I have a new piece in The Hill, discussing the increasingly popular “Modern Monetary Theory”:

The basic problem is that MMT proponents mix up the roles of fiscal and monetary policy. They argue that monetary policy should play a supporting role, holding down interest rates to reduce the cost of public borrowing.

Meanwhile, the thinking goes, fiscal austerity should be the tool used to hold down inflation when aggregate spending begins to exceed the productive capacity of the economy.

Unfortunately, there is a long history suggesting that this approach will not work. In 1968, President Johnson raised taxes and balanced the budget, in the hope and expectation that this would hold down inflation. Instead, inflation got even worse, as monetary policy was still highly expansionary. It is monetary policy that determines the price level, not fiscal policy. . . .

Unfortunately, the underlying model used in MMT is based on false assumptions about the inflation process. If you start to rely on a flawed theory as a guide to policy, there will eventually come a time when it will lead policymakers astray, as happened when President Johnson relied on an MMT-type theory and accidentally triggered the greatest peacetime inflation in American history.

Please read the whole thing.

PS. Here’s LBJ and Fed Chair William Martin: