The Economist misrepresents MMT

I have read the articles that The Economist published on Modern Monetary Theory (MMT) in the current edition of the liberal-leaning magazine (here and there). I am not happy with the reporting, which includes false statements in general and also misrepresentations of what MMT is.

First of all, let me point out that MMT is not a “left-wing doctrine”, as claimed by the paper. Defining a doctrine as something that is taught, as the Merriam-Webster dictionary does, means that MMT is indeed a doctrine – but so is neoclassical (mainstream) economics. What I do not agree with is “left-wing”. MMT is a scientific theory about how money “works” – how it is created and destroyed, how it is spent and received and what follows from this.

In my own book on “Modern Monetary Theory and European Macroeconomics”, which was published by Routledge in 2017, I discuss the balance sheet approach to macroeconomics that MMT truly is. Focusing on the Eurozone, there is a lot of discussion of money creation, but there is nothing political in it apart from the usual presuppositions – that we want full employment and price stability. If somehow this constitutes “left-wing” politics then it is only fair to say that the current mainstream approach is “right-wing” politics – or is it not?

I think that The Economist makes a grave error when it mistakes a scientific theory, which is falsifiable, for a “left-wing doctrine” (that is not). We need to talk about what money is, where it comes from, what it does, and how it is destroyed. We need to talk about how it changes the way that people think and act. We need to discuss the legal dimension as well. All of this cannot happen as long as The Economist claims – wrongly –  that MMT is a doctrine.

The other issue that I’d like to point out is that there are many statements in the articles on MMT that are plain wrong or confused or made by people who have no authority. Take this paragraph, for instance:

Jonathan Portes of King’s College, London, points out that under mmt a country facing a combination of weak growth and high inflation, as Britain did in 2011-12, would require spending cuts rather than the increased stimulus called for by Keynes.

Who is Jonathan Portes? I have never heard of him. Given his statement I do not think that he understands MMT, so why would The Economist let him act as an interpreter for MMT? Couldn’t they find an MMT economist and ask them what MMT economists would have counseled in Britain in 2011-12? This statement construct an MMT straw man, and a clumsy one at best. “Under MMT”? MMT is not a policy regime, but a theory of how money works. The UK cannot be “under MMT” or “off MMT” since MMT is a description of reality and not a policy proposal.

Apparently, the writer believes that since neoclassical economics supports neoliberal society, the same must be true for other theories. That is wrong. Where neoclassical theory is normative – it tells you how things should be: free markets, no/little government interference, etc. – MMT is descriptive. Once you have understood how money works you will find that it should be much easier than you thought to attack unemployment and to achieve price stability, but that is not MMT.

You can build policy proposals using the insights of MMT, but then these are not “MMT”. They have “MMT inside” in that they rely on the framing of MMT. Policy proposals based on MMT include The Green New Deal, the Job Guarantee, the Euro Treasury and many more.

The last issue I want to raise has to do with the way the article misrepresents MMT. Here is a paragraph which covers what supposed is MMT:

Some radicals go further, supporting “modern monetary theory” which says that governments can borrow freely to fund new spending while keeping interest rates low. Even if governments have recently been able to borrow more than many policymakers expected, the notion that unlimited borrowing does not eventually catch up with an economy is a form of quackery.

MMT does not say “that governments can borrow freely to fund new spending while keeping interest rates low”. There is no MMT author that I know that has said something like this, and I have been around for ten years. There is no paper or book where you can find this, and I challenge The Economist to show me their source. If they can’t I accuse them of sloppy reporting and misrepresenting a scientific theory.

What is the problem with that sentence? That is very easy to answer: the framing. MMT economists know that the government does not have to borrow in order to spend and therefore does not “fund new spending”. Actually, it can’t even do it, even if it wants to. In a monetary system with a sovereign currency, which the UK has, the government just spends the money by crediting the account of the seller’s bank with reserves. This is the Bank of England’s job.

The Treasury has a publication which confirms this story.

5 Funding

5.1 The framework for public expenditure control

5.1.1 Most public expenditure is financed from centrally agreed multi-year budgets administered by the Treasury, which oversees departments’ use of their budget allocations.

There you have it: “Public expenditure is financed from […] budgets administered by the Treasury”. It does not say: Public expenditure is financed from bond issuance. It does not say: Public expenditure is financed from taxes.

So, in an enlightened world where science helps society to make the right choices, you would point out that government spending in the UK is not financed through either taxation or bond issuance. That is a technical insight that is falsifiable. The Parliament can ask the Treasury whether this is true or not and have it explained to the public if it feels like this is a good idea.

As John Maynard Keynes once said: “I give you the toast of the Royal Economic Society, of economics and economists, who are the trustees not of civilization, but of the possibility of civilization”. Whether a society is civilized depends, among other things, on the way that scientific debates are conducted. The Economist just put the UK debate on progressive economic policy on a slippery slope, claiming that a particular school of economics science constitutes “doctrine” and then misrepresenting that school’s views. They should know better than this.