Being somewhat fascinated by the ideas presented in Modern Monetary Theory (MMT) I read your piece with interest. When exploring whether a new idea makes sense, I like to read the critics.
I will not claim to know exactly what MMT is, but I will try to challenge or question some of your criticism of MMT hopefully to gain better understanding of what is and isn’t possible with MMT.
Circular Argumentation Regarding the Role of the Central Bank
One part of your argument which I did not find convincing was that you argue that MMT advocates are wrong to merge the central bank and treasury into just “government,” since the central bank is independent.
However that is not a convincing argument because the central bank is independent only because the government made it such. In principle government could change the law to print the money itself and spend that printed money. Whether that is a good idea or not is of course an entirely different question.
You also somewhat seem to acknowledge that as you later go on to explain the virtues of an independent central bank. If treasury and the central bank was effectively merged there would of course be no independent central bank.
Soft Money and and an Independent Central Bank
What I did think was very important and enlightening criticism of MMT was your discussion of what you call soft money: That if government could freely print whatever money they wanted anyone charging the government would be prone to overcharging and thus causing waste as government spends too much on services and goods which could have been cheaper.
Your argument that the central bank must be independent to create discipline in spending and create trust in the market is convincing.
But I will challenge you with an idea. In principle we are not limited to only making the central bank independent. We could make any other part of the government independent of the whims of politicians.
Independent Tax Collection
If we need some way of hindering the government from spending freely, why does that need to be the central bank. Could we not equally well create an independent tax collector service?
Basically you put a part of the tax collection outside of government control. It could be collection of a specific tax such as sales tax. This organization is responsible for following inflation and increase or decrease the sales tax in response to observed inflation.
Now this may be a horrible idea for a number of other reasons. But I am more interested in the principle here, whether I have understood the function of the central bank properly. In principle we should be able to constrain the amount of money available to government in many different ways.
We should be able to weigh the pros and cons of each method.
Independent Tax Collection vs Independent Central Bank
So let me just think out loud about the implication of arranging this differently. Currently the pressure by business is on government to cut taxes and hence cut spending. Business cannot readily influence the central bank, so their focus is on manipulating government.
Now you may say “manipulate” is a crude word to use here, but especially how American politics has developed I would say that is an apt characterization. Money has hijacked government to such a degree that it is the interests of private enterprise which tends to dominate. They tend to pay most of the lobbyists and pay most of the political donations.
With independent taxation and free printing of money the game changes. Incentives and political pressure change in nature. Voter would not necessarily push politicians to spend more money of popular programs because they know the independent tax collectors would then increase the tax rate.
On the other hand if tax rates are very low people will be more eager to ask government to invest more in health care, education, infrastructure etc. This is the problem we have today. Inflation may be really low but government can still be constrained in its ability to spend despite plenty of free human resources being available.
You have governments like the German which is extremely anti spending despite having plenty or room to spend more. The household view of economics is quite ingrained in many people. There is great antipathy towards spending more than you take in even if there is considerably slack in the economy and considerably opportunity to spend more.
The other major problem that I see that perhaps MMT could help with is the extreme financialization of the economy. It seem to me that a big part of this problem is caused by the money created by the central bank always going through the banks which are in effect the ones getting the soft money. This goes back to your criticism of MMT potentially giving soft money to government which it will waste. While that may indeed be true, have we in effect not simply created that problem another place?
The 2008 crash seems to me to essentially boil down to an issue with banks having too much soft money. Since money was cheap and plentiful for them they pushed it on people buying a new home rather recklessly. Channeling all this central bank money effectively through the banks you are enriching a large class of people who don’t necessarily do all that much for the economy.
The compensation to the finance sector relative to its contribution to the economy seems today to be grossly in excess. Sure government soft money will create other problems but that will mean we may end up overly compensating people delivering services to the government. However is that any worse than overly compensating bankers?
No Silver Bullet?
To me the issue seems to be that there is no silver bullet. Regardless of what system you opt for you will get into problems. Perhaps that is why society experience pendulum effects. When opting for one arrangement of the economy, there will just be a question of time before that arrangement starts getting heavily abused.
My inkling is that monetarism may have run its course just as Keynesian economics ended up getting abused in the past. It is as in physics, once you measure a system it changes. Or perhaps you can compare it to antibiotics. Use too much of it and it ceases to work anymore. The rules change.