether doctors or plumbers are in the 6%. Both professions are unlikely to want just any job. Spending in order to get them back to work, therefore, is likely to be inflationary despite not being at full employment.

In addition to the above, the very digital, not 100% and 100% employment seems too harsh for big switches in money supply etc. Very idealised but in practice would be much more complicated with human behaviours. And then employee shortages in important areas, e.g. health or climate change and needing to import people and resource complicate it further.

The second is the balance of payments constraint. Mind you, I do think that MMT acknowledges this.

I have only seen it mentioned as a boilerplate item, is there some description as to how this could be managed?

Lastly, the idea of keeping interest rates at 0% has always seemed like fiscal fetishism to me. Why not use all the tools at your disposal?

This seems odd to me as well, but maybe this is just simplifying the system to make the maths and management easier? Based on the simple premise; the more complicated you make a system the more difficult it is to predict and the more difficult it is to get it to deliver what you want.

 

[ks.234]

Which I will go through and see if there is anything that I can use. Funny that the first statement is: "to not know that MMT exists you must be living under a rock"!

Every single journalist, newspaper owner, commentator, interviewer and news presenter must have been living under a rock because no one, but no one, challenged Sunak when he said that his spending had to be met by tax rises only recently.

 

[matthewr]

Thanks for the additional links.

Minksy is a bit non-mainstream, so might not be the best place to learn about stuff from scratch as it were. Although he is important and very influential and especially relevant when the economy is operating at the edges (i.e. most of the last decade+). He became super popular again c. 1998 as the GFC was basically a Minksy Moment.

In modelling physical systems, the aim is to simplify the model as much as possible to represent the system accurately enough to make judgements. However, whilst the principle is a very good place to start, I am not sure how you would break down the requirement to model an economy (with human behaviour) such that you could try to assess sensitivities to fiscal levers etc.

The maths in economics get hard when you look at the micro level (i.e. people) and try and aggregate into macro level behaviour. In fact it's so hard it's never really worked and that's why Micro and Macro econ are mostly separate subjects that are understood quite well separately but you need to keep them apart, sort of like quantum and relativistic physics.

Economics doesn't really have something of the elegance and power of Maxwells equations to aggregate these impossibly complex systems into something grokkable with maths. So we end up with these simple (but powerful) line charts for IS and LM where you get to understand the power of Keynesian (and post-Keynesian) ideas without the maths. Which is why even though IS and LM are curves they are drawn as straight lines because nobody knows what the shape the curves really are and unlike engineering calculus doesn't come along to the rescue.

The other difference of course is you can't really do experiments and there is no equivalent of a wind tunnel. Which is why the economists all got so excited about the last 10 years because we have been having what are in effect ultra rare, large scale, real world experiments.

 

[laughingboy]

I have only seen it mentioned as a boilerplate item, is there some description as to how this could be managed?

I've linked to Bill Mitchell's blog about the external sector a few times on this thread. It's fairly new to me, and is an example of something that has happened a few times with MMT: I develop a misgiving about MMT, only to find when I read a lot more that it is addressed at some level.In other words, the fault is mine in not knowing enough, rather than MMT's. Sometimes, I'm still uncomfortable with the resulting explanation, but I'm not an economist, so things take time to assimilate.

I suspect that the 0% interest rate position is also an example of this. I wouldn't be surprised to find that there is a logical explanation, but right now I don't know enough to say more than: this doesn't sit right with me.

 

[ks.234]

I've linked to Bill Mitchell's blog about the external sector a few times on this thread. It's fairly new to me, and is an example of something that has happened a few times with MMT: I develop a misgiving about MMT, only to find when I read a lot more that it is addressed at some level.In other words, the fault is mine in not knowing enough, rather than MMT's. Sometimes, I'm still uncomfortable with the resulting explanation, but I'm not an economist, so things take time to assimilate.

I suspect that the 0% interest rate position is also an example of this. I wouldn't be surprised to find that there is a logical explanation, but right now I don't know enough to say more than: this doesn't sit right with me.

