Thomas Palley claims MMT fails to provide plausible macroeconomics​

12 Apr, 2019 at 15:29 | Posted in Economics | 11 Comments

Modern Money Theory (MMT) asserts society can enjoy a range of large
government programs for free via money financed deficits, all without inflation …

tomRecently, progressive Democrats have called for a range of programs … All of them can reasonably be argued for. However, there is also the question of how they will be financed. Proponents of MMT assert that is a non-problem and the programs can be financed by “printing” money and without causing higher inflation … However, simple back of the envelope macroeconomic arithmetic shows that assertion to be completely implausible …

Keynesians have long recognized that money financed deficits can be used to finance programs when the economy is away from the full employment-inflation boundary. However, that financing option is temporary to the extent that those deficits generate developments which ultimately drive the economy to full employment. The case for progressive programs rests on their own merits, which should constitute their political foundation. Financing of those programs should be rooted in plausible macroeconomics, which MMT manifestly fails to provide.

Thomas Palley

Palley argues that “money financed deficits” will generate inflation if they are part of a permanent program unless they are paid for with taxes. It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off (in part influenced by Abba Lerner’s Economics of Employment (1956) and its discussion of what has become known as stagflation) and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfil our basic economic objectives — full employment and price stability.

That government s can spend whatever amount of money they want is a fact. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much of government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

Much of the critique that Palley delivers was also waged against Abba Lerner’s ‘functional finance’ approach — on which much of MMT is based — back in the 1940s and 1950s. Even if some of today’s ‘Keynesian’ economists do not understand Lerner, there once was one who certainly did:

I recently read an interesting article on deficit budgeting … His argument is impeccable.

John Maynard Keynes (CW XXVII:320)


  1. Given

    and advocacy for monetary reform for Europe – It seems to me all parties are on the same end of the progressive spectrum.

    I am reminded of a conference attended by Kumhof of the IMF, and Professors Tideman and Hudson, in which a debate was dividing two related groups on monetary reform. Eventually it seemed clear that the differences were small and some were semantic. (at 30:35 2 minutes, and 42:30 for two minutes )

  2. […] economist Lars P. Syll wrote a critique of Palley’s latest papers (April 12, 2019) – Thomas Palley claims MMT fails to provide plausible macroeconomics​ – he was met with this response from […]

  3. MMT says that you can fund free education K-16. totally free healthcare, and welfare by deficit spending. That is the debts are paid off by the created money. And it can be done without excessive inflation. The created money expands the economy and the extra activity will tamp down inflation. Also there will be a vast fiscal space, certainly today, into which spending can occur without inflation issues. The only problems come when already the economy is at full employment and is consuming too many local resources requiring them to be imported. Tax use is to moderate spending without lowering the growth potential of the economy.

  4. Eat = think. Voice to text.

  5. Mmt usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation.

    I eat a lot of critics miss this crucial point. Along with idle resources are not inherently inflationary. This includes labour.

    And if it is not like we are saying to do all these things at once. We do not know what resource constraints bottlenecks we may come up against as we implement these things. we will find a way to reduce these bottlenecks the limiting inflation risk.

    Even if there is inflation if we have good effective progressive tax brackets that may be enough to offset it. There are also many other ways we could use offsets.

  6. “Proponents of MMT assert that is a non-problem and the programs can be financed by “printing” money and without causing higher inflation (Kelton et al., 2018)”

    Do you have a proper reference for that? And for context, a direct quote from the article. I doubt very much they said anything like what you claim, without specifying conditions and constraints also.

  7. Dear Lars,

    (1) Your blog post is misleading to the point of being dishonest.

    My paper on “Unpleasant Keynesian Arithmetic” examines the narrow policy proposition currently being asserted by MMT proponents that the US can have a massive social program spending spree financed by printing money without inflation.

    Here is what I write (p.3): “Recently, progressive Democrats have called for a range of programs that include Medicare for all, expanded Social Security, free college tuition, and a Green New Deal….. However, there is also the question of how they will be financed. Proponents of MMT assert that is a non-problem and the programs can be financed by “printing” money and without causing higher inflation (Kelton et al., 2018). However, simple back of the envelope macroeconomic arithmetic shows that assertion to be completely implausible.”

    Keynesian macroeconomic arithmetic says that the program will have to be financed with taxes and fees or else there will be inflation. Q.E.D.

    (2) Your blog post is about functional finance and the macroeconomics of money financed budget deficits. I have a separate paper titled “What’s Wrong with MMT: A Critical Primer” that addresses that issue, among others.

    (3) The bait and switch you have engaged in is intellectually dishonest and is characteristic of the MMT blogosphere.


    Tom Palley

    • Please show us your “simple back of the envelope macroeconomic arithmetic”.

  8. How about paying for desirable public services and infrastructure by recovering their value to fund them, instead of giving that value away to landowners in return for nothing? MMT advocates don’t address the fact that the value of all the desirable programs they want to pay for by issuing money will be captured in its entirety by landowners, and consequently provide no net benefit whatever to the putative beneficiaries.

