The Chicago Booth Survey on MMT

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I want to say a few things about Chicago Booth’s recent survey questions posed to a set of economists; see here. The survey asked how strongly one believes in the following two statements:

Question A: Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.

Question B: Countries that borrow in their own currency can finance as much real government spending as they want by creating money.

Not surprisingly, most economists surveyed disagreed with both statements. Fine. But, not fine, actually. Because the survey prefaced the two questions with 

Modern Monetary Theory

as if the the two statements constitute some core belief of MMT.  
Was any MMT proponent included in the survey? Don’t be ridiculous, of course not (there were a couple from MIT though–perhaps they thought this was close enough). How would a typical MMT proponent have answered these two questions? I am sure that most would have answered in the exact same way as other economists. If this is the case, then why does Chicago Booth preface the survey with MMT? There are many possibilities, none of which are attractive for Chicago Booth.

Let’s consider Question B first. Or, better yet, let’s not. This question is so ridiculous it hardly merits a response. Nobody believes that governments face no resource constraints.

O.K., so let’s consider Question A, where some legitimate confusion may be present. Before I start though, I want to make clear that I don’t purport to know the entire MMT academic literature very well. But I have done some reading and I have corresponded with some very smart, very thoughtful MMT proponents. I don’t agree with many of their views, but I think I see how some of what they say is both valid and contrary to conventional thinking. At the very least, it seems worth exploring. What I am about to say is my own interpretation — I am not speaking on behalf of MMTers.

Alright, so on to the question of whether deficits “matter.” The more precise MMT statement reads more like this “A country that issues debt denominated in its own currency operating in a flexible exchange rate regime need not worry about defaulting in technical terms on its outstanding debt.” That is, the U.S. government can always print money to pay for its maturing debt. That’s because U.S. Treasury securities represent claims for U.S. dollars, and the government can (if it wants) print all the dollars it needs. 
Nobody disagrees with this statement. MMTers like to make it explicit because, first, much of the general public does not understand this basic fact, and second, this misunderstanding is sometimes (perhaps often) used to promote particular ideological views on the “proper” role of government.

Mainstream economists, like myself, like to point out what matters is not technical default but economic “default.” An unexpected inflation whittles away the purchasing power of those caught holding old money as new money is printed to pay for whatever. I think it’s clear that MMTers understand this too. This can be seen in their constant reference to an “inflation constraint” as defining the economic limits to government spending. I tried to formalize this idea in my previous blog post; see here: Sustainable Deficits.

But it’s more complicated than this — and in interesting ways, I think. Consider a large corporation, like General Motors. GM issues both debt and equity. The debt GM issues is denominated in dollars, so it can go bankrupt. But GM also issues a form of “money”–that is, is can use newly created equity to pay its employees or to make acquisitions.

Issuing more equity does not expose GM to greater default risk. Indeed, it may very well reduce it if the equity is used to buy back GM debt. If GM is thinking about financing an acquisition through new equity issuance, the discussion is not going to about whether GM can afford to print the new shares. Of course it can print all the shares it wants. The question is whether the acquisition is accretive or dilutive. If the former, then issuing new money will make the value of GM money go up. If the latter, then the new share issue will be inflationary (the purchasing power of GM shares will go down). In other words, “deficits don’t matter” in the sense that the outstanding GM liabilities do not matter per se — what matters is something more fundamental. Equity “over-issue” may not be desirable, but the phenomenon is symptomatic, not causal.

The U.S. government and Federal Reserve in effect issue equity. The government need not default on its debt. This is because U.S. Treasury debt is convertible into money (equity) and the Fed can do so if it so chooses. The question for the government, as with GM, is whether any new spending program is accretive or dilutive. If the economy is operating at less than full capacity, then this is like GM being presented with a positive NPV investment opportunity. The government can issue new money that, if used wisely, need not be inflationary.

There are limits to how far this can go, of course. And there was the all important qualifier “if used wisely.” But this is exactly where the debate should be: how should our institutions be designed to promote the “best” allocation of resources?

I often hear that MMTers don’t have a good theory of inflation. As if there is a good theory of inflation out there already. But I see in MMT a theory of inflation that overlaps (not entirely) with my own views expressed, say, here: The Failure to Inflate Japan. The MMT view seems to take a broader view over the set of instruments that monetary policy may employ to control inflation. We can have a debate about the merits of their views, but there’s no reason to dismiss them outright or to pretend they don’t have a theory of inflation.

Another complaint I hear: the MMTers don’t want to produce a model. You know, it’s true, there are not many mathematical models out there. So what? 
First, the lingua franca of policy making is English — math is a part of a trade language. Economic ideas can be understood when expressed in the vernacular. It’s also been helpful to me and others to attempt to “formalize” our thoughts in our trade language. But it seems to me that some of my colleagues can only understand an argument if it’s posed in their trade language. This is a rather sad state of affairs, if true. 
Second, MMT, like any school of thought, is evolving over time and comes from a different tradition. Instead of demanding a model (now!), why not reach out and try to help formalize some of their ideas. You never know — you may actually learn something in the exercise.
I could go on, but will stop here for now. 
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