DEBATING MODERN MONETARY THEORY

Matthew C. Klein

Barrons, June 10, 2019, pgs. 32-33.

Reviewer Comment:
The essay is a combination of a brief historical background on the origins of this theory and discussion of its current adoption by liberals seeking to find theoretical justifications for expanded government control of economic activity. Mr. Klein presents the MMT fans' arguments well (they are expressed in financial - that is, money - terms) but does not, as they do not, discuss the subject in real, that is, political terms. For instance, he uses the typical term, 'saving, or savings' to mean any 'money' (credit) provided by government and not immediately spent (for consumption). But real 'savings' in a economy is created by 'retained surplus' from production - the difference between new production and the consumption required or otherwise expended in the production process. He also, again typically, uses the term 'money' without noting that it is actually 'credit' - that is, 'paper' money or simply notations on account ledgers. What is so revealing and significant of the content of this essay is the way that Mr. Klein spells it all out using quotations from the MMT leaders themselves without interjecting his opinion. This leaves it to the readers, who know history, to see through the facade themselves. What the clear presentation of how the bubble economy functions reveals may not be the author's intention. Shall we examine the text in detail?

We can put this clear reporter's prose into the context of the many older and recent descriptions of this MMT. The most coherent and extensive reference I have is L. Randall Wray's book - MMT. And for simplicity I have listed the other references with it.

Today the great majority - almost all - the actual money supply is not currency but credit. Fundamentally credit created by the central banks and then expanded by the fractional reserve system through the commercial banks. Thus, the MMT theorists are correct (as Klein writes) that when 'credit' is reduced by governments or banks it is the money supply that is being reduced. And expansion of credit creates increases in the money supply. According to monetary theory such increase should create or at least foster inflation. Not made clear is that increases in financial 'assets' are as fictional as the 'fiat' money in which they are measured. A fundamental theory of the MMT's is to prevent inflation by manipulating credit and taxes

Mr. Klein begins his article by writing that in the published opposition to MMT by several senators they 'were responding to the common caricature of MMT that every problem can be solved by printing money." He then continues by writing that others including, Bill Dudley and Larry Summers, 'made the same mistake'. But opposition to MMT is not simply based on this 'caricature'. He does not actually explain what their criticisms are or how they are erroneous. Rather, he claims that ' MMT is actually grounded in old and uncontroversial economic ideas and its appeal is neither ideological nor partisan."

It is indeed 'old' but is not 'uncontroversial' and he, himself, notes that it appeals to the Green New Deal fans and 'left-flank of the Democratic party."

Mr. Klein suggests to his wide and largely non-economist readership that the best simply way to understand MMT is by analogy to World War II wartime economic management. In this he provides a better view - it is not only U.S. wartime but also Soviet management. Indeed, he writes that: "Governments can do whatever is necessary to satisfy the 'public purpose' as long as they maintain their authority over the population'.

This is a brilliant summary. Of course it is the rulers who determine what the 'public purpose' IS. And we know how rulers "maintain their authority over the population."

He reminds us of some details. "The U.S. government was able to run budget deficits worth more that 20% of gross domestic product during World War II without risking either inflation or its own creditworthiness - but it needed to use rationing, wage and price controls, and financial repression to do so."

Yes, indeed. Also the Federal Reserve promised the Treasury to maintain interest rates at rock bottom, and the population was urged to convert every possible penny of income into savings bonds.

Mr. Klein then quotes Bill Mitchell, one of the leading promoters of MMT - to the effect that sovereign governments have no 'so-called financial constraints" - only "Political constraints". Well, of course, governments, sovereign or otherwise, ARE political institutions. Mr. Klein notes that Dr. Mitchell even applauds China as an example of economic policy. Nevertheless, Mr. Klein believes the U.S. can avoid China's problems by sticking to 'core' economic insights.

The first 'insight' is that 'money is a creature of law'. And he references Georg Knapp, German historical school author, of "The State Theory of Money'. This 1905 book is widely cited and the theory proposed is called 'chartalism'. But, somehow, the meaning of the very title escapes notice. 'State' means the German State. The ideological core of Knapp and his compatriots was to extol and support the German State (empire) and provide theoretical justification for its actions and legitimacy for its existence.
The theory is based on the idea that 'money' itself was created "by governments for the purpose of buying goods and services from the private sector without offering anything of equivalent value in return'.

That 'money' was created by rulers and not by the people is strongly disputed by Austrian School and libertarian economists such as Murray Rothbard.

But the basic idea that governments DO 'buy' (actually confiscate) goods and services from the private sector without exchanging back anything of equivalent value is correct. But they originally didn't need the kind of 'money' Klein and economists today think. They either convinced the people that the temple or palace owned the goods and services - or that people owed a debt to the palace and temple that was fulfilled by providing those goods and services. The form of 'money' then was as a measure of value in accounting ledgers.

The second 'insight' 'is that most money is created by the private sector, not the government. This appears to contradict the first 'insight'. The idea here is that 'money' is 'created' by the private commercial banking system when they provide a loan. Yes, they do, but only on the basis of government regulations as to how much 'credit' they can create in relation to reserves they must hold at the Federal Reserve and the Federal Reserve has 'created' that money out of nothing. It is true, as Klein writes, that when the volume of credit (which is the effective money supply) is reduced then the quantity of money is reduced. But he continues to assert that government 'fiscal policy' - meaning taxes and spending - is used to offset changes in the banking system's credit policies.

The third 'insight' is "that investors cannot own financial assets unless issuers are willing to create them. Creditors cannot save unless debtors borrow." This is a distortion of the meaning or 'save' and 'savings'. But the idea is that 'it is impossible for everyone in the world to save by accumulating financial assets at the same time." But 'financial' assets are not the only form of assets. And 'financial' assets that are composed merely of paper instruments are not real assets anyway. Not spending credit is not saving.

However, Mr. Klein continues with the standard view by writing: "This means that corporate profits rise as companies invest, and fall as households, foreigners, and the government save." He continues by noting that this concept is used in practice by investment institutions.