By Govert Schuller. 

Epstein, Gerald A. 2019. What’s Wrong with Modern Money Theory? A Policy Critique. Cham, Switzerland: Palgrave. (Amazon)

This small and critical booklet written by a progressive economist who has issues with both neoliberal austerity economics and MMT, should be quite informative for anybody with some background in MMT. First I’ll summarize his conclusions, secondly give my own take on some ideas, and lastly present the abstracts of every chapter of the booklet as written by the author himself.

From his last, concluding chapter, I summarize here his main conclusions:

1) Not all countries with a sovereign currency have the monetary and fiscal space to implement MMT policies of low interest rates and monetized debt. There is a hierarchy. The space exists for countries whose currency is also a key international currency (China, Japan, UK, EU and the US) with the US having the most space as it issues the dominant currency. Other countries will have reduced space depending on capital controls, ‘liberalization’ and size of economy. My sense is that the fiscal space available to countries is parallel to Wallerstein’s hierarchy of hegemon (USA) – core (USA / EU / Japan and satellites) – semi-periphery (BRICs and satellites) – periphery (underdeveloped countries).

2) And even if the US has most space, it is not absolute and eternal. The Eurozone and China also aspire to have ‘key currency status’, which is responsible now for the emergence of a multi-currency system, which will diminish the fiscal space of the US to run high deficits with low interest rates. Epstein even addresses the possibility for the US to lose the dollar’s “exorbitant privilege” during or shortly after another global financial crisis.

3) MMT’s policy proposals for the US actually come down to an American-centric policy with disadvantageous spillover effects for other countries, especially developing ones. Epstein’s makes the case for a more “internationalist perspective”, which he thinks is hardly or wrongly addressed by MMT.

4) Actually, the adverse impact of US fiscal policies on the rest of the world would be exacerbated because low interest rates and the absence of more strict banking regulations will result in asset bubbles and financial instability, even crises. I would add here that in chapter 6 Epstein discusses MMT’s understanding and misunderstanding of Minsky in connection with bank credit (by both regular banks and shadow banks) and its role in creating financial instability. This is a key chapter for monetary reformers to see MMT’s Achilles heel of ignoring speculative credit creation as what Epstein calls MMT’s “significant flaw”.

5) MMT claims that we do not have to worry about deficits. We can just spend our way towards an equitable society with big programs like the Green New Deal, free college and child care, and full employment. Epstein reasons that the combined cost of these programs will quickly lead to full employment (or full capacity) and then taxes, bond buying and cutting expenses have to kick in to prevent inflation. MMTers admit this in theory and propose other counter-measures, but it seems an afterthought. Therefore priorities have to be discussed and taxes put on the agenda. In the absence of such discussion, and when full capacity is attained, there will be factional fights over preferred programs while the banks, hedge funds and rich people are spared taxation and regulation.

This last point brings me to the idea that MMT might have a not so hidden agenda which leaves regular and shadow banks, hedge funds and the rich off the hook as they do not have to be regulated, reformed or taxed per MMT. They can continue their financialization schemes, reaping huge profits, creating financial crises and then getting bailed out. A fair question might be to ponder if this was the business plan of Warren Mosler–the originator and generous promoter of MMT–from the beginning so he could imagine himself to be a progressive without having to limit or regulate his financial schemes as a hedge fund manager. Epstein put the lie to that and provided the MR community with a sophisticated analysis of MMT, both its good policy goals, mixed bag of analyses and counter-productive means, and also moving the discussion into an international dimension.

As a last point I would like to add that Epstein frequently chides MMT for being soft on providing empirical backbone to their main claims. In that empirical spirit it strikes me as a huge difference between the manner in which two important, counter-intuitive claims have been put to the test. The first one is the idea that ‘deposits do not create loans, but loans create deposits’, now known as the bank credit theory of money and banking. The second is one of the main counter-intuitive claims of MMT that ‘taxes do not fund expenses, but expenses enable taxes’. The first one is proven and admitted by a large group of economists, entrepreneurs and bankers (both regular and central). The second one lacks that kind of rigorous testing to the extent that it looks more like an oft-repeated article of faith than a genuine result of research. I do not know of any central bank, national treasury or tax entity verifying or admitting this idea.* The hypothesis might appeal, especially once you understand bank credit creation, which underlying schema can then be projected on the ins and outs of government spending, but it still needs verification beyond the ‘intuitive approach’ of its origin.

Unfortunately the 100-page hardcover costs between 46 and 60 dollars. Hopefully a more affordable paperback version will come out soon.

* This idea is further developed in “Requesting Evidence for a Crucial MMT Claim“.

Epstein, Gerald A. 2019. What’s Wrong with Modern Money Theory? A Policy Critique. Cham, Switzerland: Palgrave.

