More on MMT in the Tropics: or Can exchange rate instability, and zero interest rates, guarantee prosperity in the periphery?

 

Lance Taylor, Wynne Godley and myself in March 1999

Back in the 1990s (from late 1996 to early 1999 to be precise), I worked for Wynne Godley at the Levy Institute. Minsky, that I saw in Brazil once, had just passed away. Randy Wray was at the Levy at an office not far from Wynne's, where we worked on his model. I was, also, in Ed Nell's study group (Matt Forstater was a frequent visitor), that met regularly and discussed functional finance. In fact, one of the few topics that I was first exposed at the New School, rather than at my alma mater in Brazil.

Ed organized a conference on functional finance in 1997 (if memory doesn't fail me), then published as a book (see here), which in many ways was the beginning of what later would be called Modern Money Theory (note that at the core was Abba Lerner's functional finance). At dinner (at the Orozco Room) I sat at a table with Musgrave, Duesenberry, and, for a brief moment, Eisner, that had to leave early.* I think that was the first time I met Mosler.** Randy's MMT book came next year, in 1998 (I should note that I paid less attention to that book than his previous one, based on his PhD dissertation under Minsky, since I was at the time writing my own dissertation under Wynne and Lance Taylor, both pictured above on the day of my defense).

I start this, just to explain what should be obvious, that functional finance, endogenous money, and a preoccupation with full employment not only are part of my concerns, but that I learned, at least in part, some of these ideas more or less at the same time that they were being discussed and the MMT school was being formed. Mind you the notion of effective demand, and the perils of the external constraint, were things I already knew, but some of the issues with value theory and its importance for policy I also learned with Ed, and John Eatwell, at the New School. Further, on a personal note, I should clarify that while I worked for Wynne, who at the time was concerned with the growing external imbalances of the US, and the consequences for the international position of the dollar, I tended, on this topic to be closer to Randy's views, since it was clear for any one that came from the Federal University in Rio, and who had been influenced by Maria da Conceição Tavares, that the dollar was under no danger, and the US by definition didn't have an external constraint.

All of this to say, again, that in general, I do agree with the notion that autonomous spending determines income, and taxes being charged out of income, are the result of spending, and, as a result, the limit to fiscal policy is essentially political in nature. That is something that MMT has been instrumental in popularizing in the United States, and whenever I can, I do help on that (see my podcast with Stephanie Kelton, who was at Levy when I worked there, and started her PhD at the New School slightly after I did). She was here at Bucknell to discuss the documentary Finding the Money.

 

Stephanie at the Campus Theatre, Bucknell last March

This introduction, longish and winding, is to explain why it is somewhat weird to discuss this paper by Arturo Huerta, who I have met in Mexico, but do not know very well. This is difficult because it is a misrepresentation of the differences I do have with MMT. His paper is supposedly a rebuttal to some arguments that we have made with Esteban Pérez on Modern Money Theory (MMT). The paper is a mix of name calling (essentially that we are conventional or orthodox, read, neoclassical, and that we are neoliberals or aligned with them) and a series of arguments in defense of flexible exchange rate regimes as a solution for unemployment problems in peripheral countries. The title, "Exchange-Rate Stability Causes Deterioration of the Productive Sphere and Destabilizes Developing Economies," seems to go even further and advocate for exchange rate instability. For Minsky financial stability was destabilizing, for some MMT authors exchange rate stability causes underdevelopment and is also destabilizing.

In fact, this seems to be more a response to the critique, mine more than Esteban's, to Warren Mosler's proposal for Argentina (see below),* which would definitively cause more exchange rate instability,  inflation and a huge recession, than to our original discussion of MMT in developing countries. In fact, Huerta does not cite that paper, but our response to a poorly developed and somewhat misleading paper by Agustin Mario, that I discussed here, who said without any evidence that we defended supply side views of economic growth.

Mosler's plan consists of free float (which he says retains foreign reserves), a zero (yep, that is zero) interest rate irrespective of the rate of interest in the United States, and a Job Guarantee (JG) program. The rest is less relevant, at least for our purposes. I also assume some expansionary fiscal policy on top would be necessary for the JG.

