Ed Dolan Talks to Fabius Maximus About MMT…Can It Save Us?

Summary: Next in a series about economics and the global government debt crisis, Ed Dolan talks to us about modern monetary theory. How does it differ from mainstream economics? And he has a few words to say about the Austrian school.  This was lifted from the comments of yesterday’s post.

Other posts in this series:

  1. America’s strength is an illusion created by foolish borrowing, 10 October 2012
  2. Prof Black blasts back at yesterday’s post about the US debt, 11 October 2012
Ed Dolan


  1. Ed Dolan’s comment
  2. About the Author
  3. About Modern Monetary Theory
  4. About Keynes
  5. For More Information about Economics

(1)   Ed Dolan’s comment

I have been reading this lively thread with great interest. I do not think of myself as an MMT advocate, and I gather that most of the commenters agree, yet I keep seeing them passionately claim as uniquely “MMT” views that are completely commonplace and that I, as a “mainstream” economist, have always taught as obvious truths. For example, Ikonoclast writes:

“A key MMT view is that taxes do not pay for expenditure. In one sense this is right. In another sense it is wrong but more of that later. MMT takes the view that the national budget creates all the dollars of expenditure for that year at the time the budget is brought down. MMT further states that taxes when collected extinguish the dollars thus collected”

Well, it happens that I am in the middle of teaching a monetary economics course right now, and tomorrow’s lecture addresses just this subject. One slide in my lecture (a slide that has been there for years) contains a set of T-accounts that demonstrates precisely this point: Collection of taxes extinguishes money, spending by the Treasury creates money, and when you consolidate the two T-accounts, the two transactions net out to no change in money. In exactly that sense, as Ikonoclast points out, the “MMT” proposition is both right an wrong.

Surprise, surprise! I’ve been teaching MMT for years and didn’t even know it.

Ikonoclast is right on the mark in saying that we have to distinguish between mainstream economics – here I mean truisms like “assets = liabilities + net worth” – and “man on the street” (MoS) economics. The trouble is exactly that MoS does not understand economics of any kind very well, including the truisms.

Here is a perfect example: Sometimes I take my students to a “money museum” set up by the central bank of the country where I am teaching. Among other displays there is a cube, about 18″ on a side, that contains paper bills in the local currency amounting to 1 million currency units. When I get back to the classroom, I ask my students the following question: WHERE DO THE BANKNOTES IN THAT STACK IN THE MUSEUM APPEAR ON THE CENTRAL BANK’S BALANCE SHEET?

Now, these are undergraduate students, still teenagers, and most of their preexisting knowledge is of the MoS school. 90% of them answer that the banknotes in the museum should be entered on the Central Bank’s balance sheet as a 1 million unit asset. The other 10% – the ones who know a little bit about how central banks work – answer that the banknotes should be entered as a 1 million unit liability. Of course, both are wrong! The correct answer is the the banknotes in the museum are just a stack of paper and do not appear on the CB balance sheet at all until they are issued to the public in some way, for example, through an open market operation, or transferred to the Treasury which subsequently spends them on goods and services.

I can see from the “taxes extinguish money” thread here that members of the “serious” subset of MMTers agree with me that banknotes stored by the Treasury or CB are neither assets nor liabilities of the government, they are “nonmoney”, just paper. What many contributors to this discussion thread fail to realize that us “mainstream” economists know that and have always known it, along with many other “uniquely MMT” propositions.

At the same time, I would be willing to bet a large stack of colorfully printed paper that many participants in this discussion would have given the wrong answer right to my trick question about the banknotes in the museum. Clearly, there is an MoS version of MMT as well as the serious version.

The same goes for the view of whether sovereign governments can “go broke.” I think all mainstream economists recognize that there is a sense in which the answer is yes and a sense in which it is no. In the sense that they can always create new money to settle any financial obligation that has a fixed nominal value in their own currency, the answer is, almost trivially, that no, they cannot go broke. On the other hand, they face the inflation constraint, and under conditions of hyperinflation, governments can “go broke” in the sense that the cease to be able to buy real goods and services with any finite nominal amount of currency.

Zimbabwe is a perfect case in point. It had a sovereign currency and did not blush to print octillion dollar banknotes, but eventually the people they tried to buy goods and services from just said “no thanks, I’d rather keep this loaf of bread than sell it to you for 1 octillion dollars.” Instead, they just turned their back on the government and used substitute currencies, mostly euros and rand, for day to day transactions.

