Tag Archives: ed dolan

Ed Dolan Asks: What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives

Summary:  As we approach the fiscal cliff, economists of different schools offer radically different advice.  Austrians and Chicago-ians warn about the consequences of anything other than a fast austerity. Keynesian economists suggest continued deficits until the economic growth (and especially unemployment) return to acceptable levels.  And advocates of modern monetary theory (MMT) tell us not to worry; there are fiscal limits — but they’re of no immediate concern. Today guest author Ed Dolan puts the pleasing MMT perspective under the microscope.

This is the fourth in a series about modern monetary theory. Other posts are:

(1) America’s strength is an illusion created by foolish borrowing, 10 October 2012
(2) Prof Black blasts back at yesterday’s post about the US debt, 11 October 2012
(3) Ed Dolan talks to us about modern monetary theory. Can it save us?, 12 October 2012


  1. Introduction
  2. Sustainability as solvency
  3. Mathematical sustainability
  4. Functional sustainability
  5. What can MMT and the rest of us agree on?
  6. About the author
  7. For More Information about Modern Monetary Theory
  8. Other posts about our fiscal deficits

This was originally posted at Roubini’s Economonitor; posted here with his generous permission

(1)  Introduction

As negotiations over fiscal policy heat up, one thing nearly everyone agrees on is that U.S. fiscal policy should be sustainable. The trouble is, there are sharp disagreements about just what sustainability means. This post explores three different meanings of fiscal policy sustainability and explores their significance for current budget debates.

(2)  Sustainability as solvency

The first, and simplest, meaning of sustainability makes it a synonym for solvency. The proposition that we do not have to worry about debts and deficits because the government can never “run out of money” has become a mantra among followers of Modern Monetary Theory (MMT). As L. Randall Wray puts it in his book Modern MoneyTheory, “When we say that [perpetual government sector deficits] are ‘sustainable’ we merely mean in the sense that sovereign government can continue to make all payments as they come due—including interest payments—no matter how big those payments become.”

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Ed Dolan talks to us about modern monetary theory. Can it save us?

Summary: Next in a series about economics and the global government debt crisis, Ed Dolan talks to us about modern monetary theory. How does it differ from mainstream economics? And he has a few words to say about the Austrian school.  This was lifted from the comments of yesterday’s post.

Other posts in this series:

(1) America’s strength is an illusion created by foolish borrowing, 10 October 2012
(2) Prof Black blasts back at yesterday’s post about the US debt, 11 October 2012
(4) Ed Dolan Asks What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives, 30 November 2012

Ed Dolan


  1. Ed Dolan’s comment
  2. About the Author
  3. About Modern Monetary Theory
  4. About Keynes
  5. For More Information about Economics


(1)   Ed Dolan’s comment

I have been reading this lively thread with great interest. I do not think of myself as an MMT advocate, and I gather that most of the commenters agree, yet I keep seeing them passionately claim as uniquely “MMT” views that are completely commonplace and that I, as a “mainstream” economist, have always taught as obvious truths. For example, Ikonoclast writes:

“A key MMT view is that taxes do not pay for expenditure. In one sense this is right. In another sense it is wrong but more of that later. MMT takes the view that the national budget creates all the dollars of expenditure for that year at the time the budget is brought down. MMT further states that taxes when collected extinguish the dollars thus collected”

Well, it happens that I am in the middle of teaching a monetary economics course right now, and tomorrow’s lecture addresses just this subject. One slide in my lecture (a slide that has been there for years) contains a set of T-accounts that demonstrates precisely this point: Collection of taxes extinguishes money, spending by the Treasury creates money, and when you consolidate the two T-accounts, the two transactions net out to no change in money. In exactly that sense, as Ikonoclast points out, the “MMT” proposition is both right an wrong.

Surprise, surprise! I’ve been teaching MMT for years and didn’t even know it.

Ikonoclast is right on the mark in saying that we have to distinguish between mainstream economics – here I mean truisms like “assets = liabilities + net worth” – and “man on the street” (MoS) economics. The trouble is exactly that MoS does not understand economics of any kind very well, including the truisms.

