Hummel on Modern Monetary Theory
By David Henderson
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.