 

Mosler's policy proposal for Argentina

Huerta's main point is that a flexible exchange rates would free the country to spend in domestic currency, very much like Mosler suggests, without loss of reserves, which developing should not be concerned with in the first place. He essentially argues along Wray's lines according to which: "a government does not need to fear that it will run out of foreign currency reserves (or gold reserves) for the simple reason that it does not convert its domestic currency to foreign currency at a fixed exchange rate" (from Wray's Modern money theory: a primer on macroeconomics for sovereign monetary: p. 161. It is still exactly like that in the 2024 edition).

The notion is that: "a floating currency provides more policy space – the ability to use domestic fiscal and monetary policy to achieve policy goals. By contrast, a fixed exchange rate reduces policy space" (Ibid.). Of course, a fixed exchange rate is not necessarily the same that a stable one, and the notion that allowing big devaluations is counter-productive. MMTeers may say, as I'm sure they will, we do not defend big devaluations. Maybe not explicitly, but if you keep low (zero interest rates), and do not intervene in the exchange rate market, that is, unavoidably, the consequence. Doing that will not retain reserves, and central banks should be concerned about reserves. Btw, Milei was able to reduce inflation drastically because he did intervene both in the official and the parallel exchange rate markets (and the loan from the IMF is essentially about recomposing reserves; more on that in another post).

Then comes the question of why you should be concerned with reserves, and here Huerta's position is somewhat puzzling, particularly for someone coming from a developing country. I quote here, he says: "Vernengo and Pérez (2021) do not consider that purchases of imported goods are paid for in the importing nation’s currency, accepted by the exporters so that they can make investments, acquire financial assets, and make purchases in that nation." He suggests that they would accept pesos. In this view, a country that is an oil importer, that cannot function without energy, can import oil in domestic currency. Good luck with that!

But even if we leave the realm of Latin American magical realism, an the notion that developing countries can import in its own currency the basic capital and intermediary goods that they need to maintain normal levels of activity, his view is full of problems. He accepts very conventional views about the exchange rate (while claiming that I do have orthodox views, which I never did, on fiscal austerity; on that, note that The Guardian quotes me twice, here and here, as being against austerity when many heterodox economists, some even arguably MMTeers, I might add, have been for austerity in Argentina, saying that the mistake of the Kirchners was their fiscal excesses).

His main argument is that a "flexible exchange rates are important ... for increasing the competitiveness of national productivity and reducing pressures upon the external sector." He repeats it,  saying that: "A flexible exchange rate improves competitiveness and promotes economic growth, thereby reducing the current account deficit." In other words, the flexible exchange rate does solve the external problem (Randy is always more careful about that, and I have not seen that argument in his work).

He says that: "the reason for MMT’s advocacy of flexible exchange rates is so that the exchange rates may adjust to differences between domestic prices and those of the principal trading partners. By allowing those adjustments, a nation can avoid the relative-price distortions that would affect national production." *** He notes, as I suggested above, that they are not for depreciation per se (yeah, but with a zero interest rate...), but that: "the predominant exchange rate stability (achieved by maintaining high interest rates, in order to promote capital inflow) has led to exchange rate appreciation, which is detrimental to the competitiveness of national production." In this, as we noted in our original paper with Esteban, they are very similar to Bresser-Pereira's New Developmentalism. In the concern with a competitive exchange rate, but with a tolerance, if not a promotion of exchange rate instability, which is inevitable with very low interest rates.

There are many other issues, which again reveal actual use of marginalist thinking, for example, he says: "In saying that low interest rates generate inflation, these authors presuppose that low rates increase demand, and that the economy is in full employment. However, Vernengo and Pérez do not consider the fact that low interest rates favor the growth of investment, production, and productivity." First of all, that misrepresents our views. Low interest rates, leading to a negative interest rate differential (when the local rate is lower than the US rate adjusted for risk) leads to depreciation, and higher costs of imported goods, and inflation even if the economy is below full employment (I published the model in a book edited by, wait for it ... Forstater and Wray). Inflation comes from distributive conflict, and a depreciation, by affecting the costs of production and reducing real wages, stokes inflation. Second of all, his point is that lower interest rates lead to higher investment, which is a marginalist view that associates the intensity of the use of capital with its remuneration, a problem Huerta and many Post Keynesians share with Keynes.**** I follow Sraffians and prefer to abandon marginalist principles.

Huerta puts emphasis on the role of investment as central for growth, and in the need of very low interest rates for that, irrespective of their effect on exchange rate instability. He actually says several times that exchange rate stability is a problem, and argues that: "economies that give priority to exchange-rate stability cannot employ flexible monetary and fiscal policies to stimulate growth." On this, my views are closer to Ricardo Summa, that notes that investment is not so unstable, and follows the accelerator, and that autonomous demand (the non capacity generating part of it) is central for explaining growth.

