Some Brief Thoughts on MMT
When we let the money printer go brrrr
After an exam-induced hiatus a New York Times profile of modern monetary theory, and more specifically Stephanie Kelton, has given me an opportune topic on which to return. I will, for as long as I maintain this Substack do my best to avoid writing too much about macroeconomics; it’s not my main area of interest and I’m sure the result would be embarrassing for all involved. Therefore, I’m not going to concern myself with trying to rebut or defend MMT—there are plenty of other sources for that—but instead talk about why it’s a theory that attracts such heated debate.
How did we get here?
‘Why don’t we just print more money’ is a meme which signifies almost performative lack of knowledge on economics and a distrust of the perceived neoliberalism (Prince Charles voice: ‘whatever that means’) of the subject’s mainstream. (See also, ‘economics is just astrology for men’.) These days, I am slightly amused whenever I come across it. Without being able to reduce interest rates from their already near-zero levels, there is little else for central banks to do. Quantitative is by now a very well-established fiscal policy tool. Two years on from the start of the pandemic, however, the UK economy is anticipating the highest inflation in my lifetime, but causal inference is, almost by definition, near impossible in macroeconomics, and factors other than government spending are partly responsible for Therefore, why not ask ‘can’t we just print more money’?
In incredibly reductive terms, it is for this that Stephanie Kelton has made her name—although Modern Monetary Theory has been around much longer than she has. Kelton is a professor of public policy and economics at Stony Brook University Her book The Deficit Myth has cemented itself, by now, as a classic in the popular economics genre, becoming a New York Times bestseller and, almost two years after its publication, is still topping Amazon sales charts.
What does MMT promise? There are many, much lengthier, explainers, some of which I will draw from. But, for the purposes of this piece, I will dispose of the discourse on the origins of money and jump to the main points. In short: any government that issues its own currency cannot ‘run out’ of money as the central bank can always increase the money supply. As a result, there is no reason for a government to default on its debt. This means that governments don’t have to worry about building up deficits which add to its overall debt burden. MMT has its roots in post-Keynesianism, so it assumes that most of the time, rather than markets clearing, there is spare productive capacity in the economy. This is relatively uncontroversial, but the implications are not. As a result, MMTers argue, the inflationary effects that result from an economy ‘overheating’ never really manifest and, thus, the government can continue to deepen deficits until it does meet some sort of inflationary constraint. However, under MMT this is more of a hypothetical barrier and that ‘it is hard to maintain the view that there is no scope for firms to expand real output when there is an increase in nominal aggregate demand’, according to a recent MMT textbook by Mitchell, Wray and Watts.
Now contrast this with more mainstream New Keynesian macroeconomics. This is in accordance with MMT insofar as that there usually is excess supply, but not that inflation is impossible while this is the case. When economists say ‘full employment’ (the point at which additional aggregate demand incurs inflationary pressure), they do not mean ‘no unemployment’: there are still people out of work due to structural reasons or labour market frictions. Thus the economy can be at full capacity even if it is not functioning at its theoretical ‘optimum’. At this stage government issuing new bonds (which are a form of debt) drives up interest rates by increasing the demand for loans, which means households and businesses face higher costs to borrowing which, if paid for by a further increase in the money supply will be inflationary. There is actually little within MMT on where inflation comes from or how to deal with it. Instead of monetary policy, which is the conventional solution, MMTers concede that, in the rare event where there is excess demand, they would prefer to raise taxes and reduce the deficit that way.
Initially, the headline of Jeanna Smialek’s MMT profile appears triumphalist: ‘Time to take a victory lap*’ (although note the asterisk). As the article notes, The Deficit Myth was published when inflation had been low for decades and the pandemic had led to an unprecedented increase in government spending, with the assurances that, given the exceptional circumstances, the impact on inflation, that mainstream economists had long insisted would be the result of spending at that level, would be negligible. The suffering that Covid spending was introduced to alleviate did, of course, exist before the pandemic and. Therefore, MMT offers an intoxicating alternative compared to mainstream economics arguments as to why, sometimes, there ought to be restrictions on deficit spending. This slightly clickbait-y heading did its job and ended up going viral with the usual quote-tweet debunking from mainstream economists. But, in the body of the article, any full-throated defence of MMT is more cautious and the extent to which MMT went unchallenged is, I believe, overstated. Smialek is a Federal Reserve reporter; it makes sense for her, she argued, to report on MMT having gained the position it had in national discourse. Indeed several influential figures, such as Alexandria Ocasia-Cortez and Bernie Sanders, have professed at least tentative support.
The controversy would have fizzled out more quickly had it not been for an Axios article, framing the debate in terms of gender. Focusing on Smith’s and Larry Summer’s responses, it highlighted the fact that economics, which nobody would dispute is heavily male-dominated, was rounding on its heterodox wing, represented by a female economist and a female reporter (who is, to all appearances, not particularly heterodox in her approach). Exacerbating this culture war narrative was the fact that Lisa Cook, who had recently been nominated to the fed board and, if confirmed will be the first black woman to serve, was being attacked by some of the trollier elements of the economics community, including participants of EJMR, an online forum which has become notorious for racism and misogyny.
