Wednesday, June 27, 2012

Robert Murphy Mangles MMT

Robert P. Murphy has a new article here attacking people he calls “Greenbackers” and then MMT from an Austrian perspective:
Robert P. Murphy, “The Follies of the Modern Greenbacker Movement,” The American Conservative, June 27, 2012.
The trouble with his article is that Murphy touts it on his blog as some kind of serious critique of MMT (“I ask for a comeuppance by the MMTers in this new piece at The American Conservative,” he says). In fact, the article only really gets to MMT in the last few paragraphs, and does not actually seriously engage with it.

Murphy’s largely anonymous targets appear to be non academic writers and people who advocate “debt free fiat money” – not even academic proponents of MMT.

From a quick search, Murphy’s “Greenbackers” seem to be the following:
(1) Ellen Brown of (indeed Murphy refers to her specifically in his post).

(2) Stephen Zarlenga of the American Monetary Institute (AMI), and author of the The Lost Science of Money.

(3) other supporters of both Ellen Brown and Stephen Zarlenga’s theories.
I am not sure whether Michael Rowbotham and the now largely defunct Social Credit movement might be included in Murphy’s list of “Greenbackers,” but what should be perfectly clear is that his targets are not, as far as I am aware, self-identified supporters of MMT at all.

Let us now see below how virtually the whole article is a waste of time and essentially mangles what MMTers believe.

Take some of Murphy’s major assertions:
“It’s here where the modern Greenbackers go awry. Recognizing the absurdity of allowing bankers to issue new money, then lend it to the government (taxpayers) at interest, the Greenbackers want to cut out the middleman. They want the government to reclaim control of the printing press—which of course need not even “print” money in this age of electronic financial transactions—and to issue new money whenever its spending exceeds its revenue.”
Whatever the “Greenbackers” like Ellen Brown believe is irrelevant to MMT, for such people are not even MMTers at all. In fact, in an MMT system, bonds would still be issued to the private sector, to control interest rates, though there might be some direct purchases by a central bank from the Treasury.

And the system the MMTers propose really isn’t that new: under the ‘tap system’ of issuing government bonds after WWII, a number of Western countries (like Australia) for many years actually had their central banks purchase government bonds directly when such bonds were not all bought by private bondholders. The system is explained by Bill Mitchell of Billyblog:
“[around 1981] the Australian Office of Financial Management was set up as a special part of the Federal Treasury to management federal debt. Previously, bond issues were made using the “tap system”, whereby the government would announce some volume of debt it wanted to issue at a particular rate and then sell whatever was demanded at that yield. Occasionally, given other rates of return in the financial markets the issue would not be fully subscribed – meaning some of the Government’s net spending would be covered in an accounting sense by central bank buying treasury bills (government lending to itself!). The neo-liberals hated this system and regarded it providing no fiscal discipline on government. They knew that by linking deficits $-for-$ with private debt they could more easily mount the debt hysteria and maximize their pressure on government to cut deficits and withdraw from the market.”
Murphy then resorts to scaremongering nonsense:
“The fundamental danger is that an unchecked power to issue new money might prove too tempting for political officials, who would seek to curry favor with the public through various spending programs that were “paid for” through a general rise in prices.”
Again, whatever “Greenbackers” think is not what MMTers think.

Australia had a type of system not far from MMT in its “tap system” of funding deficit spending, and yet contrary to Murphy’s rhetoric the system wasn’t destroyed by evil “political officials” causing some hyperinflationary disaster with their profligate spending: Australia’s inflation rate from 1940 to 1981 was in line with other countries where bonds were always issued to the private sector.

Murphy next moves to ideas that have never been held in MMT:
“In the limit, one could imagine the Greenbacker program not only abolishing government deficits but also all forms of taxation itself. Every year, the government could decide how much it wanted to spend, and then simply “print” that much new money. The IRS could be shut down, and no one would ever need to fill out a tax form again. Besides the savings in explicit tax payments, individuals and businesses would be spared the expense of hiring CPAs. Furthermore, removal of the tax burden would instill a massive dose of “supply-side” incentives for more work and output.

At first blush this sounds like a wonderful proposal.”
Now I have to say I am not familiar enough with the works of Ellen Brown or Stephen Zarlenga to say whether they really think taxes should be completely abolished, but no MMTer, to my knowledge, has ever proposed abolishing taxation, since, as in Keynesianism, MMT sees taxation as a fundamental way to manage aggregate demand. Hence in an MMT system taxes would never be completely abolished. And, as I have said above, bonds would still be issued to the private sector to control interest rates.

Murphy then proceeds from the imagined scenario above to a “debunking” of the “Greenbacker program” by invoking the horrors of hyperinflation and currency collapse.

But it is at this point that Murphy’s article becomes the hogwash that I suspected it would be before reading it: his implied claim to have penned some serious critique of MMT all falls apart when he says:
“To be sure, today there is a sophisticated school of thought—called Modern Monetary Theory or MMT—that is aware of these difficulties. For precisely the reasons I have given, MMTers want to retain the government’s power to tax, in order to “extinguish” money from the system when price inflation is unacceptably high.”
In other words, all Murphy’s objections do not apply to MMT, for MMT never in the first place proposed abolishing taxes or completely “monetizing deficits”*.