So one needs a managed exchange rate, to avoid the inflationary pressures, and one needs to be concerned with reserves to be able to avoid the perils of not being able to import essential goods, that would cause bottlenecks an impede growth. But Huerta knows that, as a friend noticed (see below).

As he says in his tweets, what would Mexico do if it runs out of dollars to buy corn? Why not use pesos instead then? I mean, I get that Vernengo did not consider that, but he is an orthodox economist, isn't he?

In other words, sometimes, and certainly not always, developing countries cannot pursue expansionist fiscal policies because they do NOT HAVE DOLLARS (there is a reason every country, even China, accumulated humongous reserves of dollars after 2008-9). In order to be able to do it, sometimes, higher rates are needed in the periphery (not so much in the US). Then expansionary fiscal policy can be pursued even with higher interest rates, and the economy would be able to grow (as would investment that would respond, not to the higher interest, but to higher levels of demand). Exchange rate competitiveness is not central for growth, and Latin America did its State-led, import substitution industrialization (that Huerta cites all the time) during Bretton Woods with a stable nominal exchange rate (Mexico had a fixed rate from 1954 to 1976; they call it stabilizing development). It was a period of high growth, and relatively stable and appreciated exchange rate.

* I did co-edit a book, that had what I think was the last paper written by Eisner and can be seen as a follow up to that conference (ours what out of a few sessions we co-organized at the Easterns in DC in 2004, on functional finance issues.

** Mosler was in Argentina and presented this in several venues, including, at the University of Moreno, where someone questioned the idea that flexible rates with zero interested was feasible, and correctly noted that it would be inflationary and contractionary. He proceeded to ask if the person worked with me, as the story was related to me. As if my position on this is somewhat unique and someone that suggests that it doesn't make sense is my disciple.

*** Note that for Huerta exchange rates change relative prices and allow to fix distortions, in typical marginalist fashion. The emphasis is not on the effects on distribution and through that on quantities, as in structuralist views.

**** This blog is known for emphasizing the Sraffian critique of the marginalist theory of investment (very old post on that).

Bernie and AOC are Functional Finance (and Socialists) but not necessarily MMT

Might not be MMT, but it isn't Socialism

So there has been a lot written on Modern Money Theory lately. There is this piece by The Economist, Jerry Epstein's paper, and Lance Taylor's one, more on the Democratic Socialist ideas than MMT per se (here). There was also this op-ed by Robert Shiller in the NYTimes, and the two posts by Tom Palley, that I reposted here on the blog. Finally, Christine Lagarde also commented on MMT during the World Bank/IMF Spring Meetings.

I can and I will not comment again on my views on this. As I said before, I'm a fellow traveller in the sense that I do agree with MMTeers on functional finance (even though Randy Wray, at the Easterns, presenting Stephany Kelton's slides suggested that functional finance was a late addition to MMT,  coming from Matt Forstater and Stephany in the 1990s; my take on that here, where I say that Ed Nell is the likely source), endogenous money, and with minor disagreements on the origins of modern money (by which I mean early transitions to capitalism) on some version of Chartalism. I also, noticed that I depart on certain tendencies to believe that capital mobility and flexible exchange rates make MMT applicable to developing countries, and about taxation (on the latter, I was criticized, and received both emails and tweets suggesting I misrepresented MMTeers views on taxes).

Here is where I think the dual nature of MMT as a theoretical school derived from Minsky and some strands of Post Keynesian economics* and a political movement connected to progressive parts of the Democratic Party becomes relevant. The thing is that MMT has been now associated with Democratic Socialism, with Bernie Sanders and Alexandria Ocasio-Cortéz (AOC). Stephany after all was and is Bernie's advisor, and he has embraced certain proposals beyond what I would call a pop-functional finance stance on fiscal policy. For example, his job guarantee proposal** (again I hope he wins, and I do hope Stephany plays an important role in a Bernie administration; one can hope).

However, it's worth noticing two things that are relevant in this more political context. First, Warren Mosler has posted his presentation at the New School (Mosler's slide pictured above) in which he defends the elimination of personal and corporate income taxes, and sales taxes (here). Mosler is in many ways the more public face of the non-academic face of MMT. Note that Warren plays a crucial role in the political movement associated with MMT. Also, Randy noted in this piece that he was "'a bit disappointed' that Ocasio-Cortez connected tax hikes to the Green New Deal." And no, please, I do not need to be lectured on how causality goes from spending to taxes (as much as from investment to savings; same effective demand logic). The point is that even if taxes are not necessarily to fund spending, taxes do allow for important changes in the economy.

