Thursday, July 26, 2012

Tom Palley criticizes MMT on theoretical micro- grounds as well as debunking their claim to have understood the problem behind the Euro. Earlier I've leveled harsher ones. The core of his critique is:

With regard to theoretical weaknesses, MMT lacks a convincing theory of interest rates, over-simplifies the economy by assuming an L-shaped supply schedule that ignores the effects of sectoral bottlenecks and imbalances, lacks an adequate theory of inflation, and ignores expectations and exchange rates. These omissions lead it to overstate the powers of monetary and fiscal policy.

That is, other than getting everything important wrong...

The historical problem with MMT is that it incorrectly predicts the increases in returns when the state backs currency issue, that is it's mega-economic projection is wrong, and it incorrectly estimates the cost of enforcement, which is not zero. Enforcement loses of lex monetae are not to be ignore after the break down of compliance.

If one is looking for the weakness of the Euro, it lies not in the currency union, but in the corruption of those running it. First, Greece, by its own standards, should not have been let in, second, it has allowed countries to run significantly higher budget deficits, allowing the ECB to run tighter fiscal policy, because of the US' role as designated economic loser in the world, and third when the collapse came, there was a complete and total break down of enforcement to prevent capital flight – which one could argue, as with dollarization schemes, is a feature, not a bug.

For countries under financial pressure, preventing capital flight, that is "a run on the central bank" is job one. Without this, virtually nothing good will come of the rest of the efforts, because that capital is what will form the economy that will pay off the debt. Allowing capital flight and then imposing austerity is shooting an economy through the head and then through the heart. It won't be suprising if that economy is found on a slab someplace...

One doesn't need theory to explain greed and stupidity.