Abstracts of the Chapters

Chapter 1

Introduction: Strange Bedfellows and the Rise of Modern Money Theory

Abstract Modern Money Theory (MMT) has attracted a great deal of attention and a large number of adherents in recent years. Also sometimes called Modern Monetary Theory, the doctrine’s appeal has largely come from its argument that governments that issue their own sovereign currencies do not have to pay for government expenditures—their central banks can simply create money. Mainstream and heterodox critiques have questioned the theoretical bases and the practical viability of this program. This chapter introduces my critique of these policy proposals based on their limited applicability, their possible dangers for developing countries, the advocates lack of attention to empirical evidence, and the dangerous political message it sends to progressives, among other problems.

Chapter 2

MMT Basics and the Sustainability of Money Financed Deficits

Abstract MMT is a type of post-Keynesian economics that has two distinctive components: (1) chartalism, a type of state money theory; and (2) functional finance, due to Abba Lerner, the idea that the role of taxes is not to finance spending but rather to inject or drain spending in order to maintain full employment without inflation. These ideas lead MMT advocates to claim that governments that issue sovereign money do not need to pay for spending, imply that the level of government debt has no negative consequences for such countries because such countries “cannot go bankrupt,” and suggest that the central banks’ role is to finance government spending, preferably at permanently low interest rates. This chapter investigates the general validity of these propositions.

Chapter 3

Institutional Specificity and the Limited Policy Relevance of Modern Money Theory

Abstract MMT-ers claim that their perspective applies to all countries that do not borrow extensively in foreign currencies and that have adopted flexible exchange rates. This chapter presents evidence that developing countries borrowing in their own currencies and adopting flexible exchange rates still have significant problems conducting full employment macroeconomic policy. Only those countries that issue major international currencies, particularly the US, has the possible potential to conduct MMT policy.

To enhance the ability of developing countries to pursue full employment macro policies, additional tools such as capital controls are likely to be necessary. While some MMT theorists have written about capital controls, their work is not sufficiently detailed and institutionally specific to assess the viability and effectiveness of such policies in practice.

Chapter 4

The Role of the Dollar as an International Currency and Its Limits in a Multi-Key Currency World

Abstract The United States, as the dominant issuer of the internationally accepted reserve currency, has the most ability to implement MMT style fiscal and monetary policy of all nations in the world.How secure is this role and how much can it be exploited? Major MMT figures, such as Randall Wray have argued that this role is so secure and exploitable that “we do not have to worry about it in our lifetimes”. This chapter explores this question theoretically, empirically and historically. I conclude that the world is moving to a multi-currency system that will make that role less exploitable by MMT style macro-policy.

Chapter 5

“America First” Monetary Policy and Its Costs

Abstract This chapter asks if the United States should pursue an MMT type monetary and fiscal policy even if it could, from the perspective of the emerging and developing countries. The chapter argues that while there might be some benefits for these countries, there could also be significant costs associated with floods and then sudden stops in capital flows, which can lead to significant macroeconomic problems for these countries. As a blueprint for a progressive macroeconomic policy, these impacts should be taken into account, including a more serious discussion of mitigating policies, such as financial regulations, capital controls and modifications in the US macro policy if necessary.

Chapter 6

The Mystery of the Missing Minsky: Financial Instability as a Constraint on MMT Macroeconomic Policy

Abstract There is a deep paradox in the MMT analysis: on the one hand, key MMT theorists like Randall Wray are followers (and experts) on the work of Hyman Minsky. They have also written extensively on financial instability and financial regulation. Yet, in the context of their MMT macroeconomic policies, they fail to address the potential financial instability dangers that might arise from these policies. I call this the mystery of the missing Minsky. The explanation for the paradox is that they assume that sovereign money, by definition, solves the financial instability problems laid out by Minsky. In my view, this represents a misreading of both Minsky and reality, especially in the context of modern, globalized, financial market structures.

Chapter 7

An MMT Free Lunch Mirage Can Lead to Perverse Outcomes: Fight Your Friends, Spare Your Enemies

Abstract Prominent Modern Money Theory (MMT) policy advocates often imply that progressive politicians do not need to discuss how to “pay for” important policy initiatives because sovereign money governments have no budget constraints. Some have even argued that discussing “paying for projects” is politically divisive. I argue the opposite. Implementing large programs like the Green New Deal (GND) would move the economy beyond full employment, requiring tax increases or spending cuts. Members of the progressive coalition supporting the policies would have to fight over who’s policies get implemented. This chapter explores the implications of this political struggle and political problems such as these with MMT’s approach. Some MMTers have only recently acknowledged that taxes or spending cuts would be needed to implement a GND.

Chapter 8

Conclusion: Contours of a Progressive Macroeconomic Policy

Abstract This concluding chapter summarizes the main arguments of What’s Wrong with Modern Money Theory? I argue that while I share many of the policy goals of MMT advocates, I have some significant concerns about the arguments and evidence for their proposals, and the likely feasibility and impacts of them, especially world-wide. To illustrate that better approaches do exist, I present an extended example of research PERI economists have done on an “employment targeted” macroeconomic policy for South Africa. I also briefly discuss work that PERI economists have done on programs to mitigate climate change. I discuss these in the spirit of promoting more programmatic discussions among progressive economists with similar policy goals.