The government ranted “no, you can’t do that! This is our sovereign fiat currency! You have to use it!” No one paid any attention. The government ranted “you have to pay your taxes and you have to pay them in Zimbabwe dollars!” People just said, “why should we pay taxes to you bunch of clowns?” and turned their back again. So the Zimbabwe government went broke despite its mighty printing presses. Seriously, I’d be very interested to read a good MMT analysis of the Zimbabwe hyperinflation. Know of any?

Ikonoclast is again right on the mark when he writes “It leads one to wonder why MMT advocates are so keen to make odd-seeming claims to emphasise their difference from Keynesianism in general. Perhaps one can put it down to what Freud called the “narcissism of minor differences” {see Wikipedia}.

MMTers seem to share this narcissism of minor differences with some other small schools of economics. For example, I have hung out a lot with members of the Austrian school, and even edited a book once called Foundations of Modern Austrian Economics (see it here and here). I like these Austrian guys, they are smart and have good ideas, but wow, are they ever heavy into the narcissism of minor differences. The sad thing is, although it gives them some kind of boost to their self-esteem, it hurts their ability to convince the world at large of the validity of that subset of their ideas that are both sound and original.

In the above mentioned book, I cited Milton Friedman as saying “There is no such thing as Austrian Economics – only good economics and bad economics.” (Friedman did recognize that Austrians, for example his Chicago colleague Hayek, had many good ideas.) I would say very much the same thing about MMT.

(2)  About the author

Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University.  He was a Asst Prof of Economics at Dartmouth College, and later on the faculties of U of Chicago, and George Mason U. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment.

During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington’s San Juan Islands.

His publications include Introduction to Economics (2011), and TANSTAAFL: An Economic Strategy for the Environmental Crisis , v40 (2011).

(3)  About Modern Monetary Theory (MMT)

MMT is best known for stating that governments can print far great amounts of currency without ill consequences than conventional theory suggests. It is in one sense the mirror image of the austerian (not Austrian) obsession with gold and inflation. They are bookends, in a sense.

Many well-respected economists advocate this theory. Such as my fellow author at Roubini’s Economonitor L. Randall Wray (Prof Economics at U of Missouri-Kansas City); see his articles here.

About MMT and the limits of monetizing the debt:

Here are two clear explanations of MMT by Paul Krugman (also not a fan of MMT):

  1. Deficits and the Printing Press (Somewhat Wonkish)
  2. MMT, Again

If you would like to really learn about MMT, here are two ebooks by Warren Mosler, a founder of MMT:

(4)  For More Information about the work of John Maynard Keynes

  1. The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
  2. About the state of economic science, and advice from a famous economist, 8 December 2008
  3. Words of wisdom about the global recession, from the greatest economist of our era, 29 December 2008
  4. Some thoughts about the economy of mid-21st century America, 12 January 2009
  5. Economics is not a morality tale, 14 January 2009
  6. Keynes comments on our new-found love of austerity, 21 June 2010
  7. Keynes looks 80 years into the future and across the Atlantic, to explain our broken values, 25 July 2012

(5)  For More Information about Economics

(a)  These FM Reference pages list all posts about two of the great economic stories of our age:

(b)  Where to find good commentary about economics:

(c)  Posts on the FM site about economics — theory and practice:

  1. “A depression is for capitalism like a good, cold douche.”, 17 December 2008
  2. A very important article by an expert, discussing the necessary next step to solve the financial crisis, 17 February 2009
  3. Economic theory as a guiding light for government action in this crisis, 10 March 2009
  4. Why have mainstream economists lost the argument about the need for more economic stimulus?, 27 June 2010
  5. Looking at one of the most popular books in the conservative canon: The Road to Serfdom, 7 July 2010

This post was originally published at Fabius Maximus and is reproduced here with permission.

18 Responses to "Ed Dolan Talks to Fabius Maximus About MMT…Can It Save Us?"

  1. Burk   October 12, 2012 at 12:08 pm

    That is quite a challenge you lay down.

    Firstly, the inflation constraint vs solvency constraint is a serious one that mainstream economists and commentators don't seem to appreciate. If I had a dollar for every time someone compared the US to Greece…

    Surely it is good that you are sympatico with the MMT position on this one, but how about Rogoff and company? They apparently wrote their book as though all debt was the same, and we are like Greece, and other historical instances of foreign-denominated debt. Countless politicians and economic journalists and commentators make the same error. The entire UK government has devoted itself to this error, imposing on itself a mini-euro crisis out of the false fear of insolvency.

    So I think the MMT perspective (and I would call it that) is a very useful corrective to the mainstream position, even if you characterize it as more person-on-the-street then academic.

