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Introduction
This week we’ll conclude our mini-series on studies in American capitalism. We chose to investigate Modern Monetary Theory (MMT), an alternative to the traditional strains of monetary theory presented by neoclassical economics. MMT entered the policy mainstream in the second half of the last decade, and economist Stephanie Kelton is one of the highest profile contributors to that success. Her book The Deficit Myth is a fascinating introduction to and defense of MMT.
Kelton herself admits MMT’s framework and resulting policy recommendations are so radical that they’re alien to almost every member of the U.S. Congress. To give the esteemed reader an idea, she calls President Obama a fiscal conservative. Economists talk about radical ideas all the time as an intellectual exercise. MMT is different because of the traction it appeared to gain in the halls of power in the late 2010’s and early 2020’s.
In 2019, murmurs could be heard about its policy recommendations being considered in the Federal Reserve, in Congress and even among some on Wall Street. Passionate debates were had about the morality and efficacy of “helicopter” payments – direct cash payments to ordinary citizens – and the Federal Reserve’s ability to print money to make them feasible for the government. These tools, which would’ve been unthinkable ten years before, were quickly used in the 2020 COVID relief packages and 2021 Infrastructure Law. Of course, the pandemic made so much of the previously unthinkable possible, but the intellectual foundation for the USA’s economic response was forged during earlier debates over MMT.
Old Ideas Made New Again
As the book’s title suggests, MMT is built on the premise that the traditional understanding of government spending is flawed. To Kelton and other MMT theorists, the intuitive notion that all governments are subject to the same constraints that ordinary households face – like living within their means – is a fallacy. Governments with a high degree of monetary sovereignty – who issue their own currency which they can enforce a monopoly on – have much more flexibility.
From this starting point, MMT can proceed to turn over many other traditional ideas. These governments are currency issuers overseeing a society full of currency users. State / local governments and ordinary citizens alike are required to use the currency to acquire the goods and services they demand. They have to save and budget and live within their means, but the currency issuer can click a few keys at the central bank and create unlimited sums of money.
As long as certain conditions are met, the money can simply be printed to do what the government wants. Most importantly, the projects government chooses to spend on can’t demand more goods or services than the society can supply, as inflation would result. Kelton cites inflation as the main factor holding back unlimited spending. In her framework, taxes are irrelevant for budgeting and should just be used for redistributing wealthy equitably or for recycling dollars to prevent inflation. The government doesn’t need your dollars to spend money – you need their dollars to buy food and to pay taxes. The government can print money to spend money.
Kelton excitedly declares that if only policymakers could be made to see the world as she does, then much more could be done to help ordinary people and to fight climate change. A notable example is her view on unemployment, which she views as being a result of political choice rather than economic reality. Kelton advocates for a “public option” in employment. The government could offer everyone who wants a job and doesn’t have one a guaranteed job for a living wage and with benefits. They could print the dollars to do this and thus force the private sector to pay workers a premium to the government wage. The budget deficit could automatically shift back and forth, growing in economic downturns to keep people employed and shrinking automatically as economic upswings enable private companies to hire people out of the government option. Clearly, a change in attitudes toward government spending opens many avenues for innovative and ambitious government policies!
Relearning Old Lessons, Slowly
It’s fairly straightforward to see why some were seduced by MMT in 2015 or 2019. Inflation had been stubbornly low for years in spite of record-low interest rates throughout that period. Progressives like Kelton were frustrated with right wingers stopping their policy agenda on social programs and climate change. Unfortunately, we suspect that the economic theory may have gained popularity because people worked backward from the policy outcomes they wanted to the alternative theoretical framework that could justify the costs. Kelton herself remarks how Bernie Sanders hired her and was surprised by the resulting press attention and controversy. She also frequently tells the reader how leftist lawmakers and their staffs still largely buy in to traditional monetary thinking, although more have been buying in to MMT behind closed doors.
If we step back from what intentions may have been in the past and focus on the theory itself, we think there are two key flaws that make it ultimately unhelpful. First, it depends on an overoptimistic and historically unsupported view of human nature. Even if we accept that currency issuers have much more spending flexibility than we’ve been trained to expect, history shows that over long stretches of time, human beings in positions of power will abuse the state’s spending power to the maximum extent they can get away with. Kelton’s caveats about inflation would eventually be ignored and politicians would find other scapegoats to blame the inflation on, like the Soviets did to the “hoarding kulaks” and as American politicians are trying to do in response to today’s inflation. Human beings are simply not equipped to resist this temptation forever and cannot be trusted with the responsibility to allocate free money responsibly. They need outside constraints, like that of a balanced budget perspective. The US reserve currency status and trade imbalances that she praises would also be threatened unless you could convince the rest of the world that your currency was still worth holding under an MMT regime.
Secondly, the last year has shown empirical evidence that inflation was closer than Kelton expected when the book was published in 2020. There is a big push to explain it away as being caused by supply chain disruptions due to the pandemic, but we hold the monetarist perspective that the huge government spending and money printing is the root cause; supply chain issues have been just one manifestation of the phenomenon. Another is home prices becoming even more unaffordable for first-time buyers. Even if Kelton’s proposals for huge government programs like the guaranteed job program were good ideas, which we feel they aren’t, the government clearly had less slack capacity to increase deficits before running up inflation than Kelton thought in 2019 and 2020. She might say that this was simply a matter of the government misallocating the money to goods and services the economy couldn’t provide without price increases. Our response would be for her to reference flaw #1 above.
We actually admire the fresh thinking and altruistic policy goals outlined in The Deficit Myth. However, the instrument proposed as a result, MMT, is inadequate and counterproductive. Prosperity will continue to depend, as it always has, on traditional themes like productivity growth, rule of law, physical security and conducive societal values.
All the best,
The Citizen Scholar Team
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Discussion #40: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, by Stephanie Kelton