Thursday, 7 February 2013

On the supposed weaknesses of MMT: Response to Palley

The first two articles are an "attack" on MMT by Thomas Palley, and is then followed by another article by Randall Wray rebuffing his claims. RS.

It really rankles critics that MMTers claim they predicted the Euro disaster before anyone else saw it coming.
The only problem with that is that we never said such a thing. All we’ve said is that we got it right. If others also got it right, that is great. If they said it first, even better. Rewards and Awards all around. I expect they are very few in number, part of a very select group that understood what was wrong with the Euro.
My colleague at Levy, Michael Stephens got it exactly right. What matters is to understand WHAT was wrong in the set-up in order to formulate the right policy to get out of the mess:
As discussed at GLF recently, Sergio Cessaratto (and others) think we got it wrong–our claim is “spurious”. MMT is not useful for helping to understand the crisis. It is not a sovereign currency crisis, it is a balance of payment crisis. They have not yet explained why South Dakota or Alabama or Mississippi is not suffering the fate of Greece.
Along comes another critique, by Tom Palley, whose claim is not only does MMT get it wrong, it was not first. Nay, Tom got it right before MMT. I won’t get into that because I could care less who was first. If it was Tom, give him applause.
Yet Tom’s argument is that MMT has always been flawed. First, it supports full employment. More specifically through the Job Guarantee. He has always opposed that. You see, he worries that if we give jobs to the poor, they’d buy food and that would drive up food prices for the already employed. My view is that is wrong on so many levels, especially for anyone who claims to be progressive. Yes, the poor need to eat. Give them jobs so they can get food. If that means Tom has to pay higher prices, so be it. I don’t believe his story, anyway. That is related to his second complaint.
The other argument made by Tom is that MMT ignores all the bottlenecks that would be created by full employment. Those would cause inflation. Hence, better to keep people unemployed so they cannot buy food that would create bottlenecks in the production of foodstuff. My colleague at UMKC, Mat Forstater, takes issue with this claim. MMT has from the very beginning dealt with the bottleneck issue. Let me provide a long quote–with citations–from Mat (note the Job Guarantee is also called Employer of Last Resort–ELR):
“Tom Palley says that MMT “ignores the effects of sectoral bottlenecks and imbalances” (see ). In 1997, shortly after arriving at the Levy Economics Institute to work on this project, Levy issued a working paper dealing with exactly these issues, “Selective Use of Discretionary Public Employment and Economic Flexibility”
In a note on “Institutionalist Approaches to Full Employment Policies” from the JEI in 1998, I wrote that: “involuntary unemployment is not simply an “aggregate” problem. The obstacles to full employment also include issues of sectoral proportionality and balance, and the bottlenecks that characterize the technological structure of production of a dynamic modern capitalist system running at high levels of capacity utilization.”  ( )
I went on to argue that the ELR proposal addresses unemployment due to both insufficient effective demand and ongoing structural and technological change. The same argument was addressed in the following:
“Flexible Full Employment”
“Public Employment and Economic Flexibility”
“Full Employment and Economic Flexibility”
and a half dozen other papers. All these papers also recognize that these structural factors may be a source of inflation, before full employment is reached, so Tom Palley’s additional claims that MMT assumes an “L-shaped supply schedule” (though we don’t use the flawed AS-AD framework or ISLM, but if we interpret what he’s saying as “does not recognize structural factors that can be a source of inflation at high levels of employment and capacity utilization”), and “lacks an adequate theory of inflation” (if we interpret this similarly), are also suspect. (In fact, a similar reply as this could be easily replicated for every one of his claims.)
Interestingly, if one searches the phrase “sectoral bottlenecks” on Google scholar, the fifth entry that comes up on the first page is the paper, “Flexible Full Employment” (which it says has been cited 51 times): (see ). If you add the word “rigidities” to the search then that paper is the first hit, the paper “Public Employment and Economic Flexibility” comes up third, and the “Selective Use…” paper comes up fifth, all on the first page.
[Editor's note: I wonder where Tom's own papers come up on this score? Well, being an inquisitive sort, I scrolled through the Google pages but could not find any.]
Malcolm Sawyer many years ago made essentially the same claim, so my reply to him also addresses this question:
One of the problems, of course, is that anyone can publish a claim on a blog or write it in an e-mail or post it on facebook, and even if it is totally without substance, others will read it and repeat it, because who would believe that someone who is an accomplished scholar, as well as a colleague and even friend would simply ignore a couple dozen publications going all the way back to 1997, especially when they were in attendance at, conservatively, at least half a dozen sessions and conferences where the argument was presented?
As I wrote in reply to Malcolm Sawyer, if one wants to contend that the argument is for some reason invalid, then fine, but then it should at least be recognized that supporters of the job guarantee claim that the program addresses the challenges that arise from “sectoral bottlenecks and imbalances”, but Tom Palley says MMT “ignores” them.
I’m sure he will, as an ethical person and scholar, publish an immediate retraction on his blog, and send it around the world on e-mail lists, and to everyone in his address book, and at the end of this sentence I will begin holding my breath.”
As readers of this blog know, Tom commented last week on the blog, pushing his own priority in predicting the demise of the Euro. I’m also holding my breath to see if he will recognize that he has mischaracterized MMT’s supposed failings.

Comment from Panayotis Economopoulos from a noted social network site which received the thumbs up from Warren Mosler.

Although I am only a sympathizer and do not accept all MMT positions, I find Palley' criticism erroneous in a number of fronts. 1. The Pigou real balance effect is non existent since public money has an effect only if finances spending and then ex post is stored as saving. 2. Inflationary expectations even if they are formed they are sustained only if there is a corresponding demand pressure and supply shortages. 3. Sectoral stresses and imbalances effect upon inflation can be reduced with substitution including imports and even if the currency depreciates lower international prices can counterbalance its effect. 4. The assumption that higher gov. spending implies higher taxes to balance the full employment budget is erroneous unless we consider very progresive tax brackets and budget balance at full employment in a growing economy is not neccessary. 5. The statement that MMT does not consider the Phillips trade - off is erroneous since Bill Mitchell, one of the main advocates has written extensively on the topic. 6. A zero policy rate reflects riskand cost free conditions of public money although the infation risk must be dealt with. Any private debt with risks has a positive interest rate structure and can vary according to these risks. Furthermore, interest policy as fiscal policy has lags too. 7. The correct criticism of static stock-flow analysis of MMT is compared with STATIC ISLM analysis! 8. The fact that one of his main advocates (Mosler) is a financier is an advantage and not a drawback especially since he understands fully the financial effects that Palley argues for!

Comment from the Blogger.

The ideas of MMT are incomplete without Transfinancial Economics, or TFE. The latter is similiar though to the former about the idea of the need to create debt-free money to a certain extent. In TFE this is like  Primary TFE, so to speak. However, with Advanced Stage TFE it would be possible to phase in

a)... powerful direct electronic controls at the point of transaction to deal with inflationary  pressures rather than continually raising interest rates, and taxation.

b),,, it would be possible if desired to create a "live" profile of the entire economy in real-time. This  would give future economists a far better, and a far more accurate understanding of the actual workings of the economy as never before in human history.


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