Great Leap Forward


It really rankles critics that MMTers claim they predicted the Euro disaster before anyone else saw it coming.

The only problem with that is that we never said such a thing. All we’ve said is that we got it right. If others also got it right, that is great. If they said it first, even better. Rewards and Awards all around. I expect they are very few in number, part of a very select group that understood what was wrong with the Euro.

My colleague at Levy, Michael Stephens got it exactly right. What matters is to understand WHAT was wrong in the set-up in order to formulate the right policy to get out of the mess:

As discussed at GLF recently, Sergio Cessaratto (and others) think we got it wrong–our claim is “spurious”. MMT is not useful for helping to understand the crisis. It is not a sovereign currency crisis, it is a balance of payment crisis. They have not yet explained why South Dakota or Alabama or Mississippi is not suffering the fate of Greece.

Along comes another critique, by Tom Palley, whose claim is not only does MMT get it wrong, it was not first. Nay, Tom got it right before MMT. I won’t get into that because I could care less who was first. If it was Tom, give him applause.

Yet Tom’s argument is that MMT has always been flawed. First, it supports full employment. More specifically through the Job Guarantee. He has always opposed that. You see, he worries that if we give jobs to the poor, they’d buy food and that would drive up food prices for the already employed. My view is that is wrong on so many levels, especially for anyone who claims to be progressive. Yes, the poor need to eat. Give them jobs so they can get food. If that means Tom has to pay higher prices, so be it. I don’t believe his story, anyway. That is related to his second complaint.

The other argument made by Tom is that MMT ignores all the bottlenecks that would be created by full employment. Those would cause inflation. Hence, better to keep people unemployed so they cannot buy food that would create bottlenecks in the production of foodstuff. My colleague at UMKC, Mat Forstater, takes issue with this claim. MMT has from the very beginning dealt with the bottleneck issue. Let me provide a long quote–with citations–from Mat (note the Job Guarantee is also called Employer of Last Resort–ELR):

“Tom Palley says that MMT “ignores the effects of sectoral bottlenecks and imbalances” (see ). In 1997, shortly after arriving at the Levy Economics Institute to work on this project, Levy issued a working paper dealing with exactly these issues, “Selective Use of Discretionary Public Employment and Economic Flexibility”

In a note on “Institutionalist Approaches to Full Employment Policies” from the JEI in 1998, I wrote that: “involuntary unemployment is not simply an “aggregate” problem. The obstacles to full employment also include issues of sectoral proportionality and balance, and the bottlenecks that characterize the technological structure of production of a dynamic modern capitalist system running at high levels of capacity utilization.”  ( )

I went on to argue that the ELR proposal addresses unemployment due to both insufficient effective demand and ongoing structural and technological change. The same argument was addressed in the following:

“Flexible Full Employment”

“Public Employment and Economic Flexibility”

“Full Employment and Economic Flexibility”

and a half dozen other papers. All these papers also recognize that these structural factors may be a source of inflation, before full employment is reached, so Tom Palley’s additional claims that MMT assumes an “L-shaped supply schedule” (though we don’t use the flawed AS-AD framework or ISLM, but if we interpret what he’s saying as “does not recognize structural factors that can be a source of inflation at high levels of employment and capacity utilization”), and “lacks an adequate theory of inflation” (if we interpret this similarly), are also suspect. (In fact, a similar reply as this could be easily replicated for every one of his claims.)

Interestingly, if one searches the phrase “sectoral bottlenecks” on Google scholar, the fifth entry that comes up on the first page is the paper, “Flexible Full Employment” (which it says has been cited 51 times): (see ). If you add the word “rigidities” to the search then that paper is the first hit, the paper “Public Employment and Economic Flexibility” comes up third, and the “Selective Use…” paper comes up fifth, all on the first page.

[Editor's note: I wonder where Tom's own papers come up on this score? Well, being an inquisitive sort, I scrolled through the Google pages but could not find any.]

