April 2021Policy

Two Cheers for MMT

This article is adapted from a report published by the Center for Economic and Policy Research.

The past 10 years have seen the popularization of an economic doctrine known as Modern Monetary Theory (MMT). It’s not just a theory. It has also become a political tendency with a presence on the Left, including in DSA. Here, I’m going to provide an overview of what MMT is, where it comes from, and draw a distinction between MMT as economic theory and MMT as political rhetoric.

The MMT school of economic theory is descended from followers of John Maynard Keynes. These scholars formed a community that described itself as “post-Keynesian” but was distinct from the purportedly Keynes-friendly mainstream of the US economics profession. Leading exponents included Abba Lerner, Hyman Minsky, Wynne Godley and Paul Davidson. They distinguished themselves from the dominant voices in the economics profession, typified by such figures as Paul Samuelson, or today, Paul Krugman and Larry Summers. MMT is faithful to the older post-Keynesian tradition: a comprehensive textbook treatment is here, and a new, popular treatment can be found in Professor Stephanie Kelton’s bestseller The Deficit Myth.

The Basics

According to MMT theory, the economy often operates below its potential, meaning at less than full employment. In that circumstance, the US federal government can spend the economy to full employment without making offsetting changes in taxes and without resorting to borrowing. In other words, the government can simply write checks for new spending that it desires.

This is informally understood as “printing money,” though what is really in question is digital entries in computer memory, not paper currency. The limit to check writing is not some forbidden level of public debt, but a possible rise in inflation if the government spends too much. When the economy is at full employment, increasing spending defies its own purpose by pushing up prices — you spend more without getting more.

One of the infamous claims of MMT is that the US government, because it is a sovereign entity that uses its own currency, cannot go bankrupt. Debts can always be paid by writing checks — printing more money. Ironically, while this may sound like the old joke (“How can I be broke? I still have more checks!”) it is the least controversial of MMT precepts, conceded by economists holding a wide variety of views. There is a constraint on government spending, but it is not a threatening growth in the national debt.

One way to place MMT is to consider differing views on the federal budget deficit. The old-fashioned view is that the budget always ought to be kept in balance: spending should not exceed revenue.

Another is that balance should be achieved, on average, over the business cycle. Run deficits when employment is low and surpluses when it is high. This view used to be standard, but it has been eclipsed. Now, it is generally accepted that as long as the economy grows more rapidly than the public debt, there is no problem. Total debt becomes less burdensome over time, as the more rapid growth in the means to pay it (GDP) outstrips increases in debt.

MMT and other Keynesian originalists reject all these principles. The object of MMT based economic policy is to maximize employment with stable prices. Public spending should be expanded until this ideal is achieved. If inflation runs too hot (5% or so is typically seen as a desirable upper limit), use taxes and other measures to cool it down.

Socialists will disagree on the extent to which such policies can be sustained under capitalism, as well as on the limitations of that ideal, even if attained. Economic growth under capitalism, even with decent growth in wages, still leaves much to be desired. However, at least in the short term, full employment has a lot to recommend it. We want employers to beg people to work for them, rather than the converse. Without the need for any particular intervention by the state, high employment exerts upward pressure on wages and fringe benefits.

Who is MMT?

I’ve always said the Left should welcome converts, but how we assimilate them matters too. You don’t necessarily put them in charge. And so, I find the pretensions of some MMT advocates to be off-putting. For instance, there are MMT-obsessed websites, podcasts and the like that have anointed themselves the “Real Progressives.” O-kay …

MMT’s most prominent advocates are actually a mixed bag, politically. MMT academics propose industrial-strength progressive programs. One of their more popular plans is a national job guarantee. But they also cultivate a following on Wall Street. One of their founding fathers is a hedge fund guy named Warren Mosler, who has bankrolled MMT research. He makes a home in the Virgin Islands for tax purposes and favors abolition of the corporate income tax.

A relevant fact about MMT people is that, notwithstanding their claims to theoretical supremacy, nobody bearing an MMT label has secured an appointment in the new administration. It’s not as if they lack the connections. Stephanie Kelton, for one, was a chief economic adviser to Senator Bernie Sanders. Mainstream, elite liberal thinking on economics has moved in important ways, as Josh Mason elaborates, but it shrinks from embracing MMT.

Sloppy, not to say dishonest, criticism of MMT claims that its implementation would lead to ruinous inflation, citing such cases as Zimbabwe or Weimar, Germany. Actual MMT doctrine asserts that if the federal government writes too many checks (e.g., “prints” too much money), causing a spike in the price level, it can drain purchasing power from the economy with taxes, and the Federal Reserve can cool down inflation by raising interest rates. A tax increase offsets the boost to spending. Undesirable inflation can be further precluded by interest rate hikes, which increase the cost of borrowing and thus slow down business activity.

Broadly speaking, the inflation rap on MMT is the same sort of attack leveled at liberal economics of all types for the past 50 years, if not longer. Deficit spending and growing public debt have been said to cause interest rates and inflation to explode. But past episodes of increased deficits do not bear this out.

