MMT theory fails – oversimplified framework and incomplete Keynesian economics

The critical theoretical question is: what are the macroeconomic impacts of changes in those stocks and the changes in AD that they finance? MMT sees the effects of increasing government financial obligations as entirely benign, and policymakers can use the financial space to costlessly boost demand and push the economy to full employment. There are no negative consequences from increasing government financial obligations; no conflicts with other policy objectives; and no policy implementation problems. In contrast, Old Keynesians had a more complicated view of the economy in which negative consequences, policy conflicts, and policy implementation problems are possible.16

As shown below, MMT's macroeconomic policy assertions follow from its oversimplified and incomplete Keynesian analysis. The lack of a dynamic economic model with behavioral content is a glaring professional failure. Unfortunately, instead of addressing that failure, MMT proponents have responded by claiming critics either do not understand it or have misrepresented it.

The difficulty of confronting MMT about those failings is compounded by its practice of walking back its positions and adopting those of its critics without acknowledgment. Examples include replacing the full employment threshold model of inflation (Wray 1998) with the Keynesian Phillips curve model, and also recognizing that capital controls may be needed to contain international economic forces that can potentially disrupt fiscal policy. Recently, Kelton (2019) has slipped in another long-standing Keynesian argument that stability of the debt–GDP ratio requires that the nominal interest rate be less than the nominal rate of growth (i < g). In doing so, she tacitly admits another financial constraint on government and continues the walking-back process. On the one hand, the walking-back process is reasonable: on the other hand, it dissolves MMT's claims regarding government being financially unconstrained.

3.2 Macroeconomic constraints and adverse policy feedbacks

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The second panel in Figure 2 concerns macroeconomic constraints and adverse policy feedbacks which MMT ignores and which undermine its claim that government is financially unconstrained. Though government has the formal technical ability to finance all spending by creating money, that technical ability is a will-o'-the-wisp because government is constrained by the reality of the potentially high economic costs of doing so. Using the ‘printing press’ to finance spending can create subsequent problems that leave government worse off measured in terms of its objective function.

In the real world, economic policy and policy outcomes are subject to multiple economic concerns and constraints. Those include concerns about government bond rates, private credit market long-term interest rates, financial market stability, the balance of payments and the exchange rate, the inflation constraint imposed via the Phillips curve, and policy implementation and policy credibility constraints. Those various concerns and constraints impact the economic costs and effectiveness of deficit-financed fiscal policy. However, they are all absent in MMT's oversimplified theoretical framework. In particular, MMT's framework is static and has little to say about how policy affects expectations of the future, and how expectations of the future have important immediate consequences.