James K. Galbraith is a professor at the Lyndon B. Johnson School of Public Affairs. He has posted a response to Rogoff called Modern Monetary Realism. The points made by the MMT professors are either nonsense or not true. From the Galbraith’s post:
MMT is not, as its opponents seem to think, primarily a set of policy ideas. Rather, it is essentially a description of how a modern credit economy actually works – how money is created and destroyed, by governments and by banks, and how financial markets function. Nor is MMT new: it is based on the work of John Maynard Keynes, whose A Treatise on Money pointed out back in 1930 that “modern States” have functioned this way for thousands of years.
From this description, certain straightforward facts flow. Governments create money by spending and extinguish it via taxation.
The last statement is simply not true. Government spending and taxing does not necessarily mean increases or decreases in the money supply. Let’s use an example. An economy consist of $100,000 dollars in cash. Some individuals decided to deposit a total of $50,000 in the bank. Therefore, $50,000 are now demand deposits. The total money supply is still $100K: $50K in demand deposits and $50K in cash. If a government taxed people $25K, the money supply doesn’t change. The $25K is just transferred to the government demand deposit from the individuals. This $25K is not ‘extinguished’. When the government withdraws the $25K from its demand deposit to spend it, the money supply does not change. This $25K will just move from the government demand deposit to other peoples demand deposits (or will be held in cash by the people). This government spending did not ‘create’ money. Even when the government issues debt, this does not mean the money supply will increase. If in the above example, the government issued $25K worth of debt, instead of taxing the money, the outcome would be the same for the money supply.
The money supply expansion is created when the Federal Reserve buys assets and when banks create additional money on top of their reserves (fractional reserve banking).
He does not define what he means by ‘money’. However, even if we looked at the monetary base, M1 and M2, as shown below, we will see that the money supply goes up and down.
The government always runs a deficit. That is, it spends more than it takes in each month. If what he was saying was true, than the money supply could never have a decrease. Looking at the chart, it trends upward but it has dips. You could go back further in history for all of these money supply numbers and see how false his statement is for different time periods. In short, MMT is very far from realism.