So in this particular case, discussion of MMT got caught up in a broader controversy about the treatment of women in economics. However, there was little good reason for this conflation. Attacks on Lisa Cook were entirely bad faith, which is not the case for the response to the NYT article, even if it was sometimes misguided. Many of Smialek’s critics did downplay her qualifications in talking about macroeconomics as a reporter on the Federal Reserve. However, it is unfair to write off the mainstream’s repsonse to her article as being as motivated by bigotry.
So What’s the Problem
MMT’s comparative lack of ambition could explain why economists take against it so strongly. As its roots are not too dissimilar from New Keynesian monetary analysis, differing mainly in the policy implications, it is comparatively easy to ‘debunk’. There have been a number of high-profile articles doing so without a great deal of effort. Therefore, when a high-profile press outlet such as the New York Times gives it such a large platform makes mainstream economics seem rather impotent, as if it is losing the information war.
The popularity of MMT suggests that mainstream economics is losing this war on another front. I have discussed in its own terms, as a heterodox school, i.e. one that diverges significantly from the mainstream. However, its ‘radical’ policy proposition, that spending doesn’t necessarily have to be paid for by future government surpluses, has never been entirely rejected by economists. Most acknowledge that deficit spending is an important mechanism in the economy; the overwhelming majority supported at least some level of counter-cyclical spending during the pandemic with any disagreement being over a) how much and b) how severe would the effects be several years down the line (the latter ongoing). What they baulk at is the hard lines it draws: there are NO budgetary constraints on government spending (not the constraints are often non-binding); there is NO causal relationship between government spending and price level (not that the relationship can be weak).
The narrative of MMT, therefore, is a populist pitch against economists, particularly those in government. If there is no reason to restrict government spending ever, then any reluctance of those economists to increase spending on social programmes is a manufactured and unnecessary excuse to prevent progressive policy. I understand the frustration. Deficit hawkishness has historically been used as a front for deterring the expansion of state programmes, even if its advocates have simultaneously advocated cuts in other areas of government, or an increase in taxation. What MMT does, however, is sever the last theoretical link between spending and its costs. While voters may be wary about higher taxes or inflation and therefore reject a larger state, they wouldn’t do so if they believed that they could get one for free. And if they’re sold MMT, it is only economists who tell them they can’t.
A point made in almost all the refutations of MMT I have read is how obfuscating or imprecise it is as a theory, having no real models. A working paper issued by the Banque de France dismissed it as not a real theory at all, but instead a ‘political and moral statement’. Whether it is through uncertainty over what, exactly, it involves, or frustration at its proponents shifting the goalposts of what qualifies as success, MMT has become something of a hydra, seeming to stick around no matter how many attacks it faces. But are economists right to worry so much about it? The meat of the theory (lean as it might be), has not really caught on. Even those who have professed some support for it continue to cost their spending proposals (usually with higher taxes on the rich). However, the inflation element, which is more implicit and tangential to MMT’s core, might have some staying power.
The Inflation Myth
With concerns in the UK that inflation could reach double digits and the rate at its highest in decades in the US, then wariness about inflation is likely to prevail, which will have a deterrent effect on any increases in the money supply, even if the consensus is that inflation is the result of disruptions to the supply chain (i.e. too few goods rather than too much money). It is also doing real damage to people’s lives. The UK’s ‘cost of living crisis’ is an example of this, exacerbated by rising oil prices following the Russian invasion of Ukraine, and has even become a major talking point for left-wing activists.
Even Stephanie Kelton has raised the alarm on inflation. In a recent Substack post, she acknowledged that it is ‘running at the hottest pace in 40 years’. However, she continues to question what she views as the conventional narrative in economics, listing changes in consumer behaviour, disruptions to the shipping/ trucking industry, increasing reliance on just-in-time production etc etc as contributing factors. Her point is, the list is long, and that it is foolish to overemphasise the role covid stimulus spending had in driving up inflation.
As a result, it might be too early to predict the impending demise of MMT. The problem to economists is that politicians seem unwilling to acknowledge large spending programs as a potential source for inflation. The most notorious explanation is that ‘corporate greed’ is the main driver of the recent spike, which is now trotted out regularly in White House press briefings. (Consider: would it make sense to attribute a fall in inflation to less corporate greed?) But there are others, as outlined above, with much greater credibility. This is most likely to be the lasting contribution of MMT—the casting of doubt over the causal relationship between spending and inflation.
The problem with this, and Kelton’s Substack, is that there are always myriad factors contributing to any macroeconomic phenomena and economists generally don’t need reminding of that. This does not stop some from overstating the relationship between spending and inflation but understating it in response serves no one. In fact, focusing on the supply-chain issues driving inflation undermines the tools governments and central banks actually have to reduce inflation. Resolving supply-side issues is more painless than raising interest rates or reducing the deficit but is often outside of the government’s control. There is little chance of oil prices falling significantly while Russia continues its invasion of Ukraine and reversing decades of specialisation which have left supply chains vulnerable is neither feasible nor necessarily desirable. This is not to say that the government should not intervene to prevent these issues but doing so is more difficult and takes longer. Tighter monetary policy on the other hand, is harder for economists to sell, not helped by the continuing popularity of MMT.