Power & Market
Jonathan Culbreath, posting on the American Conservative web page (March 24, 2021), urges his fellow conservatives to adopt a fashionable leftist bromide, modern monetary theory (MMT). Mr. Culbreath relies for his account of MMT on the popular book by Stephanie Kelton, The Deficit Myth, which I reviewed here. According to MMT, a government that controls its own currency never has to worry about deficit spending, because it can always print more money to pay its bills. The only thing holding it back is the danger of inflation, and this can always be averted by withdrawing money from the economy through taxation. Besides, inflation cannot occur to a damaging degree unless there is full employment. Mr. Culbreath evidently has not heard of “stagflation.” He forgets that inflation can quickly spiral out of control. There is no magic by which bookkeeping entries can erase debts without bad consequences. If something sounds too good to be true, it almost always is.
I met Murray in 1988 and I will never forget the experience. The story begins the previous year, as I was completing my bachelor’s degree in economics at the University of North Carolina and considering pursuing a PhD. I was familiar with Murray’s writings as a semicloseted Austrian in a mainstream economics program. I had seen an advertisement for some strange group called the “Mises Institute” which was offering fellowships for graduate study in economics, and I eagerly applied. Sometime later I received a letter—it was all snail mail back in the day—saying that my application had received a favorable initial review, and that the next step was “to have a telephone interview with our Vice President for Academic Affairs.” You guessed it! A phone call with Murray was arranged. You can imagine how nervous I was the day of that interview! But Rothbard was friendly and engaging, his legendary charisma coming across even over the phone, and he quickly put me at ease. (I also applied for admission to New York University’s graduate program in economics, which got me a phone call from Israel Kirzner. Talk about the proverbial kid in the candy store!) I won the Mises fellowship, and eventually enrolled in the economics PhD program at the University of California, Berkeley, which I started in 1988.
Before my first summer of graduate school, I was privileged to attend the “Mises University,” then called the “Advanced Instructional Program in Austrian Economics,” a week-long program of lectures and discussions held that year at Stanford University and led by Rothbard, Hans-Hermann Hoppe, Roger Garrison, and David Gordon. Meeting Murray and his colleagues was a transformational experience. They were brilliant, energetic, enthusiastic, and optimistic. Graduate school was no cake walk—the required core courses in (mathematical) economic theory and statistics drove many students to the brink of despair, and some of them doubtless have nervous twitches to this day—but the knowledge that I was part of a larger movement, a scholarly community devoted to the Austrian approach, kept me going through the darker hours.
That week-long experience in the summer of 1988 was amazing, not just for the instructional content per se, but also for the social and informal aspects. Nearly all reminiscences of Murray note his indefatigable spirit, his incredible energy, and his humor, as well as his penchant for late-night dining, drinking, and discussion. There was plenty of that, and it was a privilege to hang out with Murray and the other faculty (though few could hang in there until the wee hours) and students. In these conversations, while Murray was the center of attention, he didn’t dominate the conversation, but asked questions, listened, and engaged. Along these lines, Murray was what people today call a “lifelong learner.” I remember one session of the conference at which one of the other faculty was presenting. Murray was in the audience and I was sitting right behind him. At one point I leaned forward and was shocked to see that he was taking copious notes. I thought, Doesn’t this guy already know everything? But no, he was paying close attention to the other speakers—themselves younger Rothbardians—hoping to pick up a few nuggets of insight, some new perspective or approach, a new interpretation, or another way of increasing his own understanding. I have tried to model that behavior in my own career.
Modern monetary theory, with origins both in chartalism and the "functional finance" doctrine of the 1940s, is the freshest left-progressive gambit to justify radically increased federal spending. It is functional finance, promoted by post-Keynesian economist Abba Lerner, to which Mises refers in this 1950s passage from the new edition of The Theory of Money and Credit. Mises also quotes Beardsley Ruml, the New York Fed chair who in 1945 delivered a talk before the American Bar Association titled "Taxes for Revenue Are Obsolete." This talk, later published in American Affairs, makes the protoargument for MMT: sovereign national governments, with full control over their treasuries and central banks, can issue money at will to fund government expenditures. Absent any need for taxes, the justification for their continued imposition becomes social and economic, not fiscal.
