Sunday Morning Twitter: Functional Finance/A Better World Is Possible Tweeting...
A better world—a better twitter—is indeed possible...
Suresh Naidu: I will stake my fancy economics job on this: Nothing in @Ocasio2018's policy program is inconsistent with a 2018 understanding of economics.
Wojtek Kopczuk: I missed it before, by my favorite colleague to disagree with. Congratulations on tenure @snaidunl!
Suresh Naidu: Sigh you drew me out. Tell me which policy is infeasible and not addressing some market failure?
Wojtek Kopczuk: They are inconsistent with the government budget constraint. And her MMT support is definitely inconsistent with mainstream economics.
Suresh Naidu: MMT is totally consistent with lots of mainstream macro when the economy is demand constrained (and fiscal theory of the price level when its not). it is unfortunate its adherents dont see that. And budget constraints are endogenous.
Ivan Werning: What do you have in mind?
Suresh Naidu: Oh crap a real macroeconomist. I think stripped of mysticism, MMT is really boils down to "fiscal mutipliers greater than 1", which could be true in demand constrained economy.
Ivan Werning: Let's not call that MMT.
Arindrajit Dube: Core propositions of MMT seem hard to differentiate from old school (“paleo” Keynesianism) in most likely states is the world ... maybe a difference is whether literally any level of public debt can be sustained at a non-accelerating inflation. Paleo Keynesians may say no.
Brad DeLong: MMT is Abba Lerner's Functional Finance with bells & whistles & some confusions. Manipulate G to stabilize Y & π, manipulate M to get an i to make debt finance sustainable, and rely on π to tell you if your policies are sustainable... If π↑ need G↓
Suresh Naidu: Clearest exposition of MMT in a tweet. Fight me deficit owls!
Ivan Werning: Interesting. I thought idea was broadly to use a feedback rule and push back against fixed doctrines.
Brad DeLong: Yes, but in some ways MMT or FF is the fiscal theory of the price level: if your government debt strategy moves in a long-term unsustainable direction, the FTotPL raises prices now. Hence successful stabilization of Y & π now guarantees no LR debt sustainability problem. Relies a little too heavily on the efficient markets hypothesis in the form of the FTotPL for my taste...
Ivan Werning: Seems wishful. Basically, I can't imagine how it plays out in any of the debt crises scenarios (which is where we should test it!) I know of, but maybe that is very "local" in my thinking.
Brad DeLong: Continuous-time fiscal theory of the price level kinda the wrong model for debt crises. Lots of Gennaioli-Shleifer "Oh f---! Why was I thinking that yesterday? We need to dump our entire portfolio now" phenomena which CT RE & FTotPL do not handle well...
Ivan Werning: Is there any relatively modern rendition of these Lerner ideas you recommend? Dynamics, stable steady states, and all?
Brad DeLong Haven't seen one. In one sense, it is too easy: in the fiscal theory of the price level, every G, T, M, & thus D path that stabilizes π satisfies LR government budget constraint. Add an exp Phillips Curve & Y, u are fine too. 3 instruments, 1 target, 2 policy degrees of freedom
Ivan Werning: People who think these things, have they ever visited latin america, say?
Brad DeLong: big distinction in fiscal running room between reserve currencies with exorbitant privilege, and all others. If MMT or MMT-light applies, applies only to 1st...
Wojtek Kopczuk: The reserve currency status is not given for all eternity
Brad DeLong: touché... if we reelect Trump here, we may find we have some identifying variance on this question...
Arindrajit Dube It’s probably not accidental that US w/ reserve currency exhorbitant privilege is where MMT arose: it’s the easiest to imagine it in this setting. One has to move substantially away from current equilibrium before it seems totally absurd.
Brad DeLong: But MMT does perform the valuable function of reminding people that, for the US (and Germany, and Britain, and Japan), r_{short-safe} < g, in which case government debt as safe asset provision is not a drag on but rather a financing mechanism for substantive government programs.
Brad DeLong: Sunday morning twitter threads like this remind me that we could live in the Republic of Plato rather than the Sewer of Romulus as far as social science and public policy are concerned, and that the internet can be an intellectual force multiplier rather than a hive of scum and villainy... A better world is possible! Toilers of all lands, unite! The full product of labor to the workers by hand and brain, with appropriate deductions for the social welfare function Lagrange multiplier for the temporary scarcity of produced means of production!!