And the way one taxes is as important for functional finance as the way one spends. Sure the limits what can be done are political. In that respect I should say that functional finance suggests that the limits to fiscal policy, beyond the productive capacity (which might be endogenous and demand driven, and hence difficult to reach unless the economy is growing really fast), are essentially political. But exactly for that reason how one taxes, and is a central political question.

Taxes on the wealthy are central for social democratic (Democratic Socialism) policies. At any rate, this establishes in my view were I depart from MMT, which would be on the willingness to tax the rich. I'm not for eliminating income taxes (I'm happy to reduce sales taxes on some things, but increasing on others), and I would be in favor of a wealth tax too. And I'm happy that a higher tax on the well to do is discussed and tied to a popular cause like the Green New Deal (I was for that back in 2012). It should not be a surprise then that MMT finds support in Wall Street, since they would certainly like no personal or corporate income tax.

* I assume that is correct; Randy said in that roundtable mentioned above that they were kicked out of post-Keynesianism, and they didn't leave. I assume that explains the renaming MMT, which I never quite understood. See this old post in which I was surprised about the new label, which I associated back then to endogenous money.

** Here I should note that while I'm not against a job guarantee (JG), I have nothing against regular fiscal spending, like, for example, infrastructure spending to get the economy going. Again, on the panel, when I asked Randy, suggesting that Wynne (Godley) had asked the same in the past (according to my recollections), he said that conventional fiscal policy (what he calls pump priming) was inflationary, and the JG would be better. I'm even less afraid than MMTeers on demand inflation, it seems.

MMT and its Discontents: Again (Wonkish and Longish)

Modern Monetary Theory (MMT) has been in the news again, and for good reasons. I actually had a post with the same title back in February of 2012, hence the again in the title. But now, with the irruption of Alexandria Ocasio-Cortez in the political scene ,and with the discussion of a Green New Deal (discussed here 7 years ago) and the feasibility of higher taxes (here, also long ago, among the many on the topic) taking the center of the political debate, MMT has become trendy. The rise of democratic socialist ideas, since Bernie's 2016 campaign, has brought the fiscal feasibility or responsibility, in the more conservative terminology, of such progressive  plans into the center of economic policy debates. Also, the fact that Stephanie Kelton a prominent MMTer is an advisor to Bernie, has brought significantly more attention on their views.

I have discussed Modern Monetary Theory in this blog for years (going back to April 2011, when I first found use of the term, to the most recent earlier this year after Olivier Blanchard American Economic Association presidential address last January), and have known the main MMTers going back to at least the mid-1990s, when I was at the New School and working as research assistant to Wynne Godley at the Levy Institute. I guess, I can be seen, to use the term employed by Doug Henwood in his recent Jacobin piece, as a fellow traveller (like Jamie Galbraith), even though I've been critical of some aspects, in particular when applied to developing countries (more on both Henwood and MMT issues in developing countries below).

There are many critiques, which deal with both theoretical issues, mostly concerned with the Functional Finance aspects of MMT, and with the policy and political effects of MMT advising to the left of center Democratic presidential candidates. Note that I will not try to define MMT precisely, since it is a hybrid of economic theories and policy proposals. I would assume that at core it is composed by the ideas of Chartalist and Endogenous Monetary views, Functional Finance, and an Employer of Last Resort (ELR) program as suggested by Greg Hannsgen in his recent presentation at the Eastern Economic Association (EEA), in sessions we co-organized (with the presence of Randy Wray presenting Stephanie Kelton's slides and Josh Mason; Stephanie was with Bernie at the rally in Brooklyn).

My comments will be, for the most part, directed at issues that fall within the Functional Finance part of MMT, and mostly about developed economies like the US (although, I'll have something to say about developing countries like Argentina or Brazil). I might add that Randy suggested that Functional Finance was a late addition to MMT, since this ideas were not known by MMTers in the mid-1990s or so. I think that the original source for the Functional Finance story was Ed Nell, who organized a conference at the New School back in 1997, I think, with Bob Eisner, and many other Old Keynesians. I had read Abba Lerner and Evsey Domar foundational papers in Ed's classes, and I think his influence on MMTers in this area is reasonable to assume.