Everything old is new again. Mises could be describing the thoughts of an MMTer today:
For the naive mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government's Treasury Department! The government, professors tell us, "can raise all the money it needs by printing it." Taxes for revenue, announced a chairman of the Federal Reserve Bank of New York, are "obsolete." How wonderful! And how malicious and misanthropic are those stubborn supporters of outdated economic orthodoxy who ask governments to balance their budgets by covering all expenditures out of tax revenue!
At the Libertarian Scholars Conference in 2018, our associated scholar Jo Ann Cavallo (Columbia University) presented new research on the literary figure Malaguerra and how he has been used to express "a critical attitude toward the State" in Italian puppet theater. This research has now been published in the journal Achilles Orlando Quixote Ulysses (AOQU) as “Malaguerra: The Anti-state Super-Hero of Sicilian Puppet Theater,” AOQU 1 (July 2020): 259–94.
The abstract states:
Although this literary figure is little known today, Morbello/Malaguerra was famous in Sicily and elsewhere in Italy from the mid-19th to mid-20th century. This essay focuses on his vicissitudes in print (Storia dei paladini di Francia) and on the puppet theater stage, with some attention to the spread of his name and adaptation of his adventures outside Sicily, both in the epic Maggio tradition of northern Italy and in the scripts of a Catanese puppeteer active in New York City. Because Malaguerra repeatedly contests the injustices perpetrated by those in power, his story reminds us that l’opera dei pupi was not simply a chivalric soap opera for the masses before television, but could be a vehicle to express a critical attitude toward the State under the cover of dramatizing medieval and Renaissance epics. Indeed, it may be that puppet theater’s political undercurrent was a factor in its massive popularity both in southern Italy and among Italian immigrants in urban centers of the New World. More generally, the essay aims to contribute to the discussion of political ideologies in the chivalric epic genre, especially in the context of Italian popular culture.
Ludwig von Mises was called several names and epithets in his life, by his admirers and enemies alike. His friends and colleagues dubbed him the “Last Knight of Liberalism,” while his critics called him intransigent, fanatic, and even less flattering epithets.
Just recently I came across another nickname the great Austrian had in the 1920s and 30s: the sunny pessimist. Writing to Bettina Greaves in 1974, Karl Menger, the son of the famous economist, recounts how this came about:
In the years 1927–36, I often met Mises in homes of common friends. In the second half of that period he mad[e] the most terrible predictions. (Once, I was told, a lady after listening to him for half an hour retired and had to be comforted.) All his gloomy prophesies (later surpassed by reality) were uttered with complete equanimity and a constant smile, which earned him the nickname of the sunny pessimist.
It is easy to understand how Mises could be pessimistic in the 1920s and '30s, as Europe was descending rapidly into the hell of socialism. He could explain almost in real time how the policies of the Nazis and the socialists they replaced in power led to the destruction of civilization and the world war. Omnipotent Government from 1944 is perhaps his fullest explanation of the process of the destruction of German civilization, but he saw the same trends in other European countries. Thus, in 1940, in the manuscript that was later published under the title Interventionism: An Economic Analysis, Mises wrote that the Nazis had practically won before they even invaded France; the policies of the western democracies were practically indistinguishable from the National Socialists’, and the French government found it more important to prosecute war profiteers than to ensure adequate provisioning of the French army.
It is more impressive that Mises kept calm and smiling throughout, just like Vera Lynn urged the British soldiers to. Already at the end of the First World War, Mises recounts in his Memoirs (p. 55), he had arrived at the “hopeless pessimism that had long pervaded the best minds of Europe.” Yet his personal philosophy allowed him to escape the apathy such pessimism can lead to. Already as a teenager he had chosen a line from Virgil: tu ne cede malis sed contra audentior ito (do not give in to evil but proceed ever more boldly against it) as his motto. This continued to be his attitude through the darkest days of European history.
Another anecdote recounted by Rudolf J. Klein, one of Mises’s pupils, may substantiate Mises’s prophetic abilities. Writes Klein:
In 1935 he [Mises] came back to Vienna from Geneva for a short visit. I saw him at his old office at the Chamber of Commerce and asked what he thought would be the final outcome of the Hitler regime. He replied (in 1935!), “When one wing of the German army will be at Vladivostock and the other at Gibraltar, the whole thing will break down!”