Finally, MMT says that, even though deficits are not “financially” constrained, they face real constraints in the inflation rate, exchange rate, available resources, capacity utilization, the unemployment level, and external balance.

In short, Murphy’s article does not need to taken seriously: he does not even engage with anything but a straw man version of MMT.

* I know MMTers object to the phrase “monetising a deficit,” so I will place quotations marks around the phrase.


  1. Maybe Murphy was indirectly talking about ideas from this article by Randall Wray:Abolish Taxes

  2. I will read that article, but a quick skim through suggest to me it is tongue in cheek.

    Anyway, here is what other MMTers say about taxes:

    "MMT: Taxes function to regulate aggregate demand, and not to raise revenue per se."

  3. I don't think that Murphy is saying he is doing a serious critique of MMT - he is just predicting that he will get a backlash from MMT supporters as a result of the article. Based on the comments section of his blog in the recent past this seems like an accurate prediction.

  4. I didn't have to finish reading this knowing it was Murphy and that MMT is applicable to all sovereign currency issuers whereas Greenbacking applies solely to the US of A. So absolutely nothing to read here.

  5. Lord Keynes, you are hands-down the most irritable and trigger-happy person I have encountered in the blogosphere. I was NOT attacking MMT in the article. I even went out of my way to say you guys were more sophisticated that the Greenbackers; I said you knew that you needed to have taxes in case price inflation heated up.

    On my blog, what I meant was, if I even include "MMT" in my article--even if I'm praising them--that MMTers will bite my head off. Lo and behold, I was right.

    1. (1) Very well - apologies.

      (2) Perhaps you should have told your acolytes it was not meant to be a serious critique of MMT, for they appear on and run they mouths off, proclaiming that "Bob Murphy has taken you guys down again" etc, etc.

      (3) and in point of fact, I regard myself as a Post Keynesian, not an MMTer, as the name of my blog says.

    2. Okay, I appreciate MMT as description of the system and I have learned plenty from it. However, sometimes I think MMT wards off criticism of it's prescriptions (to the extent they exist) by excessive appeals to pedanticism and/or ad hominen. I remember for a while there, MMT bloggers answering criticisms of deficit spending by focusing on the fact that money is not printed, but rather typed into a computer. Which of course is true, but it led down the path of protracted descriptions of the mechanism of deficit spending and away from the discussion of the actual effects of deficit spending and whether it achieves the results it sets out to achieve. Now I believe it is important to get clear on the relevant mechanisms, and like I said, I have learned a lot about sovereign issuers from MMT but that combined with the inevitable insults to critics' intelligence and I can't help but smell a hint of misdirection... hmmm

    3. The macro effect of deficit spending is to keep up aggregate demand.

      All MMT is saying is that the excess savings of the non-government sector have to be reinjected into the spending circulation. There's nothing controversial about that - that is how the existing automatic stabilisers work.

      What MMT says is that the level of unemployment shows that the auto-stabilisers aren't strong enough. Either taxes are too high for the size of government or government is too small for the level of taxes.

  6. "In fact, in an MMT system, bonds would still be issued to the private sector, to control interest rates, though there might be some direct purchases by a central bank from the Treasury"

    That's not strictly true LK. Most of the MMT economists consider bond issue to be an anachronism of the fixed exchange era and that it should be swept away.

    The tool of choice in monetary policy is the central bank interest rate and bills from the central bank up to about three months.

    Beyond that they see no reason for a restriction of government borrowing from the central bank given that it is a zero sum operation anyway.

    After all the central bank determines interest rates in the system, and there is no reason the central bank can't determine the correct interest rate to charge the government (or for that matter the correct amount of lending appropriate to the current conditions).

    Neo-classical theory is hypocritical on this point anyway - if the central bank is independent then surely it can say 'no' to the government when it comes to the central bank for a loan and it can determine an appropriate interest rate to charge.

    We all know that the real reason for the ban on central bank funding is so that the private sector can take a cut of the transaction flow - risk free.

  7. LK, I do not think Wray's article is meant as a tongue in cheek. He often puts this articles as one of his selected publications. The title though is a bit misleading, he is not saying abolish all taxes but the point of the article was to show that the main ( and only ) use for taxes would be to provide incentives to individuals to do certain things (ex: tax in cigarettes to provide some incentive to decrease sales, transaction tax on bonds to reduce speculation, etc )

  8. You here this argument over and over again that what if the central banks would not be independent, then polticians would just print and print money endlessly.

    The argument is stupid because there is no alternative to good governance like Wray says. Have currency boards or fixed exchange rates kept politicians from spending and running deficits before?

    Murphy wants to redicule MMT because he is really angry with It. Why? Because It debunks all that he is preaching. So far he hasn't been able to come up with anything that makes sense to people who are not lunatics like him that save in coconuts.

    And you are right, his audience is not well educated. A gold bug cannot be educated in macroeconomics. It just doesn't make sense.

    1. Actually systemic factors can certainly cause or contribute to corruption. You are basically saying 'we should have peace and justice'

  9. A Manifesto for Economic Sense-Paul Krugman and Richard Layard