Let me start with Paul Krugman's critiques of MMT, which have been clear and perhaps the most widely read (but there are many, including critiques by Tom Palley and Sergio Cesaratto here in the blog). So Krugman, in one of his most recent posts, starts by showing that there are many levels of the fiscal deficits that are compatible with full employment (not sure who thinks that this is wrong; I would add the same is true about the rate of interest, and that there is no natural or neutral rate of interest, a point that Keynes made back in the 1930s, and that is coherent with the capital debates, and, hopefully, it will be clear why this is relevant below). Then he argues more problematically, in my view, that crowding out is a serious concern, in his words: "The question then becomes one of tradeoffs: would the things the government could buy with a higher deficit be worth the lost private investment due to a higher interest rate?" But he knows well that the crowding out effect is empirically (if not theoretically) irrelevant, since investment is not particularly responsive to interest rates (he knows it's all about the accelerator); then he moves to the issue of the natural rate itself.

He seems to think two things (he can certainly correct me if I'm wrong). One, that MMT requires that you use monetary policy in order to achieve full employment. Two, that if you are in a situation of like the zero-lower bound, then the central bank cannot bring you back to full employment. That is, her assume that, using his own graph, the economy would be in position A.

Note that by his own argument you can go back to a point like B, with full employment by pursuing expansionary fiscal policy (be that an ELR or something else like traditional fiscal policy to expand infrastructure spending, for example; on this I should say that Randy suggested that he thinks traditional fiscal policy might be inflationary, and that's something perhaps would be compatible with Krugman; he noted how Minsky suggested that an ELR can be used as a buffer to control inflation). That is the IS would move up.

So it's unclear what the fuss is all about. If it is because the Fed could, in the MMT story (not sure Functional Finance authors would say that), print money to finance the deficits and bring the economy back to full employment, then the concern might be that it would be inflationary, in a Monetarist sense that printing money might be the cause of inflation. But that does not seem to be his preoccupation (I dealt with the issue of monetization of debt back in May 2011 in a reply to Krugman, who was back then, not surprisingly, criticizing MMT). His concern seems to be that the rate of interest would not go up. But of course, there could be a flat interest rate close to zero, a horizontal monetary policy (MP) line, and the expansion of the IS could be achieved bringing the economy to full employment (right below the C and B points with a zero interest rate).

But that doesn't seem to be the issue either. My guess is that he thinks that the problems is more like the one below, from an older post by him, in which the natural rate of interest is negative (my discussion of that here), and the Fed cannot lead the economy to full employment.

So his point is that the Fed cannot make it because it cannot bring the economy to the natural rate of interest, the one that is compatible with full employment and stable prices. He then goes on to criticize Stephanie on her critique of the natural rate, and tells us that: "So what purpose does claiming that the natural rate is a meaningless concept serve? It looks to me like sophistry – word games intended to confuse what should be a simple issue."

I'm not sure what Stephanie said about the natural rate, but I think it is well-established that the natural rate concept is problematic (note that on this some MMTers have said things I would disagree;  e.g. Forstater and Mosler suggest here that the natural rate of interest is zero; my discussion of that here). So I think the position that Krugman attributes to her is correct. Paul Samuelson would agree, as he did when he admitted that the capital debates had shown that neoclassical parables cannot hold (on the capital debates read this old post). So let me explain it briefly. There is no sophistry, just pure logic.

The capital debates show that with factor price reversals, when one good can be said to be capital-intensive at one level of the wage-profit ratio, and labor intensive at another level of the same ratio, there is no monotonic inverse relation between investment and the rate of interest. The investment schedule could look like the one below (my graph), with portions that have a negative slope and some in reverse, and if savings (determined by the level of income as in Keynes' principle of effective demand, rather than a Ramsey inter-temporal model) is given as in the graph below, then there might be no natural rate of interest. Keynes was explicit about that in the General Theory. That means that the monetary authority can set the rate of interest, what Keynes referred to as the normal rate, that was conventional, and that fiscal policy can be used to bring the economy to full employment. Btw, I think that overall Krugman and Kelton agree on that. Krugman says he's defending the theory, not the policy proposals, since he thinks they agree on that.