Aside from the geographic inaccuracies—as is well known, the Germans never invaded Spain and they were stopped at Moscow and Stalingrad, not Vladivostok—Mises’s foresight is eerie. Others, it is true, predicted German aggression throughout the thirties, but those predictions seem based on little more than Teutophobia. Mises, on the contrary, loved German culture, was well read in the German classics and German philosophy, and it pained him deeply to see the destruction of German and European civilization. Yet he understood the inevitable outcome of socialism and autarky: the breakdown of the international division of labor and war.
Mises’s social philosophy is just as relevant today as ninety years ago for understanding the chaos around us. Ideas rule the world, and the real factor supporting the ruling elite is always the dominant ideologies. Just like Mises had to battle the Marxist and non-Marxist socialists who took power across Europe in the first decades of the twentieth century (and in most places hold on to it to this day), so today we are faced with cultural Marxists and progressive mobs. Since there is no way to defeat them in the long run except by exposing their erroneous and antisocial doctrines, and since the “progressive” barbarians may well remain in control for the foreseeable future (and cause untold damage to the economic and spiritual civilization of the West—or what’s left of it), it’s well to keep before us Mises’ personal example. There are reasons enough to be pessimistic, but let us at least be sunny pessimists.
Tu ne cede malis sed contra audentior ito.
In his noneconomic magnum opus, The Ethics of Liberty (henceforth TEoL), Murray Rothbard outlined what he considered to be the fullest and most complete ethical system of freedom and libertarian natural law. Additionally—at least up until Hans-Hermann Hoppe introduced his argumentation ethics—Rothbard also considered this book to contain the strongest available ethical case for libertarian self-ownership, property, and the nonaggression principle. The most famous and elaborate component of Rothbard’s moral case is his natural law system, which was a renovation of older Scholastic and Thomistic natural law and took up the majority of TEoL’s early chapters. I do not, however, consider his natural law to be Rothbard’s strongest case for liberty, even though he seemed to think it was.
Natural law is very interesting and enlightening, but Rothbard’s real strongest argument is one which I rarely see mentioned (besides Kuznicki’s interesting summary) and which I call the Rothbardian trilemma. Rothbard lays it out almost offhand, to the side of what he seems to think is his primary argument, in chapter 8, “Interpersonal Relations: Ownership and Aggression.” Here is how he introduces it:
Here there are two alternatives: either we may lay down a rule that each man should be permitted (i.e., have the right to) the full ownership of his own body, or we may rule that he may not have such complete ownership. If he does, then we have the libertarian natural law for a free society as treated above. But if he does not, if each man is not entitled to full and 100 percent self-ownership, then what does this imply? It implies either one of two conditions: (1) the "communist" one of Universal and Equal Other-ownership, or (2) Partial Ownership of One Group by Another—a system of rule by one class over another. These are the only logical alternatives to a state of 100 percent self-ownership for all.
Essentially, the argument goes like this: someone must control our bodies, because otherwise we are left in a contradictory state where we can do nothing with ourselves, not even commit suicide, because we would be controlling (or, in the case of suicide, damaging) property that we do not own. Now, if someone must control our bodies, there are three different ways we can arrange that right of control—which is what we call right of ownership—of bodies:
- Everyone owns (“the libertarian natural law for a free society”)
- Everyone owns everyone else equally (“Universal and Equal Other-ownership,” as Rothbard calls it)
- Some (group of) people own others (“Partial Ownership of One Group by Another”)
Only some of these are tenable, as we shall see.
Rothbard next begins to knock down alternatives (2) and (3)—either showing them to be untenable or unethical. First, he deals with (3):
here, one person or group of persons, G, are entitled to own not only themselves but also the remainder of society, R. But, apart from many other problems and difficulties with this kind of system, we cannot here have a universal or natural-law ethic for the human race. We can only have a partial and arbitrary ethic, similar to the view that Hohenzollerns are by nature entitled to rule over non-Hohenzollerns.
Essentially, option (3) fails the universalizability test: if you would choose this option, the burden of proof falls on you to show why some should rule. Ask yourself, what is it about a king or an aristocracy that gives them the right to rule their subjects? The the divine right of kings previously supplied just that sort of justification—yet even that justification fails, because it is an impossible task. Although there are many differences between rulers and subjects, there are none which are ethically relevant.
Next, Rothbard takes (2) out of the running. First, he points out that “if there are more than a very few people in the society, this alternative must break down and reduce to…partial rule by some over others.” This is because, he says, “it is physically impossible for everyone to keep continual tabs on everyone else, and thereby to exercise his equal share of partial ownership over every other man.” It is impossible, in other words, for every man to get permission from every other man before he does what he wants to do: we would all die before that was possible. Moreover, as Rothbard says in the next paragraph, “it is surely absurd to hold that no man is entitled to own himself, and yet to hold that each of these very men is entitled to own a part of all other men!” For, how could they vote on what the other people should do, without exercising unilateral control over their own decision and mouths? If they did not exercise such unilateral control, there would first have to be a vote on how everyone could vote—ad infinitum! In this way, we can see that universal and equal other-ownership is already an impossible situation.
Now, it is possible that such control rights, which Rothbard would call ownership, could be exercised on a “retroactive” basis: essentially, everyone is free to exercise unilateral control over themselves until there are enough votes telling them to do something else to outweigh their partial share in their own bodies—two votes, in the case of equal other-ownership. This would solve the problem of infinite voting regress, but it would likely result in first-come-first-served aristocracy, where whoever can jet around the fastest (along with a buddy) and “command” the most people would own all of those people, including how those people vote. Additionally, this assumes that one needs only a majority of those present, and not a unanimity, to make a decision—an assumption which is in fact contrary to universal equal ownership. All this really devolves back to (3), since those who aren’t around currently don’t get to exercise ownership rights and become slaves of the person with the bigger army unless they bring an army of equal size. Also, this arrangement, where everyone has de facto control over themselves, but a different kind of control over others, which requires not their permission before their “property” is used, but their assertion of a contrary rule, is a double standard which would actually have to be voted for by an equal other-owning collective like the one described above, therefore not actually escaping infinite regress.
There are a few other options which Kuznicki mentions in his article which I would like to address briefly as well, since the natural objection to the Rothbardian trilemma is to attempt to break out of it. First, he muses that “in the real world, people may acquire use rights not only through ownership, but also through lease, rent, borrowing, or other forms of agreement with the owner….it is not necessarily clear that all types of use rights must stem from someone’s ownership somewhere.” My challenge to this, then, is to find just such a moral claim which does not simply regress to option (3) as the use-until-contradiction option I covered above does. This is a claim which would have to be substantiated, because as far as I am aware, partial ownership, no ownership, and whole ownership cover the entire breadth of possible arrangements of control rights. After mentioning briefly a possible theological turn for this, Kuznicki moves on to his final point on the subject: “if we have use rights, but not ownership, many of the same assertions Rothbard later makes will still be valid.” Here I would ask, What is the difference between having use, or control, rights, and having ownership? If I have a right to control every aspect of something, that is identical to full ownership: if someone else tries to control it, that means that for a time I do not have control of it. If I have only partial control rights over something, then I have partial ownership, which is already covered in the trilemma. Hence, we return to option (1): libertarian self-ownership, which reveals itself to be the only option which is both desirable and logically possible.
In conclusion, I find this to be a much stronger case for libertarian self-ownership than any other that I am aware of. It requires, moreover, very little buildup or framework, and makes almost no assumptions, making it ideal for those not already willing to consider libertarianism. In light of this, I am very surprised to find that it is not mentioned all that often. I think that, with some extending and defending, it could even be stronger than argumentation ethics.
Listen to the Audio Mises Wire version of this article.
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.
A main thesis of modern monetary theory (MMT) is that fiscal deficits are not a problem. On the contrary, they create financial assets for the private sector (in a closed economy, a public sector deficit equals a private sector surplus). Moreover, if the government can always create money to cover its expenses, there is no need to fuss about government deficits. The pursuit of a balanced budget is, according to MMT supporters, completely misguided.
Ultimately, from an accounting point of view, public debt is a financial asset of the nonpublic sector, while, as L. Randall Wray’s writes in Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, “government deficits equal non-government’s surpluses, generating income that can be saved.”
This claim is very Machiavellian. From an accounting point of view, everything is correct, strictly speaking. The deficit in one place must equal the surplus in another. Conversely, governments can get into debt only if citizens put aside some savings that they agree to pass on to the government. At first glance this may sound fairly reasonable.
This sort of accounting, however, obscures the economic nature of events and tells us nothing about causality. We can change the definitions of our accounting terms all we want, but that still won’t mean that government deficits can produce prosperity.
