Modern Monetary Theory is sometimes cartoonishly summarized as “government can borrow and print unlimited money without negative consequences so long as it issues debt in its own (printable) currency.” Based on this cartoon, what the U.S. government has been doing for the first 20 months of 14 Days to Flatten the Curve is exactly the right approach.
The Wikipedia summary of MMT is more nuanced. A government that issues its own fiat money
- Can pay for goods, services, and financial assets without a need to first collect money in the form of taxes or debt issuance in advance of such purchases;
- Cannot be forced to default on debt denominated in its own currency;
- Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
- Recommends strengthening automatic stabilisers to control demand-pull inflation rather than relying upon discretionary tax changes;
- Bond issues are a monetary policy device, not a funding device.
(Note that the government’s stated inflation rate, alarming as it might seem, grossly understates costs to buy a house (real estate prices are not included) and also is not adjusted for delivery time (see Is inflation already at 15-30 percent if we hold delivery time constant?).)
One of the policy implications, according to Wikipedia:
Achieving full employment can be administered via a centrally-funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice-versa.
What we’ve seen over the 20 months of 14 days is sort of like “guaranteed jobs” in that people get a paycheck, but they don’t actually work (the paycheck is called “$600/week unemployment check,” resulting in higher-than-median wages for those who don’t work). On the other hand, the government has put most of its effort into making existing government jobs more lucrative. Government workers have gotten paid for not working (teachers who didn’t teach, librarians at home while libraries were closed, park employees at home while parks were closed) and more government workers, already earning salaries far above those in the private sector, won’t have to repay their student loans (funded by higher taxes paid by those who never enjoyed the opportunity to go to college). On balance, it seems reasonable to consider the higher-than-median-wage unemployment payments as the “centrally-funded job guarantee” that MMT proposes. And, in fact, as any employer trying to hire can attest, full employment was achieved (i.e., everyone who wanted a job had one).
Do you buy or sell stocks and real estate when the government is printing money?
MMT economists also say quantitative easing is unlikely to have the effects that its advocates hope for. Under MMT, QE – the purchasing of government debt by central banks – is simply an asset swap, exchanging interest-bearing dollars for non-interest-bearing dollars. The net result of this procedure is not to inject new investment into the real economy, but instead to drive up asset prices, shifting money from government bonds into other assets such as equities, which enhances economic inequality. The Bank of England’s analysis of QE confirms that it has disproportionately benefited the wealthiest.
Let’s see if the MMT folks were right:
Check and check!
The primary inflation control mechanism in MMT, again according to Wikipedia:
Driven by fiscal policy; government increases taxes to remove money from private sector. A job guarantee also provides a non-accelerating inflation buffer employment ratio, which acts as an inflation control mechanism.
What are the Democrats who control Congress working on right now, as the headlines are filled with reports of raging inflation? Tax increases!
First, is it fair to say that MMT is actually the mainstream economic philosophy in the U.S. and has been since at least March 2020? (In other words, the folks who run the U.S. economy profess belief in neoclassical economics, but their actions reveal a belief in MMT.) Second, have the events that unfolded since then proven that MMT is correct?
- “Rising Rents Are Fueling Inflation, Posing Trouble for the Fed” (NYT): rest assured that inflation is temporary, except that you’ll pay 10 percent more for at least the full year of your one-year lease (“That’s a concern for the Fed, because housing prices tend to move slowly and once they go up, they tend to stay up for a while. Rent data also feed into what is called “owners’ equivalent rent” — which tries to put a price on how much owners would pay for housing if they hadn’t bought a home.”)
- “As Inflation Rises, Beware of the Money Illusion. It May Cost You a Lot.” (WSJ) (average people unable to comprehend that selling a house at a profit in nominal dollars is not a success when inflation has been higher than the profit)