The point is NOT that the state can do whatever it wants, even though it has a lot of space, but that at the end of the day monetary policy is central for the ability to pursue fiscal policy, and the monetary authority can keep (unless it's forced by law not to do it; and that would bring up the discussion about the rise of the neoliberal idea of independent central banks) interest rates low enough to allow for fiscal expansion without debt growing at a very fast pace. Think of Marriner Eccles during the New Deal (chairman of the Fed at that time; search the blog for more on that). This is the argument that Josh Mason did, in a different way in our session with Randy at the Easterns. Note, also, that even though politically it was acceptable for the Fed to keep interest rates low, at 2.5 percent during the Depression and World War II, by the 1950s political pressures by financial markets and rentiers forced the Fed-Treasury Accord, and things changed (even though rates remained relatively low).

I'll comment briefly on two additional critiques of MMT, the one by Larry Summers, the ex-Treasury Secretary and advisor to the Clintons and Obama, and the one by Doug Henwood, an influential Marxist (see my discussion of his comments, and others, on Marx for the New York Times here), and writer of a very good book on Wall Street. I am sorry to say that both have too many arguments of authority and ad hominem attacks on some MMT authors, which I'm not interested in discussing. But there are a few substantive issues. One is the danger of inflation (that I'm glad Krugman seemed less keen on) and the others are on MMT and developing countries, and the political relevance and practicality of MMT proposals (here most critics have in mind the Bernie/Ocasio agenda of Medicare for all, cheap or free college tuition in public institutions, a jobs guarantee, and a Green New Deal).

I'll start with Henwood. His major issue is inflation, I would say. He says: "That brings us to the next problem: inflation. When the printing presses run freely, it’s not only reactionaries who think that runs the risk of spiraling prices. As I was researching this piece, many people to whom I described MMT, from Democrats to Marxists, brought it up as a worry. MMTers are coy about the topic — they never say how much is too much, and they profess great confidence in their ability to control it." Let me start by saying that inflation has not been a problem in 40 years, while wage stagnation is a central one. But if one is concerned about it, at least one should get the correct analytical tools to discuss it.

He tells us that: "The standard view of the Weimer inflation is that the German economy, severely damaged by World War I and forced to make huge reparations payments to the victors, wasn’t up to the task — it just didn’t have the productive capacity, and its citizens were both unwilling and unable to pay the necessary taxes. So instead the government just printed money and spent it, not only to pay its own bills, but to support bank lending to the private sector." First, that's NOT the standard view of the hyperinflation in Germany. You can read here the standard story, and I cite even a conservative historian like Niall Ferguson admitting that the monetarist story embraced by Henwood is NOT the dominant view among historians. The notion that the economy was at full capacity (didn't have productive capacity) and that printing money caused inflation is what Cagan thought about it. A more refined and somewhat structural story is the dominant view actually. In my view, it is clear that debt in foreign currency (not domestic), and, hence, the external problems of the current account, that forced depreciation, together with wage resistance are at the core of the hyper., German and many others.

In addition, it's worth emphasizing that the US is not Weimar Germany, in the sense that even with much larger fiscal deficits, debt would still be in domestic currency, and no significant pressure for depreciation would arise. The role of the dollar as reserve currency is not really under significant jeopardy. Certainly, there might be questions of inflation if we reach full employment, and that's a different issue (I'll come back to the topic below when I discuss Summers and the political feasibility of MMT sponsored plans). But the kind of alarmism of even suggesting that the US would be on the verge of hyperinflation is not serious. I won't comment on other primary mistakes like the notion that the rise of Nazism is associated to the hyper, when it is clearly connected to the Depression and deflation a decade later.

Henwood is on firmer ground, actually, when he discusses the external limits. Yes, indeed, for most developing countries like Argentina or Brazil, the ability to pursue expansionary fiscal policy is severely limited by the balance of payments constraint. Considerably before full employment, the patterns of consumption and investment may require too many imports, particularly of intermediary and capital goods, and even with capital controls, interest rates might be hiked to avoid capital flight and depreciation. Depreciation does solve the external problem, often by throwing the economy in a recession, and not because it stimulates exports. There is extensive discussion of that in the blog about it. Sometimes MMTers sounded like New Developmentalists in Latin American suggesting that depreciation would solve the external constraint and that capital controls were not even necessary. I don't think Randy believes that (or Stephanie), but it was certainly something that Warren Mosler believed in the past (whether he changed his mind I can't tell). But again the debate seems to be about the feasibility of MMT in the US (that's why I didn't emphasize in my comments on the roundtable the differences of debt in domestic and foreign currency, something I always do, as noted by Josh).