    On Zimbabwe, MMT has had several essays- search Bill Mitchel's blog. MMT is not insane.. it does not advocate hyperinflation. It does advocate slightly higher inflation at times like today when it would a helpful progrowth and pro employment policy. It also advocates very disciplined government economic policy, driven by current needs. When we are at the lower bound, as now, government spending (and debt, if one wants to match deficits with debt) is highly positive, and we should not be cowed by ideological deficit "hawks" whose true aim has been shown time and again to be upward income redistribution and restriction of government provision for the common good, not debt reduction.

    In boom times, when inflation rises, MMT is fully on board with running government surpluses and raising taxes, and reducing debt. It is entirely dictated by the local conditions, though in the real world, most countries have enough growth and trade deficits that ongoing fiscal deficits are perfectly acceptable, from a MMT perspective. There is no a priori need to balance budgets over the business cycle, or to maintain debt (or deficit) as some % of GDP, etc. Those kinds of fiscal rules of thumb have no real basis.

    • ThomasGrennes   October 15, 2012 at 10:08 am

      The reference to "Rogoff and company" appears to refer to the economic effects of government debt. This is an empirical issue, and there is a growing body of empirical work
      indicating that excessive government debt has a negative impact on real economic growth.
      Various papers have studied different time periods and country groups but they have similar results. Beginning at low levels of debt relative to GDP, increases in debt have no
      effect or a small positive effect on growth. However, when the debt/GDP ratio exceeds a
      threshold level (approximately 70-90% of gross debt on average), the rate of growth decreases. This body of literature is not consistent with the hypothesis that debt ratios have no significant economic effect.

      • Rafael Barbieri   October 15, 2012 at 10:30 am

        When reading the work of Rogoff and co, they do not differentiate between a monetary system based on a sovereign currency issuer with no fixed exchange rate, vs. a monetary system where the exchange rate is either fixed or where currency creation is divorced from state control (ECB, a currency board as examples), This is a huge determinant of whether high debt/GDP ratio are significant drivers or detractors of growth. High debt/GDP rations in fixed exchange rate regimes can reduce the policy space when reacting to a crisis. This is not the case in a full sovereign currency system.

        I would say that a high degree of private indebtedness relative to private incomes after a crisis is what causes growth to decline. This results in increased deficits and debt/GDP rations. The causation that high government debt/GDP ratios leading to low growth is backwards using this reasoning as low growth is causing government debts and deficits to expand.

      • EEB   October 17, 2012 at 4:18 am

        Someone ought to teach Rogoff, et. al., that correlation is not causation! Higher debt/ GDP is invariably the result of a collapse in tax receipts (due to a financial crisis or Crash) combined with increased gov't. spending on automatic stabilizers (to the extent that they exist). The causes of variations in GDP growth are the consequences of the collapse of the economy itself; the higher debt levels can become a cause only if debt service sufficiently robs the real economy. Such robbery is significant only in countries which lack a sovereign non- convertible currency or must amass relatively great quantities of hard currency to finance imports/ service hard- currency external debts, particularly when the gov't. taxing power is operationally weak.

  2. Rafael Barbieri   October 12, 2012 at 5:00 pm

    "In boom times, when inflation rises, MMT is fully on board with running government surpluses and raising taxes, and reducing debt. It is entirely dictated by the local conditions, though in the real world, most countries have enough growth and trade deficits that ongoing fiscal deficits are perfectly acceptable, from a MMT perspective. There is no a priori need to balance budgets over the business cycle, or to maintain debt (or deficit) as some % of GDP, etc. Those kinds of fiscal rules of thumb have no real basis."

    I agree with this, but would like to add that economic activity, production, and full employment will cause the government deficit to decline all else being equal. This process in itself will reduce benefit spending as the unemployed stop receiving government checks as they find full time employment. Furthermore, these very same employees will begin to pay taxes. As a result, they on net reduce government debt while also increasing GDP as production increases. The opposite was true during the beginning of the recession. The recession caused government deficits to rise. The government deficit in part is an outcome. It is a result. It is not what we should be measuring our government's effectiveness by over especially during just one part of the cycle. The purpose of government is to enable to private sector to be as productive as possible. Somewhere along the line this thinking was lost as we seem to think that the government's financial issues supersede the needs of the private sector. Logically this is absurd as the government cannot face a solvency issue, only an inflation problem, or currency crisis; neither of which are happening now.

    The economic problems in today's reality reside on the household balance sheets NOT the government's balance sheet.

    • mannfm11   October 16, 2012 at 4:08 am

      They couldn't run surpluses because it would draw money out of the system. As long as the private sector is bound by statist endowed money creators, debts will expand beyond the capacity to pay. Also, scarce resources will be flushed down the drain.

