Gelinas on MMT

At City Journal Nicole Gelinas expresses skepticism of Modern Monetary Theory:

Eleven years ago, the 2008 financial crisis transformed politics, creating the conditions for a new crop of national-profile candidates who are throwing the old rules away, from Donald J. Trump to Alexandria Ocasio-Cortez. Now, insurgent academics have come forward with a seemingly elegant theory to revolutionize economics, underpinning the profligate spending impulses of many of these newly minted politicians. This framework, “Modern Monetary Theory” or “Modern Money Theory,” has a simple premise: the U.S. and other Western countries can offer government-funded, good-paying jobs to anyone who wants one and pursue any other public-policy objective as well, through vastly increased spending. The outlays for such ambitious efforts, the theory holds, won’t result in high deficits, high interest rates, or inflation—the bugaboos, typically associated with runaway spending, that haunted Western policymaking on both sides of the aisle from the 1970s to the early 2000s. Those risks are exaggerated, MMT maintains, and can be mitigated through prudent government action.

Extravagant as they sound, MMT’s prescriptions resemble how the U.S. and other Western governments have approached economic and monetary policy in the years leading up to and following the financial crisis. That’s hardly a comforting feature of MMT, though. This upside-down theory matches reality only because reality is upside-down. Western governments have used their power over the past decade to inject trillions of dollars’ worth of government distortions into a supposedly free-market financial system, where the values of stocks, bonds, and real estate have become increasingly hallucinatory. Expanding the MMT model would drive the West only further from reality. MMT promises not a free lunch but a lifetime engorging feast, assuming that because the normal rules of economics don’t apply now, they will never apply. That’s a perilous assumption.

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Throw everything in the old textbooks out, MMT partisans say. The guiding principle of MMT is that modern governments face no pressing constraints on spending—including the need to hike taxes to pay for it. Unlike older-style progressive economists, Modern Monetary Theorists don’t advocate for high taxes. The Robin Hood idea of taxing the rich and giving to the poor is “based on the misunderstanding that we need the taxes,” L. Randall Wray, an academic economist, writes in Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (updated in 2015). Taxes might be useful tools to discourage bad things like smoking and encourage good things like solar power, or to flatten wealth disparities, but they’re ultimately not that important when it comes to budgetary concerns. If government doesn’t need to rely on taxes to pay for its services, though, where will it get the money? Borrowing? Not necessary, either, according to MMT. As Wray puts it, “government never needs to sell bonds before spending.” Bonds “have become anachronistic.” The government can sell bonds for the same reason it sells American Eagle Platinum Coins: because some people like them. But it doesn’t need to.

If the government doesn’t have to tax or borrow to fund its operations, it has only one other option: print the money. For MMT, that’s nothing to worry about. Modern governments don’t literally need to print money, of course; these days, they can create it on computers. “A government always spends by keystrokes,” says the brand-new, first-ever textbook built around MMT, written by Wray and fellow academic economists William Mitchell and Martin Watts, and called simply Macroeconomics (2019). Whatever amount the government wants to spend, the Federal Reserve can just conjure out of the ether and deposit in the Treasury Department’s bank account.

What follows is an adaptation of the comment I left to that post.

One of the problems that those who adhere to “the old textbooks” need to address is how we have been able to increase our level of federal debt without any of their predictions of doom coming true. Since the founding of the Republic, the debt in real terms has increased a hundred-fold and at every step people have been predicting catastrophe which never seems to materialize.

I don’t think Ms. Gelinas is being quite fair to MMT. Just like Keynesianism it has both a formal variety and a folk variety. Formal Keynesianism says that correctly timed and structured debt-based stimulus can replace a shortfall in aggregate demand and the debt should be paid down during the expansion phase of the cycle. Folk Keynesianism says that debt-based spending will always stimulate the economy, a somewhat different proposition, and there is no need to pay it back.

What Ms. Gelinas has described is folk MMT. More formal MMT proposes that we can extend credit to ourselves with impunity so long as the extension is tethered to increases in real production.

I have several bones of contention with MMT, the most significant of which is that I think that MMT-ers fail to understand hyperinflation which they tend to view as very high inflation. It isn’t. Hyperinflation is a catastrophic loss of confidence in the currency and that can happen quickly, without warning, and despite the underlying numbers. It’s a psychological and social phenomenon. Consequently, extending too much credit too fast bears serious risks.

Our problem is that politicians are not economists or any other variety of scientist and don’t really care about the underlying issues so long as they get re-elected. Folk MMT is like catnip to politicians.