The MMT bait-and-switch: separating rhetoric from reality

The most provocative claim of MMT is that taxes do not finance spending. The implication for the naïve is that federal spending is unlimited, which suggests we can have all the nice things we want unencumbered by the political burden of associating new spending with higher taxes. As Aaron Wistar puts it in his review of The Deficit Myth:

“Medicare for All? We can afford it. A multi-trillion-dollar Green New Deal? We can afford it. A guaranteed job for anyone who wants to work? That, too. And, Kelton argues, we don’t necessarily need to raise taxes to do all this.”

The image of an unlimited source of funding for liberal projects has understandably tempted advocates whose proposals have been routinely confounded by concerns, some hypocritical and others not, about budget deficits. The Australian economist John Quiggin distinguished the theoretical texts of “academic MMT” from the propaganda of “popular MMT” thusly:

“The result in many cases is a ‘motte and bailey’ rhetorical strategy in which MMT advocates make strong statements which sound as if they match the popular view, but retreat to a less interesting but more defensible position (the ‘motte’ in the medieval castle that gives rise to the analogy) when challenged.”

Paul Krugman recently described MMT as a marketing ploy. Even though he is more in agreement with it than not, he says he fails to see anything new in it. I call it a bait and switch. The bait is the promise of unlimited resources for progressive causes. The switch is in the fine print, where the caveats are disclosed. Still, MMT is more on our side than not.

In a certain superficial sense, taxes indeed do not literally finance spending. However, we should also say that at some point, spending requires some response in the form of taxation, borrowing or monetary policy. It may not be dollar-for-dollar, but some kind of balance — acknowledged in MMT theory — must be established for inflation to remain at acceptable levels.

Can “money printing” alone ever bring forth greater public spending without the danger of inflation? Often it can, since the economy frequently operates with some amount of “slack,” which means that not all resources and labor are fully employed. But there are limits to the maximum output and employment that can be achieved. These limits are usually understated for political reasons. But limits there are, so at full employment — if the price level is locked down — more public spending means less private spending. If the price level is not locked down, more public spending raises the price level.

There is no limitless cornucopia of resources — no big rock candy mountain — for new progressive projects. This should be particularly obvious when the economy is at full employment. To get more of anything, we must accept less of something else. We cannot help but think the dramatic MMT assertion that taxes do not finance spending is a distinction without a difference. This writer sees the claim as more appropriate to political rhetoric than to economic theory.

So on the bait and switch, the bait is that unlimited public spending, without the political burden of “pay-fors,” is possible. The switch is the belated admission that additional spending, at some point, can put upward pressure on the price level and require a response. The obvious response would be higher taxes (and not progressive taxes, by the way) and contractionary monetary policy, but MMT writers discount the likelihood or merits of taxation in favor of alternative measures. The alternatives include deferred compensation, moderation of wage demands, price controls and “patriotic savings.”

Deferred compensation may seem to be an easy lift. It sounds like an IRA. However, if the Green New Deal takes years, even decades, to implement, compensation is likely to be deferred for a long damn time. Moderation of wage demands is less appealing. A wage increase foregone this year reduces the worker’s base for future increases. In the same vein, to some extent price controls will trickle down to shrink labor compensation.

Nobody likes taxes. Taxes to arrest inflation would have to bear most heavily on consumption and on the unrich, since that is the source of most purchasing in the economy. The political appeal of the alternatives to taxes is left to the judgment of the reader. They could be uncharitably described as consumption repression by other means.

Going Big with MMT

In an exchange with me for In These Times, MMT scholar Pavlina Tcherneva declared: “There is nothing more crippling to a bold policy agenda than the myth that the government can run out of money.” In response, I said that what cripples progressive economic policy in the US is the sway of the capitalist class, exploiting differences over race, gender and national origin.

The MMT-inspired “How to Pay for the Green New Deal” elaborates what I would call a similar technocratic cast of mind that is blind to class struggle. The priority of a Green New Deal is unquestionable, but if you read between the lines of the essay, as noted above, the outlines of an austerity program are visible. The essay is modeled on Keynes’ classic, “How to Pay for the War” (World War II). Now considering the implications of losing World War II, or allowing climate change to proceed unobstructed, austerity could be defended. But to be defended, it must first be acknowledged.

The constructive crux of MMT is that — usually — fiscal and monetary activism can significantly expand the horizons of federal spending without the risk of inflation or spikes in interest rates. That was demonstrated last year with a federal budget deficit of $3.3 trillion (up from $984 billion in 2019) and no serious signs of inflation, and it will be demonstrated again this year with the Biden administration’s $1.7 trillion COVID relief/stimulus package. This economic downturn enhances the possibilities for deficit-financed spending growth. Whether that will be enough to pay for the Green New Deal is a different matter. For 2021 the logical priority is economic recovery; and on that topic, MMT commentary is on the right track.

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