By Arnold Kling
A reader asked me for my thoughts on so-called Modern Monetary Theory, as described here, for example.
As I understand it, the central dogma of MMT is that a government that prints its own currency and accepts that currency as payment for taxes can run up massive deficits without having to default. It can always just print more money.
Technically, MMT is true. As a practical matter, it would be suicidal to ignore the debt problem because of it. Some critics of MMT use the Zimbabwe example. But you don’t even have to go that far. Look at Israel in around 1980. Because they were printing money to cover a deficit, inflation got up to an annual rate of 100 percent. The result was that the dollar became the store of value, with Israeli currency a medium of exchange–and at that, it was being used with greater reluctance every day.
Having your currency start inflating so rapidly that it no longer becomes a store of value is very, very costly. People have to put a lot of time and effort into obtaining alternative stores of value. All sorts of relative prices get distorted.
Consider another group of crackpots, the gold standard advocates. They say that a dollar should be a physical unit of measurement, meaning x grams of gold. Having the value of the dollar fluctuate is like having the length of an inch fluctuate–how can you conduct business when that is happening?
I would much rather turn my country over to gold-standard crackpots than to MMT crackpots, thank you very much. (By a crackpot, I mean someone with the characteristics that Huemerassociates with irrationality. I expect to see a lot of comments on this post with those characteristics.)