  3. John Ballard   October 16, 2012 at 3:58 am

    “assets = liabilities + net worth”

    This "truism" strikes me as a layman exactly wrong. As someone in retirement I regard assets as net worth MINUS liabilities. Why? because if I drop dead that is exactly how my executor will determine the value of my estate.

    I get that liabilities can be considered as "assets" in the accounting sense. I was shocked to come across years ago the notion that banks regard my hard-earned money on deposit as a "liability" if it is not being leveraged to the penny (and recently, it seems, beyond). I was shocked and dismayed at first, then I realized that in the world of accounting and finance those numbers on the page are essentially different from the human being they represent. Unlike their human producers, the numbers are immortal.

    At the core of both your Modern Monetary Theory and what you have termed "Man on the Street" thinking is a misunderstanding of what those of us on the street face. Like those folks in Zimbabwe I know that no matter how much money you print or how cleverly you attempt to "prime the pump" inflation is the bear in the woods that will tear up the campsite. And no, I have no desire to go to a gold standard or any other. As every schoolboy knows, gold is just another element on the table of atomic weights and the price of gold is potentially as volatile as any other commodity depending on supply and demand. One may as well use pork bellies or orange juice concentrate as gold. (Or depending on where you live, potable water in the Mid East is also pretty valuable, I hear.)

    I am coming to the conclusion in my old age that modern economic theories and those of the man on the street are little different from the symbiotic relationship that bound the lord of the manor with his vassals, or a land owner with share croppers. I hate to sound Marxist, but the reality is that the moment a laboring person walks home his "value" evaporates until he reports for work the next day. But the inventory he leaves behind, which never belonged to him, can be stored, packaged and managed, like any other commodity (wine, art, popcorn, cotton candy, even ice sculpture) subject to the vagaries of the market, of course, but ultimately the property of someone other than the person who produced it.

    Entrepreneurs and members of cooperatives, of course, are not the same. But they have never been part of the larger economy any more than the gleaners of Old Testament times. But I do enjoy reading and speculating about the future as much as anybody.

  4. mannfm11   October 16, 2012 at 4:05 am

    I will take the Austrian position. First, no currency would have value without debt in the system denominated in it. The dollar has value because the world was hoodwinked into embracing it on a gold exchange basis. It was then used to collateralize currencies around the world and real estate and other assets in the US. Add to the international debt denominated in dollars.

  5. mannfm11   October 16, 2012 at 4:05 am

    Central banks issue notes based on the fact they gain possession of collateral, at least in the past, largely short term paper of high grade. They can always redeem the paper and draw in the money should there be a challenge. No so much now. I suspect the Fed would have to significantly raise the reserve requirement in order to take action against inflation, as their supply of marketable paper is not sufficient to defend the currency against attack. There is sufficient dollar debt domestically and internationally, not to mention as collateral in other nations, that only the indication the US government was going to attempt to pay in paper for what was once a private asset, could hyperinflate the dollar. At present levels, US government debt is probably servicable, provided the current position improvves and rates remain low. But, should the US continue to indicate it is going to spend without regard, the rest of the world would abandon the dollar, save for the marginal amount it needed to service its now worth debts. Destroying the retirement assets of Americans for some kind of statist rip off will not serve the future of the country or mankind well.

  6. mannfm11   October 16, 2012 at 4:06 am

    The true idea behind Austrian economics is to destroy the free ride the political class gets from issuing debt, credit and covertly stealing private assets. States only marginally have the best interest of their people as a priority. Democratic or totalitarian, this is the case. Thus they invent ways to steal from the people, abuse the people, brain wash the people and endow a few with privilege. The US Constitution prohibited titles of nobility. Seems that was all forgotten, as they prevail throughout society. Think deposit insurance is for the depositor? His money is the only money that can pay the losses and should the government move in to guarantee, it will be this very money needed to extinguish the loss. Thus a few benefit at the expense of the rest.

    • olly100   October 22, 2012 at 2:51 pm

      austrian economics is nonsense

  7. Ed Dolan
    EdDolan   October 16, 2012 at 4:33 am

    Thanks for all these comments–what a nice spectrum of differing points of view!

    I'm afraid I was not monitoring this comment stream closely, but instead, following the one over at the original post on Fabius Maximus ( http://fabiusmaximus.com/2012/10/12/43944/ ). Last time I checked, there were 88 comments there, including several of my replies to others' comments. In fact, if you check it out, you will see that, this "post" was originally submitted as a comment on a comment, and then promoted to an independent post by the FM editors. Anyone who is interested in MMT might like to take a look at the whole thread from start to finish–several tens of thousands of words, I think.

