Framing the Progressive Platform


New Economic Perspectives has the article Framing the Progressive Platform. The following phrase is repeated several times:

This monetary system—which has been willfully misunderstood, but operational now for over half a century—pays Americans first, then collects taxes second.

Of course the author is referring to Modern Money Theory (MMT).

I have been a proponent of MMT for quite a while now, but I find it disturbing that most proponents of MMT do not notice (or do not address) the holes in MMT theory that are big enough to drive a truck through.

The main accounting identity that drives MMT is the sector balance. What MMT ignores is that accounting is a static snapshot of accounts, but the real economy is a dynamic system. Even quasi static analyses are inadequate. When a bank gives a borrower money to buy things now, but also enters a debt that must be repaid over the next 30 years, these two things perfectly cancel each other out in a static sense. Dynamically, buying now and paying later has significant economic impact.

Then there is mark-to-market. When we want to calculate our net-worth including our stock holdings, we value each share we own at the price of the last stock market transaction in that stock. For small, individual holders, you can sell out your stock position at very close to the market price snapshot. Large holders of stock, and the economy as a whole cannot liquidate their entire positions at the snapshot market price. We see the falsity every day of mark-to-market. As the market indices rise and fall every day, there are billions, if not trillions, of dollars created or destroyed by the end of every day.

Steve Keen (see the post Oliver Green in conversation with Steve Keen, Contrarian Economist and Author) seems to be one of the few that understands the essential dynamism of the economy that must be included in any model that wants to be accurate over a wide range of conditions.

If you want to sell the public on your model of how money works, you’d better have a darn good model that passes the tests of a few simple observations like the ones I have made above.

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