So that leads me to the last critique, the one by Larry Summers in his recent piece in WAPO. Summers says that: "Modern monetary theory... is the supply-side economics of our time" and that "these new ideas [about the importance of fiscal deficits] are being oversimplified and exaggerated by fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone." He also says in Monetarist fashion that printing money would lead to hyperinflation. In his words: "As the experience of any number of emerging markets demonstrates, past a certain point, this approach leads to hyperinflation. Indeed, in emerging markets that have practiced modern monetary theory, situations could arise where people could buy two drinks at bars at once to avoid the hourly price increases. As with any tax, there is a limit to the amount of revenue that can be raised via such an inflation tax. If this limit is exceeded, hyperinflation will result." Again, emerging markets, like Germany, borrowed in foreign currency, that they cannot print. It was often the depreciation of the currency, the increase in the prices of imported goods, and the wage resistance of workers that led to hypers, and the central bank printed money afterwards, with money being endogenous. A foreign debt or external problem, not a fiscal one.

But there might be a danger of inflation (not hyper) if Bernie wins the election and manages to pass Medicare for all, free college, a Job Guarantee and actually spend some money on infrastructure, and to do something about global warming, without significant reshuffling of spending. Here is where I think the question of the supposed naïveté  of MMTers comes to play, with Henwood suggesting that they shirk the question of fiscal choices, and with Summers saying they resemble voodoo economics, the supply-side of the left (mind you supply-siders are many things, but certainly not naïve). I think, first of all, that the dangers of inflation are exaggerated, for several reasons. First, the labor market is not as tight as normally suggested. The number of people discouraged and out of the labor force is relatively large. Second, there are positive effects of growth on productivity (the Kaldor-Verdoorn effect, search on the blog too), so the supply constraint is not fixed, rigid at one given level (people said the natural rate of unemployment was 5 percent or higher just a few years back; again check past blog posts). Third, the bargaining power of unions, and workers in general, is not particularly strong, and it would take sometime to pick up.

More importantly, there is no chance that a Bernie presidency (and that's in and of itself a big if) would have both houses and could implement even a little bit of the program presented. Mind you if it happened we would probably get to full employment in a couple of years, and get increases in wages, and perhaps some inflation. But some inflation might be good, in particular if it allows for higher real wages, something sorely needed. How much inflation? Difficult to say, but the structure of the Fed is not going to vanish, and higher rates would be used to discipline the labor class, with the support of many neoliberal Dems. The limit will come probably before full employment and the capacity limit of the economy is reached (yes inflation happens before the capacity limit, because it's often cost push, and the sort of demand pull stuff Summers and Henwood are afraid about is not that common). In other words, the limits to fiscal expansion would be political, not economic, and there is no reason for the left to be up in arms against an imaginary enemy. Hyperinflation is like the the windmills for the Quijote. The giants to attack are actually the ones pointed out in the progressive agenda, like lack of spending on health, education and the environment, and MMTers have been instrumental in getting these ideas in the political discourse, and moving the Dems to the left.

But taxes matter too. Here is where the MMTers refusal to acknowledge that taxes on the wealthy are necessary is a political mistake (not all I've been told, but some for sure, as I've heard that criticism). Note that from the logical point of view they are not incorrect in suggesting that causality goes from spending to taxes, like it goes from investment to savings. It's implicit in the Keynesian/Kaleckian model in which autonomous spending (government spending is in there) determines income through a multiplier process. And taxes, like savings, grow with income. But it is important to note that politically (again this is not analytically, but politically) countries that went for a more ample Welfare State opted to tax their citizens, particularly their more wealthy citizens, at a higher rate. Tax increases on the wealthy should be (and are) part of the progressive agenda. It has an important distributive effect, and it makes the spending politically acceptable. At this juncture, however, even Blanchard says that we should just borrow, since interest rates are low, and will remain low.

The crucial point is that overall MMTers have been helpful in moving the Dems in the right direction (the right direction is to the left), and that is a good thing. The problem with Dems is not the existence of a few social democrats or socialists in their midst. In fact, even being generous there will probably be just three democratic socialists in the presidential primaries (Bernie, and, perhaps, Warren and Tulsi). The problem is the vast majority of neoliberals that still dominate the party. The same could be said about MMT. The problem is not the exaggerated propositions of MMTers, but the excessive fear of inflation when there are too many relevant problems to be concerned with.