MMT: Not Modern, Not Monetary, Not a Theory
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Modern monetary theory (MMT) has a new champion, and a new bible. Stephanie Kelton, economics professor at SUNY Stony Brook, is the author of The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. Professor Kelton was an advisor to the Bernie Sanders presidential campaigns, and her ideas increasingly find purchase with left progressives. It is certainly possible that she has a future either in a Biden administration or even on the Federal Reserve Board, which is a testament to how quickly our political and cultural landscape has shifted toward left progressivism. And left progressivism requires a "New Economics" to provide intellectual cover for what is essentially a political argument for painless free stuff from government.
Kelton's essential argument, first advanced by MMT guru Warren Mosler in the 1990s, is quite simple: federal spending is unconstrained by revenue. Taxes function only to regulate demand and hence inflation; federal borrowing functions only to regulate interest rates. Sovereign government treasuries can create and spend as much money as they like to stimulate growth, especially when the economy is underperforming. If inflation spikes, taxes can be imposed to take money out of the economy.
Thus the only constraints on unlimited government spending are political. Unleashing ourselves from these "self-imposed" constraints, as Mosler puts it, is purely a matter of political will. Revenue is irrelevant to how you fund a government, so why not use government to fund the economy as a whole?
I direct readers to Dr. Bob Murphy's recent substantive review of Kelton's book here, as Bob does a thorough and effective job of debunking MMT and providing Austrian rebuttals to her claims regarding money, debt, and deficits. But I would make three quick points of my own:
- MMT is not modern. Kings have used seigniorage and currency debasement for centuries to fund their endeavors, always at the expense of their subjects.
- MMT is not monetary. It is primarily a fiscal approach to state finance, focused on tax policy as the economic accelerator and brake. Its roots predate the US Federal Reserve Bank, and in fact predate the present notion of "monetary policy." MMT finds origins in early twentieth-century chartalism, whose proponents opposed gold in favor of paper money issued by government and mandated as legal tender. It is also a genealogical heir to the Greenbackers of the late 1800s, who believed Congress should direct the issuance of unbacked paper currency.
- MMT is not a theory. It is accounting. In fact, it relies on an accounting subterfuge which bizarrely claims government deficits represent private (societal) surpluses. Because government is the font from which currency springs, all financial assets (denominated in that currency of issue) exist thanks to government! Thus, under "national accounting," the more government spends, the richer we the people get. When tax revenue is $100 but government spends $120, Americans are richer by $20. And so on. This is not a theory; this is accounting gimmickry almost purposefully designed to obscure what's really going on.
In the relentlessly circular world of MMT, government is the source of all finance and in effect all wealth. Taxpayers don't fund government, because after all government first provides the "tokens" (currency) taxpayers need to pay their IRS bills! Government funds taxpayers, which is broadly speaking what the American left really believes. It's a version of Obama's "You didn't build that" rewritten into policy.
But let’s not kid ourselves: the US federal government already finances its operations, at least in part, using conjured money. 2020 federal spending may exceed $8 trillion as Congress and the Trump administration blow the roof off the authorized $5 trillion budget with COVID relief bills. More than half of that amount, maybe as much as $4 trillion, will be "deficit financed"—a nice way of saying not financed by tax revenue. This is a first in American history, to put it mildly.
This $4 trillion will not simply issue forth from Treasury Department printing machines, as Kelton would prescribe, but the effect is the same: the Treasury issues debt to cover the shortage, which the "public" buys, implicitly understanding that the Fed will always provide a ready market for such debt. And where does the Fed get the money to buy Treasurys? It creates it from nothing, in Keltonite fashion.
Chicagoites, market monetarists, supply-siders, NDGP targeters, and other free market proponents frankly don't have much to say about MMT. They already accept the premise of "monetary policy," i.e., that government or central banks should issue and control money in society. They already accept treating the money supply and interest rates as forms of policy tools. They already accept deficits and taxes as methods to prime or slow the economy. So although they may object to how Ms. Kelton wants to use money politically, they can't much object to whether money is used politically.1
Kelton deserves credit for writing a book aimed at lay audiences instead of for her peers in academic economics. Unlike most of those peers, she seems genuinely interested in helping us understand how the world works. And unlike most left progressive academics, she also seems interested in helping average people improve their lot in life. Perhaps most importantly, she does not display the kind of contempt and anger toward Red State America we see from the Paul Krugmans and Noah Smiths.
It's easy for those of a free market bent to dismiss MMT out of hand, but the impulse to create something from nothing resides deep in the human psyche, and politics is where this impulse finds expression. We should not underestimate the allure of MMT in the midst of our current upheavals, because it appears to make possible every left progressive program: unlimited public works and federal jobs, useless and uneconomic green energy schemes, reparations for black Americans, Medicare for All, free college, free housing, and a host of others. MMT is the perfect economic proposal for those who sincerely and deeply believe wealth simply exists in America, and will continue to exist, regardless of incentives. All we need to do is figure out how to more fairly divvy it up—and so why not through government spending?
The promise of something for nothing will never lose its luster. MMT should be viewed as a form of political propaganda rather than any kind of real economics or public policy. And like all propaganda, it must be fought with appeals to reality. MMT, where deficits don't matter, is an unreal place.
- 1. Austrians have always decried state-ordered or central bank monetary expansion per se, because it produces no new wealth in society but benefits those closely connected to the new money. And Austrians consistently apply Say's law to refute the entrenched idea that demand and consumption form the foundation of a healthy economy.