How China uses MMT & how MMT is a description of ‘Minsky Socialism’.

The current function of economics twitter is to argue about MMT. Every pundit right up to the best minds in economics have weighed in on the subject. It’s therefore maybe a little arrogant of me to jump in, especially after Paul Krugman has just stepped into the ring. However, I do think there is a point nobody has made yet so I’m going to have a stab at it and it’s this:

I think China basically does what the MMT people are advocating for.

It’s extremely difficult to break through what Krugman calls “MMT Calvinball”, the infuriating practice of MMT advocates saying one thing in one context and the opposite somewhere else. If anyone outside of MMT says that MMT is in favour of funding initiatives entirely with deficit spending then it’s sacrilege of the highest order, but if Stephanie Kelton says it in a Bloomberg article then it’s fine. MMT advocates can deny it all they like but I’ve spent a lot of time trying to understand what it is that MMTers are actually saying and it - is - not - easy!

However, I think it becomes a lot easier if you use China as the reference point. The Chinese government doesn’t restrict itself to the policy tools that Western governments use and when it wants to enact a stimulus or a constraint on the economy then that might come in the form of interest rate changes or deficit spending by the national government but it might equally come in the form of a directive from central government to banks to change their lending standards such that they lend more to small and medium-sized privately owned businesses…with a strong hint that this is not just a kind offer that banks may act upon if they wish but really more of a command. That, I think, is pretty much MMT in action.

If you strip out all of the rhetorical flourish of MMT on the advocacy side and try to understand its policy recommendations I think this is the answer you get- MMT advocates for the government using multiple interlocking policy levers at once and says that it should avoid relying on single tools like interest rates or tax & spending even if this results in the government taking a far more active role in economic management within the economy. I.e. Like China does.

China refers to this as “Socialism with Chinese characteristics” by which I think they mean “the USSR was a mess so let’s make clear that we’re not doing that!” but I think you could reasonably describe it as a sort of Misky Socialism. Minsky obviously wrote assuming a capitalist system but if you were to have a Socialist government controlling the ‘commanding heights of the economy’ while also believing deeply in Minsky's view of how market crashes work wouldn’t you end up with something very like the Chinese system? Add a Job Guarantee to China’s economic model and I would argue you are pretty close to both Minsky and MMT.

So I’m sure MMT detractors (in which I would usually include myself) would say I’m being too kind to MMT here and supporters would say I was misrepresenting it somehow but China does use these tools and those tools have been, so far, reasonably successful in managing the Chinese economy. The question is whether the political side of China- the hugely dominant state, is necessary for these tools to work. I think the answer is yes and no.

I do think using multiple carefully targeted policy tools clearly requires far more government action than controlling the economy via interest rates, which can be done by an independent central bank. I don’t, necessarily, think it requires the full dictatorial level of political repression seen in China. I do, however, think it would make such repression easier by concentrating huge power in one place.

So what would this explanation suggest about what MMT would look like in the US (where it is most often and most seriously touted)? Well, for example, it might mean that rather than the US government directly funding a bunch of green power companies it might instead issue a directive to US banks mandating that they must make credit conditions easier for green startups and much harder for polluters while also mandating that they must each invest in, say, 50 green startups in the next five years to a minimum level of some dollar amount. If this caused inflation and/or financial instability (or was expected to) there might be other offsetting lending restrictions or government cuts or extra taxation. Does this sound like a normal US policy initiative? No. Does it fit with the policy framework MMT provides- I absolutely think it does. It’s not the ONLY way of doing it within MMT but it’s an example of the kind of policy MMT might advocate while traditional economics might not.

This goes some way to explaining MMT advocates struggle to articulate what they would do in any given situation. Whereas a traditional economist might say “given those economic circumstances we should raise interest rates” an MMT economist would try to change the economic circumstances themselves through dozens of targeted interventions. It’s a contrast between a thermostat approach to economic management of lowering or raising interest rates to change the overall “heat” of the economy and a sort of thousand sniper rifles approach of enacting dozens of ad-hoc interventions throughout the economy to meet multiple policy objectives.

Does this mean I am switching my allegiance to supporting MMT? No, it very much does not. Firstly I worry about the concentration of power, second I worry about the ability of any governing authority to pick the necessary interventions well and third it’s noticeable that China is playing the economic game from a very different starting point than western economies. It’s talking about 6% growth rates as “a slowdown”, that sure seems to leave a lot of wiggle-room that other economies don’t have! Plus it has capital controls, has historically been willing to devalue its currency, etc, etc. I do think this means we need an answer to the Chinese economic model though. MMT is politically relevant today because of figures like Sanders and Ocasio-Cortez being ascendant in US politics but China is a much bigger deal than that. As it climbs into undisputed first place in the rankings of world economies, as is clearly inevitable, it’s surely going to be the case that the world will look to them and their economic system for guidance on how to effectively run an economy. That is far more powerful than any individual person, no matter how ascendant they may be in US politics today.

If I can end briefly by adding my best guess at our best route forward, and I really do acknowledge that I’m not enough of an expert to know if my views really are the most economically sound way forward, I’ve been trying to engage with the discussion as best I can and I have a few thoughts.

My natural policy preference would just be for something like the Nordic model and I believe polling indicates this is popular but I think we need to acknowledge that our political systems have been unable to deliver effective policymaking or financial stability. We have defaulted to austerity at times when interest rates have hit zero and central banks have run out of firepower. Unconventional central bank policies seem to have failed to end the economic sluggishness in anything like a timely manner. Clearly, some sort of change in how we view fiscal policy is required.

The Wren-Lewis/Portes fiscal rule is something that’s popular on the left in the UK and seems a strong starting point. I would argue that what it implies is that, because it advocates for any and all fiscal spending required to pull us off the zero lower bound and because it constrains borrowing when the economy is running hot, it is, effectively, using fiscal policy to target low but stable interest rates, just as interest rates are used to target low and stable inflation.

This seems like something we should commit to- governments should always be willing to use fiscal policy to push interest rates off zero and to hold back fiscal policy if interest rates are pushed too high. What I worry about is that in our broken political system Conservative parties will do what they did after 2008 and use fear and misrepresentation to force unwarranted austerity. Given that this is the case I would like to step beyond the Wren-Lewis/Portes rule and be slightly more radical. I believe we should accept the argument for helicopter money not because governments couldn’t just use fiscal policy instead but because some governments are willing to undermine economic stability for political advantage and so we must grant the central bank new tools, like helicopter money, to achieve the outcome of not only low and steady inflation but low and relatively steady interest rates. I think we should produce narrowly draw targets for central banks when using these new hybrid monetary-fiscal policy tools so that we aren’t handing over policy-making power to central banks but instead just allowing them to fulfil their function of economic stabilisation.

I could, of course, be entirely wrong. I’m not really qualified to say. We should be careful though about dismissing MMT as pseudo-science because although its advocates spout a lot of nonsense there is the whole other issue of the spectre of China’s influence on economic policymaking worldwide. It is going to grow enormously over the next century and if we have no alternative proposals then their system will surely win out.

Thanks for reading, I hope this made a helpful contribution to the debate.