  8. Schofield   October 25, 2012 at 1:42 pm

    The question that many don't understand and therefore fail to answer is whether a sovereign government has no choice but to originate non-recursive (non-refluxing) money to accomodate Wynne Godley's reasoning on Sectoral Balances Accounting. We know that private banks originate recursive (refluxing) credit (money) under capital constraint rules. If we are able to understand that the two types of money are available to optimize an economy this substantially enlarges the control levers at our disposal as a society. It also finally allows us to let Keynes step out of a real politik closet of his own making that he entered despite acknowledging that Abba Lerner's Functional Finance was a natural progression of his own ideas. It highlights also the need to pursue a search for more nuanced and acceptable levers to control abnormal inflation.

  9. john newman   November 3, 2012 at 9:49 pm

    Start with "Zimbabwe for hyperventilators": http://bilbo.economicoutlook.net/blog/?cat=20

  10. john newman   November 3, 2012 at 9:53 pm

    Also of interest on the hyperinflation subject would be "Confessions of an Old Wizard" by Hjalmar Sacht. Within days of the Reichsbanks decision to quit honoring "emergency money" issued by private institutions in Weimar the inflation there ended.

  11. DeusDJ   November 4, 2012 at 9:12 pm

    my question to Ed Dolan: do you think it was appropriate for someone to come to you and ask you what the difference between mainstream economics and MMT is? Do you think it was really appropriate for you to respond without giving some sort of disclaimer that you aren't really qualified to answer the question? I mean, ok you had a nice stab at it, but because of the fact that you come at it from a completely different perspective you really cannot know all of the differences and understand why MMT even exists at all. for you to claim that we're disagreeing on marginal things is really calling neochartalists or MMT'ers idiots. Here's the deal: all of us agree or disagree with a position based on whether it jives with our beliefs. For example, we dismiss austrian economics based on their ideological positions, but then attack what they claim is economics by attacking the details. With neochartalism you don't really disagree with what it wants to do, which is to have people understand that in a monetarily sovereign system there is no reason why government cannot AND should not spend to provide for full employment. So why do you then dismiss it so handily, or at least not give it it's proper due? First of all it's as I said, you weren't really qualified to answer this question (and this is also because you're too brainwashed with your own way of thinking to really *know* what MMT says about all these issues). but second of all, you have read enough to where you made it explicitly known to your readers that you would be considered a "mainstream" economist, and as a result of how you know MMT'ers would perceive you you really didn't give the attention to detail that it deserved. Next time someone asks you about MMT, go to your friend here at economonitor randy wray and ask him if you aren't sure or just don't know.

    • DeusDJ   November 4, 2012 at 9:26 pm

      btw, I should have added, for you to say that MMT is only saying stuff a mainstream economist knew all along is really, really silly. Let me lay out MMT for you as simply as I can: it describes the reality of monetary systems under sovereign, non-convertible currencies. It explains how government spending actually drives down interest rates, and how government bonds are really only interest rate maintenance accounts (the point of this is to demolish the viewpoint that government spending crowds out investment, something mainstream economists like yourself try to do only through "empirical" evidence, whatever the f that means). Finally, it explains that our real resources are the population of any particular country and that the only way to bring prosperity to our children who are looking to a bright future is to build CAPACITY! NOT TO SAAAAVE MONEY! And if you build capacity, you're also saying that you will provide them with jobs. yes yes, this is basically what Keynes said. yet we also understand that the private sector always goes through business cycles, and that the best way to ensure full employment is through counter cyclical measures like a employer of last resort (also called job guarantee). Contrary to MAINSTREAM dogma of the existence of a natural rate of unemployment beyond which you have inflation, neochartalists say that setting a wage rate sets a floor to prices in additoin to providing for full employment. Again all of this also emphasizes that the national debt is a meaningless number in and of itself.

      now tell me Prof. Dolan, does a mainstream economist like you try to explain to people these fundamental tenets to good economics? MMT does not explain everything, for that you need a good education in heterodox economics (such as post keynesian price theory, or social surplus approach to the economy) but even if you were to only repeat these fundamental notions to a full employment economy going forward that would be fantastic. The problem is that you don't do this. Now whether that's a problem I'll let you decide, but the next time you and other mainstream economists want to say "oh but I already knew that!!1!1!!" then do us all a f'ing favor and START SAYING IT.

      • DeusDJ   November 4, 2012 at 10:50 pm

        and I forgot to add the chartalist part of MMT, which says that money is a ultimately a debt-credit relationship and that goes for state money as well, which is the kind of money we have (taxes impose a liability on the non-government sector, so state money becomes the unit of account).