Bill Mitchell’s blog is excellent, but a bit technical for me and takes several readings.

Yes, starting off with an instinctive feeling that ‘this just can’t be true’ is how I’ve come to MMT.

On ZIRP, my understanding is that MMT does not advocate a zero interest rate at all, rather it says interest rates are not an effective tool for controlling the economy. I’ve started reading from the wonderfully name GIMMS website which lays out many MMT questions posed here in a clear and basic manner. Here is one on Negative Interest Rates, but MMT attitude to ZIRP can be inferred

https://gimms.org.uk/fact-sheets/negative-interest-rates/

 

[IanW]

Minksy is a bit non-mainstream, so might not be the best place to learn about stuff from scratch as it were. Although he is important and very influential and especially relevant when the economy is operating at the edges (i.e. most of the last decade+). He became super popular again c. 1998 as the GFC was basically a Minksy Moment.

Thanks, I will have more of a read. I am lucky / unlucky to have the time available at present to read around these interesting subjects (at least to me, I can well imagine this is very boring for most people)!

The maths in economics get hard when you look at the micro level (i.e. people) and try and aggregate into macro level behaviour. In fact it's so hard it's never really worked and that's why Micro and Macro econ are mostly separate subjects that are understood quite well separately but you need to keep them apart, sort of like quantum and relativistic physics.

Economics doesn't really have something of the elegance and power of Maxwells equations to aggregate these impossibly complex systems into something grokkable with maths. So we end up with these simple (but powerful) line charts for IS and LM where you get to understand the power of Keynesian (and post-Keynesian) ideas without the maths. Which is why even though IS and LM are curves they are drawn as straight lines because nobody knows what the shape the curves really are and unlike engineering calculus doesn't come along to the rescue.

The other difference of course is you can't really do experiments and there is no equivalent of a wind tunnel. Which is why the economists all got so excited about the last 10 years because we have been having what are in effect ultra rare, large scale, real world experiments.

Having heard the terms Micro and Macro Economics it is not a surprise to hear that there are 2 mostly separate subjects. The use of Micro modelling approaches and large scale sims to aggregate the results is exactly what I would expect to have been in use it had worked at all. Maybe with the wider use of what were theoretical and have now become applied maths techniques and faster solvers etc will result in better models, but for now it sounds like it will remain separate.

I fully understand the lack of economic model validation and the big limitations it causes, but would draw the parallel with Covid in terms of a large changes in data availability and variance across a range of countries. I am still surprised that data driven modelling has not provided more of an insight into Covid and the effectiveness of different approaches, with so many countries logging so much data. But have concluded in the end that the quality of the data is so variable (over time due to human behaviour and from country to country), and so it has not been possible to develop such models with any confidence. In the world of economics validation data and test data (its consistency, variance and availability) remains a massive problem and so is comparable in that sense.

 

[IanW]

I've linked to Bill Mitchell's blog about the external sector a few times on this thread. It's fairly new to me, and is an example of something that has happened a few times with MMT: I develop a misgiving about MMT, only to find when I read a lot more that it is addressed at some level.In other words, the fault is mine in not knowing enough, rather than MMT's. Sometimes, I'm still uncomfortable with the resulting explanation, but I'm not an economist, so things take time to assimilate.

I suspect that the 0% interest rate position is also an example of this. I wouldn't be surprised to find that there is a logical explanation, but right now I don't know enough to say more than: this doesn't sit right with me.

I am reading through some of his blogs, so thanks for posting the links.

I continue to struggle with some of the terms, but I am getting better at understanding economist speak!

 

[ks.234]

Thanks, I will have more of a read. I am lucky / unlucky to have the time available at present to read around these interesting subjects (at least to me, I can well imagine this is very boring for most people)!



