Some Serious Criticism of MMT

Normally, criticism of Modern Monetary Theory (MMT) comes from libertarians, and is laughably ignorant and incompetent criticism at that.

But now some thoughtful criticism can be found here at the Naked Keynesianism blog:

Sergio Cesaratto, “The Spurious Victory of MMT,” Naked Keynesianism, July 2, 2012.

In short, MMT would be fine for

(1) the US,
(2) those nations with strong trade surpluses (say, Germany and Japan),
(3) those nations that seem to run near perpetual current account deficits but attract a lot of foreign capital (say, Australia), and
(4) even the Eurozone, if it were suitably reformed with a union-wide fiscal policy, would be able to achieve full employment via MMT-style policies.

But those nations, especially developing nations, that face real constraints on their current account deficits would perhaps find it difficult to maintain full employment via MMT, if balance of payments crises ensued in response to surging imports.

All this underlines the need for reform of the international payments system. It’s time to give developing countries the support from the IMF and World Bank (suitably reformed) that they need for infrastructure and industrial development to achieve some degree of export balance and internal wealth, to make MMT work.

To be fair, I think Bill Mitchell has tried to address some of these criticisms here:

“… a nation might have a food supply problem just because of location. Then they have to import food. For example, in Kazakhstan where I am working at the moment, they face really significant problems in winter getting fresh vegetables and fruits. Many of these nations also have very little that the World wants by way of their exports. The fact that such a country’s national government is sovereign in its own currency and can spent how ever much it likes in that currency will not solve the problem – there is not enough goods and services (in this case) food for the sovereign government to purchase.

In those situations, a country requires foreign goods and they need to export to get hold of foreign currency or receive development assistance from the rest of the World. In the latter case, I see a fundamental change is required in the role of the IMF (more or less back to what it was intended to do in the beginning). Where are country is facing continual current acccount and currency issues as a result of the need to import essential goods and services, the IMF might usefully act to maintain currency stability for that country. ....

It is often claimed that MMT does not consider exchange rate issues sufficiently. I do not actually know why people think that other than they are just rehearsing their fears that somehow violent exchange rate swings are a common occurrence. They are not. But the story goes that the amorphous financial markets are poised to pounce on any country that runs a budget deficit and will destroy their currency if they feel there is no intention to get back into surplus.

The other angle on this is that deficits apparently fuel import growth and plunge the currrent account into further deficit which then leads to depreciation (if floating) or a foreign reserve drain (if pegged). This, in turn, leads to expectations of further depreciations and the currency is sold short by hedge funds.

They never really say the same thing about a private investment boom which sucks in imported productive capital. Somehow adding productive capacity in the private sector is ‘more efficient or more productive’ than, for example, a large-scale public education policy which increases the capacities of the population in both the workplace but also general life.

They also never really say anything about private imports of luxury cars (so-called positional goods) into developing countries. ....

It is often claimed that MMT does not consider exchange rate issues sufficiently. I do not actually know why people think that other than they are just rehearsing their fears that somehow violent exchange rate swings are a common occurrence. They are not. But the story goes that the amorphous financial markets are poised to pounce on any country that runs a budget deficit and will destroy their currency if they feel there is no intention to get back into surplus.

The other angle on this is that deficits apparently fuel import growth and plunge the currrent account into further deficit which then leads to depreciation (if floating) or a foreign reserve drain (if pegged). This, in turn, leads to expectations of further depreciations and the currency is sold short by hedge funds.

They never really say the same thing about a private investment boom which sucks in imported productive capital. Somehow adding productive capacity in the private sector is ‘more efficient or more productive’ than, for example, a large-scale public education policy which increases the capacities of the population in both the workplace but also general life.”
Bill Mitchell, “Current Accounts and Currencies,” Billy Blog, October 25, 2009.

There is serious debate to be had here, not because of any hostility to MMT (indeed I personally regard MMT with sympathy as a more radical form of Post Keynesianism), but in the spirit of constructive criticism.