  9. “Palley’s Critique of MMT: Post Keynesian or neo-Keynesian? by Philip Pilkington
    So, Tom Palley has a new criticism out of MMT. Frankly, I’m not hugely concerned with the critique itself. The criticisms are old and I don’t think that Palley will convince anyone of the ills of MMT that are not already convinced (it’s that type of paper…).

    What I have been wondering, however, is what to make of the substance of the paper itself. What I mean is: is this a Post-Keynesian critique of MMT? Or is it something else? I’m not sure that I want to answer that question just yet. For now I’m content to raise it.

    What might this something else be? Well, let’s just peruse some of the features of the paper that stood out to me. First is the implied assertion that any economic work that does not use “simultaneous equation models with dynamic adjustment mechanisms attached” are not doing “professional” economic work.

    For the last seventy years the language of macroeconomics has been small scale simultaneous equation models with dynamic adjustment mechanisms attached to explore issues of stability. Proponents of MMT have a professional obligation to provide such a model to help understand and assess the logic and originality of their claims. (p2)

    Well, that seems to me to disqualify a good deal of Post Keynesian work to the dustbin of history. I suppose the General Theory itself does not fall under Palley’s criteria, given that it is over 70 years old, but certainly most of the work done by the Cambridge Keynesians would not meet Palley’s “professional” standards. Indeed, Joan Robinson and Nicholas Kaldor — both of whom severely criticised static equilibrium based modelling, which is exactly what Palley is referring to — would be seen as having attacked basic professional standards in economics.

    That, of course, raises the question of the place of historical time and uncertainty in Palley’s critique. Since the “professional” criteria he requires obviously eliminate historical time and uncertainty any Post Keynesian writing that integrates these — to my mind this encompasses all true Post Keynesian writing — also falls to this critique.

    Honestly, I wouldn’t have even bothered making this point if it weren’t for the content of the rest of the paper. I probably would have chalked it up to an unthought remark made in the midst of a heated critique. But what the rest of the paper pushes raises even more questions about from what standpoint it is criticising MMT.

    Throughout the paper Palley seems extremely sympathetic to the ISLM framework. This will appear strange to Post Keynesians who are aware how unpopular this framework is among their kin. Joan Robinson provided extensive critiques of the IS-curve, endogenous money theory indicates that the LM-curve should be flat (although Palley seems to indicate that all the old Keynesians knew this anyway) and John Hicks famously rejected the framework because it didn’t incorporate time and uncertainty. To me, one of the defining features of Post Keynesian economics is the rejection of the ISLM curve.

    Next Palley introduces his theory of inflation and it is… the Phillips Curve. According to Wikipedia the two defining features of neo-Keynesianism or the neoclassical-synthesis — the foes of the Cambridge Keynesians from the 1950s through to the 1970s — are, you guessed it, the ISLM and the Phillips Curve. I think that’s a fairly accurate representation too.

    In his discussion of the Phillips Curve, which he supports, Palley claims that leading MMT economist Bill Mitchell “is… a strong advocate of the traditional Phillips curve” (p13). As evidence of this he links to this blog Mitchell wrote in response to Palley’s last critique. But in this blog Mitchell explicitly states that MMT seeks to circumvent the Phillips Curve. He writes that the MMT framework is “a way of interrupting the dynamics that underpin the Phillips curve”. So, there is some contradiction here. Clearly Mitchel is not the “strong advocate” of the Phillips Curve that Palley thinks.

    But the real confusion comes when Palley claims that he and the other MMT critics are “adopting traditional Phillips curve theory” and that this theory indicates that “lower equilibrium unemployment is always associated with higher equilibrium inflation” (p13). However, in the paper that he wrote in 1994 which he cites to buttress his claims that the Phillips Curve is correct Palley wrote:

    [T]he model showed that inflation is determined by the rate of aggregate nominal demand growth, and not by the rate of unemployment as claimed in the neo-Keynesian Phillips Curve literature. (p116)

    So, which is it? Is this a trade-off between inflation and unemployment that Palley is referring to? Or is it a trade-off between inflation and aggregate nominal demand growth? Because it seems to me that there is a very large difference indeed.

    In the specific case under scrutiny it is clear that the MMT Job Guarantee program would certainly cause unemployment to fall. But it would not clearly cause aggregate nominal demand to grow. Certainly, there would be a once-off upward adjustment in aggregate nominal demand as people shifted from the dole onto the Job Guarantee but this demand would not continue to grow provided the JG wage remained stable.

    But I feel that we are getting too far off track here into the specifics of the debate. What Palley seems to be offering in the paper is defence of the ISLM and the Phillips Curve against MMT. He also appears to be claiming that proper macroeconomic work should be done using static economic models and that any work that is not done in this way is not “professional”. So, the question that I wish to raise here is, given all of this, is Palley’s critique Post Keynesian or is it neo-Keynesian? I genuinely do not know.”

    • Philip raises many just questions there. Thanks Jan 🙂

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