Having heard the terms Micro and Macro Economics it is not a surprise to hear that there are 2 mostly separate subjects. The use of Micro modelling approaches and large scale sims to aggregate the results is exactly what I would expect to have been in use it had worked at all. Maybe with the wider use of what were theoretical and have now become applied maths techniques and faster solvers etc will result in better models, but for now it sounds like it will remain separate.

I fully understand the lack of economic model validation and the big limitations it causes, but would draw the parallel with Covid in terms of a large changes in data availability and variance across a range of countries. I am still surprised that data driven modelling has not provided more of an insight into Covid and the effectiveness of different approaches, with so many countries logging so much data. But have concluded in the end that the quality of the data is so variable (over time due to human behaviour and from country to country), and so it has not been possible to develop such models with any confidence. In the world of economics validation data and test data (its consistency, variance and availability) remains a massive problem and so is comparable in that sense.

Has any model of the economy ever produced an accurate prediction of what will happen in the future? It seems to me that all economic models are being tweaked on a monthly basis and only provide a picture of where we are.

Perhaps we should try a model of where we want to get to, rather than describing where we are? But that I’d a political question rather than just an economic one

 

[matthewr]

Has any model of the economy ever produced an accurate prediction of what will happen in the future? It seems to me that all economic models are being tweaked on a monthly basis and only provide a picture of where we are.

It depends what you mean. Economic models predicted the 10 year record levels of inflation announced yesterday for example and this sort of thing happens all the time in central banks and various policy bodies.

But the public most often experiences economic forecasting via macro predictions about GDP and so on about which the only thing you can say is that they are always wrong. A lot of this is driven by the media and economists largely hate the fact that modelling (with all its caveats and flaws) get reduced to "The economy is only going to grow 0.5% next year minister, what do say to that?"

See SWL for more here : https://mainlymacro.blogspot.com/2014/08/on-macroeconomic-forecasting.html

 

[ks.234]

It depends what you mean. Economic models predicted the 10 year record levels of inflation announced yesterday for example and this sort of thing happens all the time in central banks and various policy bodies.

But the public most often experiences economic forecasting via macro predictions about GDP and so on about which the only thing you can say is that they are always wrong. A lot of this is driven by the media and economists largely hate the fact that modelling (with all its caveats and flaws) get reduced to "The economy is only going to grow 0.5% next year minister, what do say to that?"

See SWL for more here : https://mainlymacro.blogspot.com/2014/08/on-macroeconomic-forecasting.html

Rising inflation is always forecast. Inflation and interest rises always seem to be just around the corner. So getting right once in 10 years is, well, predictable !

 

[matthewr]

Rising inflation is always forecast. Inflation and interest rises always seem to be just around the corner. So getting right once in 10 years is, well, predictable !

Rising inflation is always predicted by politicians of a certainly political bent not by economic models. And the macro story of the last decade has been economics correctly predicting no inflation and vested interests (political and city) predicting sharply rising inflation incorrectly and never admitting they were wrong.

 

[ks.234]

The academic in the video upthread who say anyone who hasn’t heard of MMT has the intelligence of an insect really has no knowledge or understanding of the real world outside his horizons

Just this week we’ve had numerous mentions of “taxpayer money’, ‘can’t afford it’ and ‘where does the money come from’ in relation to HS2 and the reported inflation increase blamed on the increased wages and energy prices.

If all of intelligent life has heard of MMT why have none of our news outlets? Why is the Monetrist line never challenged?

All the talk on public spending is littered with the language of taxpayer money that is never corrected, and the role of the increase bond yields on inflation is confined to the back pages that do not inform the front page one jot. The financial pages of the Guardian tell us that the effect of the biggest increase in bond yields for years will have a deflationary effect in the disposable income of the poorer households who spend while enriching the disposable income of the rich who don’t, but the headline stories all leave out the role of the Bond Markets and concentrate on telling us that the cause of our economic problems are lorry drivers earning a bit more and the price of gas.

If academics have known for so long that what we’re being told is so far from the truth, why have they not got their message out? Are they only capable of communicating with other academics?