Here is a perfect example: Sometimes I take my students to a “money museum” set up by the central bank of the country where I am teaching. Among other displays there is a cube, about 18″ on a side, that contains paper bills in the local currency amounting to 1 million currency units. When I get back to the classroom, I ask my students the following question: WHERE DO THE BANKNOTES IN THAT STACK IN THE MUSEUM APPEAR ON THE CENTRAL BANK’S BALANCE SHEET?

Now, these are undergraduate students, still teenagers, and most of their preexisting knowledge is of the MoS school. 90% of them answer that the banknotes in the museum should be entered on the Central Bank’s balance sheet as a 1 million unit asset. The other 10% – the ones who know a little bit about how central banks work – answer that the banknotes should be entered as a 1 million unit liability. Of course, both are wrong! The correct answer is the the banknotes in the museum are just a stack of paper and do not appear on the CB balance sheet at all until they are issued to the public in some way, for example, through an open market operation, or transferred to the Treasury which subsequently spends them on goods and services.

I can see from the “taxes extinguish money” thread here that members of the “serious” subset of MMTers agree with me that banknotes stored by the Treasury or CB are neither assets nor liabilities of the government, they are “nonmoney”, just paper. What many contributors to this discussion thread fail to realize that us “mainstream” economists know that and have always known it, along with many other “uniquely MMT” propositions.

At the same time, I would be willing to bet a large stack of colorfully printed paper that many participants in this discussion would have given the wrong answer right to my trick question about the banknotes in the museum. Clearly, there is an MoS version of MMT as well as the serious version.

The same goes for the view of whether sovereign governments can “go broke.” I think all mainstream economists recognize that there is a sense in which the answer is yes and a sense in which it is no. In the sense that they can always create new money to settle any financial obligation that has a fixed nominal value in their own currency, the answer is, almost trivially, that no, they cannot go broke. On the other hand, they face the inflation constraint, and under conditions of hyperinflation, governments can “go broke” in the sense that the cease to be able to buy real goods and services with any finite nominal amount of currency.

Zimbabwe is a perfect case in point. It had a sovereign currency and did not blush to print octillion dollar banknotes, but eventually the people they tried to buy goods and services from just said “no thanks, I’d rather keep this loaf of bread than sell it to you for 1 octillion dollars.” Instead, they just turned their back on the government and used substitute currencies, mostly euros and rand, for day to day transactions.

The government ranted “no, you can’t do that! This is our sovereign fiat currency! You have to use it!” No one paid any attention. The government ranted “you have to pay your taxes and you have to pay them in Zimbabwe dollars!” People just said, “why should we pay taxes to you bunch of clowns?” and turned their back again. So the Zimbabwe government went broke despite its mighty printing presses. Seriously, I’d be very interested to read a good MMT analysis of the Zimbabwe hyperinflation. Know of any?

Ikonoclast is again right on the mark when he writes “It leads one to wonder why MMT advocates are so keen to make odd-seeming claims to emphasise their difference from Keynesianism in general. Perhaps one can put it down to what Freud called the “narcissism of minor differences” {see Wikipedia}.

MMTers seem to share this narcissism of minor differences with some other small schools of economics. For example, I have hung out a lot with members of the Austrian school, and even edited a book once called Foundations of Modern Austrian Economics (see it here and here). I like these Austrian guys, they are smart and have good ideas, but wow, are they ever heavy into the narcissism of minor differences. The sad thing is, although it gives them some kind of boost to their self-esteem, it hurts their ability to convince the world at large of the validity of that subset of their ideas that are both sound and original.

In the above mentioned book, I cited Milton Friedman as saying “There is no such thing as Austrian Economics – only good economics and bad economics.” (Friedman did recognize that Austrians, for example his Chicago colleague Hayek, had many good ideas.) I would say very much the same thing about MMT.

(2)  About the author

Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University.  He was a Asst Prof of Economics at Dartmouth College, and later on the faculties of U of Chicago, and George Mason U. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment.

During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington’s San Juan Islands.

His publications include Introduction to Economics (2011), and TANSTAAFL: An Economic Strategy for the Environmental Crisis , v40 (2011). See his posts at Roubini’s Economonitor.

(3)  About Modern Monetary Theory (MMT)

MMT is best known for stating that governments can print far great amounts of currency without ill consequences than conventional theory suggests. It is in one sense the mirror image of the austerian (not Austrian) obsession with gold and inflation. They are bookends, in a sense.

