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Charitable interpretation of MMT: 1) Phillips curve is very flat, 2) Government debt limit is very high (say 500% of GDP) so shadow value of fiscal space is low, 3) Below debt limit, r<g. 4) Central bank reserves pay interest. So, money and debt are the same thing. 1/8
The truth is that we don’t know for sure that this view is wrong. (4) is correct. Plenty of evidence supports (1) and (3). However, (2) is much more uncertain. 2/8
MMT proponents like to point to Japan. Totally fair. But Japan is quite an outlier. Most countries have faced problems at much lower debt levels. 3/8
Another example sometimes used is Britain after WWII. But this example if flawed. Britain and many other countries used a heavy dose of financial repression to manage and reduce their high debt levels in the early post-WWII period. 4/8
Proponents of MMT may counter: Let’s reinstitute some financial repression! Their policy prescriptions are certainly more likely to work if we do. And the 3rd quarter of the 20th century was pretty good in terms of growth despite (or perhaps because of) financial repression. 5/8
Proponents of (my charitable interpretation of) MMT may be right. So, why not try it and then stop when we start facing problems? 6/8
Two reasons why this may not be worth the risk: 1) Financial crises can happen all of a sudden. 2) Even if we don’t hit the debt limit, we may get close and therefore be using fiscal space that has high shadow value. It would be very hard to tell. 7/8
I am skeptical about MMT. But proponents and skeptics seem to mostly be talking past each other. This was an attempt to engage productively. If you reply, please reply constructively. 8/8