Malcolm Sawyer many years ago made essentially the same claim, so my reply to him also addresses this question:

One of the problems, of course, is that anyone can publish a claim on a blog or write it in an e-mail or post it on facebook, and even if it is totally without substance, others will read it and repeat it, because who would believe that someone who is an accomplished scholar, as well as a colleague and even friend would simply ignore a couple dozen publications going all the way back to 1997, especially when they were in attendance at, conservatively, at least half a dozen sessions and conferences where the argument was presented?

As I wrote in reply to Malcolm Sawyer, if one wants to contend that the argument is for some reason invalid, then fine, but then it should at least be recognized that supporters of the job guarantee claim that the program addresses the challenges that arise from “sectoral bottlenecks and imbalances”, but Tom Palley says MMT “ignores” them.

I’m sure he will, as an ethical person and scholar, publish an immediate retraction on his blog, and send it around the world on e-mail lists, and to everyone in his address book, and at the end of this sentence I will begin holding my breath.”

As readers of this blog know, Tom commented last week on the blog, pushing his own priority in predicting the demise of the Euro. I’m also holding my breath to see if he will recognize that he has mischaracterized MMT’s supposed failings.


Scott FullwilerJuly 26th, 2012 at 3:17 am

So, if MMT got it wrong by ignoring BoP, then doesn't that also mean Palley got it wrong? Didn't see any BoP in Palley's quote. Yet Tom refers approvingly to Sergio's post in his critique. Sigh.

RamananJuly 26th, 2012 at 12:51 pm

"They have not yet explained why South Dakota or Alabama or Mississippi is not suffering the fate of Greece."

That's simple. Fiscal transfers compensate.

Regions in the US receive fiscal transfers: even Martin Feldstein figured it out in "The Case Against EMU" written for The Economist

I think for the case of the Euro Area setup, the first to point this out probably are Wynne Godley and Ken Coutts in 1990.

LRWrayJuly 26th, 2012 at 1:35 pm

There is no Uncle Sam in Europe to do it; and "transfer" is the wrong word. Uncle Sam issues the currency and does not have to reduce income in one state to increase it elsewhere. That is precisely the problem identified by MMT. But neither you nor Feldstein recognize that–your analysis is gold standard. Yes it is "fiscal", no it is not "transfer". If we had a fixed economic pie then in real terms we'd be transfering real stuff to the poor regions. But that ain't true, either, as outside WWII we've never operated continuously at anything approaching capacity.

RamananJuly 26th, 2012 at 2:30 pm

Well aware of the "incredible lacuna" which is what I wrote in my comment about the absence of fiscal transfers. – don't need "em em tee" to understand it.

RamananJuly 26th, 2012 at 2:33 pm

Btw, Feldstein does recognise this:

"A further reason for a single United States currency is that the American fiscal system provides an alternative source of regional stabilisation, making regional monetary policy less important. Each dollar decline in America's real GNP reduces taxes by about 30 cents and increases transfer payments by about 5 cents. These national fiscal responses are paralleled at the state and regional levels. When the Massachusetts economy turns down, the residents of Massachusetts send fewer tax dollars to Washington and receive more in transfers from the federal government. To the extent that the Massachusetts downturn is greater than the downturn in the nation as a whole, the result of this fiscal structure is a permanent transfer to Massachusetts. Thus even though Massachusetts lacks an
independent monetary policy, a decline in the state's economy automatically triggers a stabilising shift in fiscal policy. "

RyanVMarkovJuly 26th, 2012 at 3:08 pm

MMT loves any kind of critique, with or without merit.
It eats critique like a warm bread making it stronger and even more popular than before. .
To fellow-critics: Keep ‘em coming! You are doing a great job!

Scott FullwilerJuly 26th, 2012 at 3:18 pm

Good for him! Still, there's the additional point that Mass. doesn't need to stand behind the FRB of Boston or the banks in Mass. Did he get that one, too?

