Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Thursday, March 14, 2019

The Chicago Booth Survey on MMT

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 process.

I could go on, but will stop here for now. 


  1. Good, honest engagement. Finally!

    This is science: trying to figure things out.

    What many other mainstreamers do, trying to impose idiotic statements on MMT, strawman it and gaslight it is... not science.

  2. This is a great post. The Chicago Booth survey questions were indeed in bad faith.

    The analogy between fiat money and corporate stock is very useful. During that section, you wrote "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."

    I think it would be useful for some MMT economists to comment on that statement. It seems to me that the important thing is that the project have positive NPV to the government, not just to society as a whole. That is, the project must raise the path of expected real surpluses in order to avoid inflation.

    Imagine a government that has constant real expenditures and that imposes only a lump sum tax. This government attempts to issue new nominal liabilities to finance a project that will boost GDP by 1 percent. Since the path of surpluses is unaffected, this policy would generate inflation and raise no real revenue -- even though the project is socially productive.

    Now imagine that the same situation, except taxes are proportional to GDP rather than lump sum. Now the project raises tax revenue by raising GDP, and to at least some extent this would offset the inflationary impact.

    Would MMT economists agree with what I just wrote about the two hypotheticals? If not, why?

  3. An excellent statement. On the basis of my own limited familiarity with this discussion, it seems pretty clear that the Booth survey is guilty as charged. And the "strawman and gaslight" element is indeed all too common in mainstream reactions to "heterodox" opinion.

  4. very nice discussion. Hard to disagree with anything here.

  5. " But it seems to me that some of my colleagues can only understand an argument if it's posed in their trade language."

    Maybe you're pining for the good old days - Adam Smith cohort or something - when you didn't have to formalize your ideas with math. I think we've all learned by now that the formalization is important - it's a check on consistency, and gets all the assumptions up front. Not sure why you think it is fine for people to advance ideas without doing that, and then complain that people don't understand them. Math doesn't make it harder. It makes it easier.

    1. In fairness, MMT proponents do produce a quite a few mathematical models that explain their thoughts—you'll see this frequently on Bill Mitchell's blog. I think what Andolfatto is criticizing are the not-so-subtle attempts at derailing any sort of productive conservation by asking the MMT proponents to write a textbook's worth of models to explain their claims when much of what they're saying is easily understood in plain English.

    2. if so, attitude seems flipped from the previous post

    3. I spent a while scrolling through Mitchell's blog and never encountered a symbol. What I did encounter was a fairly typical heterodox economist's view of the rest of the economics profession, i.e. "math is crap," "PhD economics education is a travesty," etc. Where can I find these "quite a few" math models of MMT?

    4. You might like:

      > If you look just at introductory sources — Randall Wray’s primer on MMT, Wray and Bill Mitchell’s macro textbook, Warren Mosler’s Soft Currency Economics — you’ll find many equations, including various forms of the government ‘budget constraint’ (though they don’t call it that). This is to say nothing of the academic papers by MMTists, which are, as you’d expect, far more heavy on equations.

    5. Here are some links, Mr. Williamson:

      Outside of Mitchell's blog:

      There's nothing really complex about any of the math, but it does show their willingness to formalize their claims.

      And I agree that the proponents of MMT have an overly critical writing style, particularly when a lot of their main public points—e.g. "taxes aren't technically needed for public spending"—can be derived from mainstream models. But the debate between MMT economists and mainstream economists has been going on for a while now; the rhetoric has understandably devolved over time. I wouldn't take it too seriously.

    6. "math doesn't make it harder. It makes it easier"

      ... and/or more superficial

    7. "'s a check on consistency,..."

      Internal consistency maybe, what about external consistency, that is with reality?

      Henry Rech

    8. The fact that you formalize your economic argument in mathematical form doesn't necessarily make it less realistic. Done well, it goes the other way.

    9. It is very difficult to formalize reality, to say the least.


  6. Another thought: You're sounding more heterodox by the day. Should dust off your CV and send it to UMass Amherst. :)

  7. I don't understand why MMT or government finance is always framed by the question of borrowing or taxing.

    There is third option, which is money financed fiscal programs.

    Ben Bernanke suggested money financed fiscal programs for Japan, in 2003.

    The great Japanese finance Minister Korekiyo Takahashi sidestepped the Great Depression through money finance fiscal programs While Western economies moldered, Japan's economy grew.

    Obviously, there are limits to money financed fiscal programs. But monetary policy may not be stimulative when the economy becomes stagnant enough with low inflation and low interest rates. And endless borrowing creates other concerns.

    Why not a discussion about money financed fiscal programs?

  8. David's description of MMT could just as easily describe a Keynsian who advocates counter-cyclical fiscal policy. Since such ideas are several decades old, I suspect that mainstream economists are irked by the claim that MMT proponents have found something new.

    What exactly is the new science here? MMT proponents may have more aggressive policy prescriptions, but what do they claim to have discovered about the economy that mainstream economists do not know? I have not been able to figure this out by listening to lectures on the internet. Perhaps someone more familiar with the economics literature can explain.

  9. I think the survey was a bit of a joke. I have no doubt that the main MMT protagonists would answer the questions similarly to the majority.