Many well-respected economists advocate this theory. Such as my fellow author at Roubini’s Economonitor L. Randall Wray (Prof Economics at U of Missouri-Kansas City); see his articles here.

About MMT and the limits of monetizing the debt:

Here are two clear explanations of MMT by Paul Krugman (also not a fan of MMT):

  1. Deficits and the Printing Press (Somewhat Wonkish)
  2. MMT, Again

If you would like to really learn about MMT, here are two ebooks by Warren Mosler (hedge fund manager and banker), a founder of MMT:

(4)  For More Information about the work of John Maynard Keynes

  1. The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
  2. About the state of economic science, and advice from a famous economist, 8 December 2008
  3. Words of wisdom about the global recession, from the greatest economist of our era, 29 December 2008
  4. Some thoughts about the economy of mid-21st century America, 12 January 2009
  5. Economics is not a morality tale, 14 January 2009
  6. Keynes comments on our new-found love of austerity, 21 June 2010
  7. Keynes looks 80 years into the future and across the Atlantic, to explain our broken values, 25 July 2012

(5)  For More Information about Economics

(a)  These FM Reference pages list all posts about two of the great economic stories of our age:

(b)  Where to find good commentary about economics:

(c)  Posts on the FM site about economics — theory and practice:

  1. “A depression is for capitalism like a good, cold douche.”, 17 December 2008
  2. A very important article by an expert, discussing the necessary next step to solve the financial crisis, 17 February 2009
  3. Economic theory as a guiding light for government action in this crisis, 10 March 2009
  4. Why have mainstream economists lost the argument about the need for more economic stimulus?, 27 June 2010
  5. Looking at one of the most popular books in the conservative canon: The Road to Serfdom, 7 July 2010



Prof Black blasts back at yesterday’s post about the US debt

Summary:  Economics is one of the central sciences of our time, especially about one of the frontier subjects: the macroeconomic effect of debt. Yesterday’s post centered on a graph from Ed Dolan. Today we have a rebuttal by Prof William K. Black. There are few aspects of economic theory more important today.

This is the second in a series. Other posts are:

(1)  America’s strength is an illusion created by foolish borrowing, 10 October 2012
(3)  Ed Dolan talks to us about modern monetary theory. Can it save us?, 12 October 2012
(4) Ed Dolan Asks What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives, 30 November 2012

This discusses  yesterday’s post, in particular the source of its centerpiece, a graph from “By One Key Budget Indicator, the Structural Primary Balance, Even Greece Is Doing Better Than the United States. Why That Should Worry Us.“, Ed Dolan (bio), Roubini’s Economonitor, 8 October 2012.

Prof William K. Black


  1. Prof Black’s reply
  2. About the author
  3. Update: Ed Dolan replies
  4. About Modern Monetary Theory
  5. For More Information

(1)  Prof Black’s reply

The argument that began the discussion relies on this fundamental assertion {from the post}:

“A fundamental measure of a nation’s financial condition is the structural primary budget balance. AKA the cyclically adjusted budget balance. As in this graph from “By One Key Budget Indicator, the Structural Primary Balance, Even Greece Is Doing Better Than the United States. Why That Should Worry Us.” by Ed Dolan. “

He is a very conservative scholar as you can see from his blogs and his associations with George Mason University and Cato. Dolan’s piece includes the admission that our present deficit

  • is largely the product of the Recession and
  • during the recovery from the Great Recession fiscal stimulus acts as an “automatic stabilizer,” i.e., a “counter-cyclical” policy that speeds recovery and reduces the severity of the recession.

Europe and Chile as economic experiments

Note that the world has provided a “natural experiment.” The EU responded to the Great Recession with austerity, a pro-cyclical policy that makes the recession more severe and longer. Moreover, EU and ECB leaders’ mantra is “there is no alternative” (a phrase that should send warning chills up any veteran’s spine) — because nations that joined the Eurozone gave up their sovereign currency they no longer have the ability to adopt rational automatic stabilizers. More precisely, they crippled the effectiveness of their automatic stabilizers through the limitations of their “Stability and Growth Pact.”

Note that this has not prevented budget deficits from occurring but it has greatly reduced fiscal stimulus.

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