Bill ClayJuly 31st, 2012 at 5:21 am

Randy, thanks to all you MMTers for continuing to bat down the same old same old "criticisms" that really just express ignorance of the material. I guess after a long enough spell of this abuse (unexpected in academia, at least by those of us on the outside), one gets over the doubt, "Are they REALLY all wrong or am I just crazy?"

One nit: your "reply to Malcolm Sawyer" link goes to a UMKC Outlook server that requires authentication, presumably as UM student, staff, or faculty. Is there a publicly-accessible link?

CalgacusJuly 31st, 2012 at 10:19 pm

Bill: Also -as always, that reply to Sawyer paper by Forstater is a gem. Wish he wrote more for the intertubes, as he is wonderful on the history, and the literature. Thanks for making the nit query – made me look at the paper again & led me to this fine (free downloadable) book in the bibliography. Nels Anderson's 1938 The Right to Work.

EEBAugust 8th, 2012 at 6:35 am

Yes, but that is true of EVERY state in a substantial downturn/ depression. And to that extent, it is not a "transfer", except in the sense that income is "transferred" from the Federal gov't. to the states- perhaps all 50 of them! Just because (say) California gets more does not necessarily mean that (say) Florida gets less. So, thinking of this in terms of "transfers" from "rich" states to "poor" states is not, in general, a valid methodology.

Ray PhenicieAugust 19th, 2012 at 7:25 pm

"One of the problems, of course, is that anyone can publish a claim on a blog or write it in an e-mail or post it on facebook, and even if it is totally without substance, others will read it and repeat it, because who would believe that someone who is an accomplished scholar, as well as a colleague and even friend would simply ignore a couple dozen publications going all the way back to 1997, especially when they were in attendance at, conservatively, at least half a dozen sessions and conferences where the argument was presented?"

Gresham's Law is at work here, but with information instead of money. I'm not really a troll its just that other people have said this so succinctly:

from Wiipedia;
Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."

Cheryl Boudreau has written a paper entitled:
Gresham's Law of Political Communication: How Citizens Respond to Conflicting Information

"Although citizens are often exposed to conflicting communications from political elites, few studies examine the effects of conflicting information on the quality of citizens’ decisions. Thus, I conduct experiments in which subjects are exposed to conflicting information before making decisions that affect their future welfare. The results suggest that a version of Gresham’s Law operates in the context of political communication. When a credible source of information suggests the welfare-improving choice and a less credible source simultaneously suggests a choice that will make subjects worse off, subjects make worse decisions than when only the credible source is available. This occurs because subjects base their decisions upon the less credible source or forego participation. This occurs mostly among unsophisticated subjects, who are more easily led astray. These findings reveal important limits to the effectiveness of credible information sources and suggest how political campaigns might strategically use conflicting information to their benefit. "

Robert SearleFebruary 7th, 2013 at 2:54 pm

The ideas of MMT are incomplete without Transfinancial Economics, or TFE. The latter is similiar though to the former about the idea of the need to create debt-free money to a certain extent. In TFE this is like the Primary TFE, so to speak. However, with Advanced Stage TFE it would be possible to phase in

a)… powerful direct electronic controls at the point of transaction to deal with inflationary pressures rather than continually raising interest rates, and taxation.

See my "working paper" on Transfinancial Economics

b),,, it would be possible to create a "live" profile of the entire economy in real-time. This would give future economists a far better, and a far more accurate understanding of the actual workings of the economy as never before in human history.

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Håvard Halland Håvard Halland

PHåvard Halland is a natural resource economist at the World Bank, where he leads research and policy agendas in the fields of resource-backed infrastructure finance, sovereign wealth fund policy, extractive industries revenue management, and public financial management for the extractive industries sector. Prior to joining the World Bank, he was a delegate and program manager for the International Committee of the Red Cross (ICRC) in the Democratic Republic of the Congo and Colombia. He earned a PhD in economics from the University of Cambridge.