If we focus solely on MMT’s [Modern Monetary Theory’s] essential claims about money, distinct from any associated policy proposals, it is neither new nor modern. It simply justifies funding government expenditures by issuing fiat money, which, of course, all economists have long been aware is possible. MMT then attempts to downplay the potential inflationary impact of such financing with manipulations of the government and central-bank balance sheets. But it merely puts the standard analysis into different boxes. Indeed, sophisticated advocates of MMT recognize that inflation can result from substantial increases in government expenditures unless one of three conditions holds: (1) there is significant unemployment in the economy; (2) government uses its taxing power to control inflation; or (3) the banking system somehow counteracts the government’s monetary expansion. Yet as we will see, advocates of MMT are overly optimistic about the efficacy of these three potential constraints on inflation, either overlooking their limitations, being unclear about how exactly they would be implemented, or grounding them in dubious economic doctrines.
This is the second opening paragraph of Jeffrey Rogers Hummel, “Interpreting Modern Monetary Theory,” this month’s Econlib Feature Article.
I told Jeff while editing it that it’s what my editors at Fortune in the late 1980s and early 199os called “a thumbsucker.” That’s not an insult; it’s actually an indirect compliment. It means that the reader will, at times, need to ponder a bit more than usual. The reason is that Jeff covers a lot of ground on the issues in Modern Monetary Theory and as a result, there are paragraphs, fortunately only a few, that you might need to reread to completely understand. Co-blogger Scott Sumner, who himself has written about MMT (and Jeff cites his work), will understand every paragraph on one reading. Others will probably want to go a little more slowly.
But the payoff is worth it. Going into this, I didn’t have a good understanding of MMT. As a result of reading and editing Jeff’s work, I have a much more solid grasp.
Note to Professors:
I would bet that some of your students in intermediate macroeconomics, especially some you most want to reach, will come to with questions like “What’s MMT all about?” I recommend that you hand them Jeff’s article or, better yet, anticipate the issue by having the article on your syllabus.
READER COMMENTS
Benjamin Cole
Apr 1 2019 at 12:46pm
From what I can gather, the conventional macroeconomic community regards MMT as a catastrophe-in-waiting.
And then from what I can also gather, the MMT crowd has been running Washington DC since about 1960, with the fleeting exception of some years in the Clinton administration. Deficits don’t matter (as long as your party is in power).
Real per capita incomes in the United States have tripled since 1960 and there are others, such as Brian Kaplan, who say even that vastly understates the situation.
Thanks to the miracle of the Internet, we all have additional thousands and even tens of thousands of dollars of uncounted real income.
So is MMT a disaster or what?
Jon Murphy
Apr 1 2019 at 2:13pm
Good article. It is a thinker, but worth the mental energy.
David Henderson
Apr 1 2019 at 4:52pm
Thanks, Jon. I can imagine this article being on a number of syllabi for intermediate macro courses around the country. Students will ask their professors: what’s MMT about. Professors will have a long article, but really a short one compared to the others on the syllabi, to point their students to.
Come to think of it, I’ll update the post to make that point.
Benjamin Cole
Apr 1 2019 at 11:35pm
David Henderson:
You may wish a few clarifications to the Hummel piece, if used in a rigorous macroeconomics course.
MMT has no programatic ideals. It is simply deficit-spending to stimulate a domestic economy. The federal deficit may finance militarization, as happened in Japan in the 1930s (the only developed nation to sidestep the Great Depression, btw), or as happened after US entry in WWII.
The modern-day GOP=MMT Practitioners. A nation can implement MMT not through additional federal spending, but through tax cuts. Some results; bigger deficits. This is precisely what the GOP did with the 2016 doubling of the standard income-tax deduction and corporate income tax cuts. The result has been bigger federal deficits, an economy growing better than expected, while inflation has been miniscule. (I approve of tax cuts on productive behavior, btw, and there may be some additional stimulus from that angle, but the immediate impact the GOP=MMT tax cuts was deficit spending). Hummel needs to clarify that the greenies are only “wannabe” MMT’ers–the GOP is MMT in real-time. Unfortunately, Hummel is more interested in wrestling with powerless leftist MMT theorists than with analyzing the real-world MMT-in-action results obtained by the GOP.
Hummel does not error, but also does not clarify whether MMT is only “borrow and spend,” or MMT can also be simple money-creation, that is money-financed fiscal programs (aka helicopter drops), or some mix. Indeed, the macroeconomics profession seems to leave this distinction blurry. Does QE+budget deficits=money-financed fiscal programs? Are there two variations of MMT, with one being financed by “borrow and spend,” and a second by the simple money-creation model (ala Japan, in the 1930s)? Are there hybrid MMT models, such as the US which has practiced both “borrow and spend” and QE?
Lastly, how to explain Japan? Japan deploys negative interest rates on bank deposits, the central bank holds interest on 10-year government bonds to 0%, and the central bank has bought back 45% of the nation’s epic levels of national debt, at about 230% of GDP. The Japan results, and somewhat the US result of QE, seem to strongly suggest a nation can use its central bank to buy back government bonds, without inflationary effect. But still I wonder, “Why fool with central banks at all, and why not just have the Treasury print money to finance deficits and stimulus?” It seems to me there is a legitimate concern about ever-growing national debt un relation to GDP, and that would make simple money-financed fiscal prohrams more attractive. (That said, if a nation can issue permanent bonds at 0% interest, maybe that is a financing option too, and that may soon be a reality in Japan and Germany.)
In conclusion, I think MMT may be flawed, but then so is much of conventional macroeconomics. The Federal Reserve as macroeconomic policy tool seems hopelessly Rube Goldbergian.
MMT is proving useful is opening new windows on how to think about macroeconomics—and lastly, MMT stimulus is the de facto policy of the GOP today, in real time and in real life, and perhaps debates about MMT should begin with that fact!
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