    I also think the main weakness in MMT is its weakness in explaining the relationship between deficits, money creation financing of deficits and inflation. Yes, MMTers will say inflation is a constraint, but MMTers also argue that the Job Guarantee will mitigate inflationary tendencies. The test will be how deficit control with money creation financing will work with the JG in practice.

    MMT also insists there is no foreign exchange constraint and easily invokes capital controls and discounts the power of markets. I believe the attitude is much too cavalier.

    Henry Rech

    1. "MMT also insists there is no foreign exchange constraint....".

      I would say that for most countries foreign exchage (currency) stabilization is more daunting than inflation.

  10. In regards to building a quantitative MMT model one may say that Stock-Flow consistent Post-Keynesian models presented by Godley, Lavoie and Zezza are not inconsistent with the MMT premises. The main feature is the consumption function defined as the consumption of a certain fraction of the current (expected) disposable income plus a certain fraction of wealth (over a period of time). Nothing special in these models - they come from Philips (MONIAC), Kalecki and Modigliani. Within this framework the stock of government liabilities cannot grow indefinitely as wealth effects will lead to increased consumption eventually closing the gap in aggregate demand caused by hoarding of liquid financial assets. Obviously these models rely on adaptive expectations but in my opinion (I am an engineer) this is a correct assumption. Inflation is modelled as a conflict between the wage expectations (influenced by unemployment rate) and desired volume of distributed profits impacting markups. Such a model can be easily enhanced to account for income distribution, real estate can be added, etc. The key point I want to make is that the G&L model lets us understand that until the (aggregated) households accumulate enough wealth in the form of real and financial assets (portfolio allocation is defined by a Tobin-like function), government deficits are required to push the system towards the full utilisation of labour in the absence of unsustainable private sector borrowing frenzy (as before the GFC). Once a stable long-term growth trajectory has been reached, there may be no need to stimulate. (With a weird income distribution and inadequate fiscal policy the system will actually settle on secular stagnation trajectory - as predicted by Bhaduri & Marglin). Obviously a real economy is not stationary and the model is very oversimplified. But the debate is still stuck at looking at the portfolio allocation / liquidity preference component - what will happen if more bonds are sold or more "money printed". (Question A). Both bonds and bank deposits are from the point of view of the households (savers) almost the same (excluding capital gains/losses on bonds). There is no loss of the value of money ("dilution") as long as the households are willing to accumulate liquid financial assets. If the FED pays interests on surplus bank reserves, the answer to A is true (in the narrow sense defined above). The stock of M1 or M3 or the total sum of money and government liabilities is a residual not an independent variable because the velocity is a dependant variable.

  11. The article is a good example why we need a model to be more precise.

    1. The issue at hand is that the cost of raising an additional dollar has to be equal to the present value of future benefits (and claim to the shareholders). This is why the GM example is in line with any simple neoclassical investment frame model

    2. The analogy to the government is similar: The cost of a dollar financed through bonds/inflation/seigniorage has to be equal to their NPV benefit. In Leeper's active monetary regime the benefit is a claim to future taxation, in the fiscal regime contemporaneous inflation adjusts

    3. This is the 5th article I come across which can't pin point what MMT is. Can anyone provide us with a basic framework which
    a) has a unique price level
    b) a non-explosive solution
    c) rational expectations


    1. I want to be very clear: this post was NOT about "pinpointing" what MMT is. It was about willful misrepresentation of MMT by whoever at Chicago Booth was responsible for this survey. The school of thought may be hard to define, but anyone who has done even a little bit of reading the academic literature would have known that these statements do not follow from MMT. The idea that academics cannot be expected to know better than this is pitiful.

    2. Thank you very much for your reply - I really appreciate it. Unfortunately, many of us do not have the time to read a new line of literature and we are curious if there exists a basic framework that highlights the central mechanisms that are claimed by MMT (or even just a central theorem / policy implication). Otherwise, we can't judge if the questions asked in the survey were justified. Reading the wikipedia article on MMT, I can see at least some connections to the questions.

      A final thought: I can really recommend to investigate the fiscal theory of the price level. It builds on the new keynesian framework where the government does not raise taxes to stabilize debt and inflation adjusts such that the government asset pricing equation holds. Potentially, one can map MMTs policy implications on government deficits and unemployment to an optimal government spending rule in the fiscal theory.

  12. Rational expectations as an axiom have been universally rejected by Keynes and all Post-Keynesians. They are also fundamentally incompatible with the behavioural economics, based on modern psychology. It is impossible to build a Post-Kenesian / MMT model in a framework based on intertemporal utility maximisation. But it is even worse than that. To throw a little spanner - please consider building a neoclassical model of income distribution between workers and capitalists in the context of Anwar Shaikh's "Laws of Production and Laws of Algebra: The Humbug Production Function". However once we reject the rational expectations axiom, the problem of explosive solutions no longer exists. Regarding a unique price level, we again need to look into the humble humbug paper to realise that the marginal revenue productivity theory is based on a tautology. Once we understand this, all what's left are chapters 9 and 10 from the 3rd volume of Capital, minus Władysław Bortkiewicz's misinterpretation. See

  13. This was a vert civilized post, exemplary for the type of debate needed - thanks. Looking forward for more; should be possible to formalize both MMT and “mainstream” to pinpoint differences?