MMT Gospel: Is This Time Different?
By Pierre Lemieux
“Modern Monetary Theory” or MMT comes in two broad versions, the economic version and the political-gospel version. It is not easy to distinguish them.
The economic version claims that a national state can finance its interventions, or some of them, by using unemployed resources or, at full employment, by diverting (that is, grabbing) employed resources through deficits financed by money creation. If inflation ensues, the theory continues, it can be countered by more visible ways of grabbing resources such as higher taxes, wage and price controls, capital controls, rationing, and such. The few economists who defend MMT invoke bits and pieces of economic theories that are not exactly “new,” those of John Maynard Keynes or Abba Lerner, for example, but their claims remain very marginal.
They often have strange ideas, such as “Anything that is technically feasible is financially affordable,” as Professor Stephanie Kelton has written. George Selgin corrects her:
That something is technologically feasible means, not that it’s “affordable,” but only that it might be done at some finite cost. Perhaps Professor Kelton does not recognize, or does not want her readers to recognize, the difference. But a difference exists nonetheless, and it’s a lu‐lu. For all I know, we might populate the moon, equip every U.S. citizen with a Ferrari, or fill Lake Meade with champagne, technically speaking. But I’m quite certain we can’t afford to.
The idea that the state could dramatically increase its reach and substitute public choices to individual choices on a grand scale without facing serious budget constraints has understandably enflamed those who believe it should control a larger part of economic life (and therefore a larger chunk of personal lives, for the people’s own good). In fact, MMT seems mostly defended by activists and academics who see it as a promise to make possible the sort of society they want.
Hence the political-gospel version of MMT. MMT claims that we can get all the “nice things” that “we” want at no cost to anybody among us. The sovereign state only needs to create dollars (or other national currencies under foreign sovereign states) to pay for them. A movement called Our Money, created by Baptist pastor Delman Coates, wants exactly that. The gospel aspect of MMT has been identified as such, and not disowned, by The New Republic (Osita Nwanevu, “Spreading the Gospel of Modern Monetary Theory,” October 3, 2019). Says the pastor:
We need more leaders, more infuencers becoming evangelists for this incredible good news … that our economy does not have to be predicated on scarcity.
The fact that many economists on the left, notably Larry Summers and Paul Krugman, have warned against the fallacies of MMT does not stop the movement’s preachers from clamoring for free money to finance the Green New Deal, a federal job guarantee, and God knows what. (Incidentally, slaves did have a job guarantee.) Snake oil is not only for sale on the right.
One representative of the MMT gospel is D.T. Cochrane, an economics lecturer at York University in Toronto. In an article that was reproduced on a site for Canadian accountants, “How Government Deficits Fund Private Savings,” Mr. Cochrane explains that the worries about budget deficits “are largely based in misrepresentation or ignorance of government debt and money.” Many good critiques of MMT exist (besides George Selgin, you may want to read Scott Sumner and Patrick Horan and Warren Coats) and I will concentrate here on only one argument Mr. Cochrane echoes. The objection that creating money to finance government expenditures will lead to hyperinflation like in many countries such as Venezuela, he claims, is invalid. Inflation, he argues, came from the fact that “production had collapsed”; the relation between inflation and the increase of the money supply is not necessarily true.
In a Cato Journal article, Sebastian Edwards reviews the case of Venezuela, which Cochrane invoked. Inflation was already a problem when Hugo Chávez was elected in 1998–partly, as many other populist leaders, with a mandate to stop inflation. In fact, he continued to increase the monetary base at high annual rates (10%-30% until 2003, and still higher until data become unavailable in 2013). Probably because of high oil prices, the regime was able to cap inflation at these high rates, until it reached 43.5% in 2013. GDP collapse in 2014, when annual inflation was 57.3%. Hyperinflation ensued with 1,000% in 2017, 130,000% in 2018, and even more since then (in prices denominated in the national “sovereign” currency), but it is clearly incorrect to say that inflation reared its ugly head only after GDP had collapsed.
Edwards also review in detail the cases of Chile in 1971-1973 and Peru in 1985-1990. In these cases too, money creation and high inflation preceded GDP collapse. The collapse of production was in large part a result of high inflation and the consequent distortions in the economy. Of course, when high inflation becomes hyperinflation, production collapses even more. Speaking of episodes of runaway inflation in Latin America, Edwards writes:
In most of these episodes—Argentina, Bolivia, Brazil, Chile, Ecuador, Nicaragua, Peru, and Venezuela—policymakers used arguments similar to those made by MMTers to justify extensive use of money creation to finance very large increases in public expenditures.
A wider empirical study published in 2004 by Professor John Frain of Trinity College Dublin confirms the prediction of standard economic theory: increasing the money stock necessarily, at some point (when the increase does not follow an increased demand for money by individuals), leads to inflation (John C. Frain, “Inflation and Money Growth: Evidence from a Multi- Country Data-Set,” Economic and Social Review 35:3, , 251–266). Frain built a series for 87 countries’ average money growth rates and average rates of inflation between 1948 and the early 2000s. Drawn from his data, the two charts below show the close correlation between the two variables. (The second chart excludes the two outliers of the first one, Nicaragua and Argentina, in order to reduce the scale of the graphic and show more clearly that the correlation continues to hold for the other countries.) The correlation coefficients are high and the parameters of the two regression lines are highly statistically significant.
On the contrary, Edwards notes, MMT supporters “have offered very little empirical evidence on how the policy would function.”
To summarize: From what we know, financing government expenditures by creating money is highly inflationary and leads to serious or catastrophic economic problems and, indeed, to the collapse of production. With MMT, this time would not be different.