We also encounter MMT confusion when it comes to the interpretation of budget surpluses. According to Wray, the Clinton administration’s budget surpluses were “just the flipside to the private sector’s deficit spending.” That is, they were simply a side effect of private sector deficit-financed expenditure. However, it is unclear how the private sector could be indebted to the government, which shows that this whole approach is highly suspicious.
Indeed, the supporters of MMT once again redefine the basic terms. As Robert Murphy notes, “when MMTers speak of ‘net saving,’ they don't mean that people collectively save more than people collectively borrow. No, they mean people collectively save more than people collectively invest.”
the MMTers are certainly correct when they observe that “private saving net of private investment” can't grow without a government budget deficit (again if we disregard foreign trade). But so what? The whole benefit of private saving is that it allows for more private investment.
By redefining “net saving” in this way, MMTers are ignoring the primary source of wealth creation, i.e., investments (and an increase in the market value of assets). Of course, any definition can be used, but the supporters of the MMT have chosen one that suggests that the government must have a deficit for the private sector to increase its net savings. The fact that any debtor’s obligation means a creditor’s claim is irrelevant to the basic fact that the private sector can increase its savings and assets even in a situation without a government deficit.
The above analysis clearly shows that MMT is largely based on semantic manipulations and using definitions different from generally accepted ones. However, when you get through this conceptual chaos, you see clearly what the MMT is all about. The whole theory seems to exist only to justify higher government spending and larger budget deficits (it is no coincidence that Congresswoman Alexandria Ocasio-Cortez or Senator Bernie Sanders refer to the MMT when asked about the source of funding for the Green New Deal or universal healthcare and free higher education).
Let’s give the floor to Wray himself (p. 8):
Imagine how the policy discourse will be changed when our President could no longer claim that “Uncle Sam has run out of money”; when our government can no longer refuse to create jobs, or to build better infrastructure, or to put astronauts on Mars because of lack of funds.
For the supporters of MMT, the government is almost a divine institution that creates money with its expenses and does not have to worry about this dismal economics and the limitations of its laws. Government deficits are not bad and do not lead to a crowding-out effect and interest rate increases. On the contrary, in the MMT view, deficits lead to decreases in interest rates, because they increase the amount of bank reserves; they also allow the private sector to accumulate wealth. As long as it issues its own currency, the government has virtually no financial restrictions. Limitations exist only in the minds of politicians and orthodox economists—we can afford much more; we can finally have full employment!
It is not surprising, therefore, that the MMT has recently gained despite its theoretical problems. The controversial program that turns the whole of economics on its head, promising full employment, must attract public attention, especially in times of economic crisis. Let’s hope, however, that this popularity will not prove permanent and MMT will be abandoned.
It seems that modern monetary theory (MMT) doesn't make a real distinction between monetary policy and fiscal policy. If that's the case, then a system based on MMT has no need of a central bank.
In the last several years modern monetary theory has been thrust forth excitedly by the more progressive ranks of the Democratic Party, led by Bernie Sanders and Alexandria Ocasio-Cortez, as a wondrous, curative economic elixir. MMT being brought to the fore has stimulated a robust discussion that has prompted many good questions. Not yet among them to my knowledge, however, are: Why do we still need the Fed, and does this mean that we should lower taxes?
For those who are unfamiliar with it, MMT is perhaps best explained by metaphor. Stephanie Kelton, the chief economist for Bernie Sanders’s campaign in 2016 and a leading MMT economist, has explained it in terms of a bathtub being filled up with water. The spigot is the federal government; the water is money; the tub is the economy; and the drain is taxes. According to MMT, when the Federal government needs money it simply “turns on the water” by contacting the Treasury, which contacts the Fed, which credits the federal government’s account at the Fed for that amount. The government then spends that money into the economy; to continue the metaphor, water is filling up the tub. Now there is only so much space in the economy for additional money. This is because, as we all know, more money chasing the same amount of goods causes inflation. To manage this, according to MMT, the government taxes money out of the economy as necessary—“draining the water.”
Recognition of this last point, according to its advocates, represents a serious contribution on the part of MMT theorists—the idea that the government isn’t collecting taxes to fund programs, but to manage inflation (when it needs money for government programs, it just turns on the spigot and runs more water into the tub).
Two things stand out. First, in the MMT conceptual framework there is no role for the Fed. Reading both Warren Mosler's and Stephanie Kelton’s available books and papers (the two economists most closely associated with MMT), that was what really stood out as differentiating them from the various post-Keynesian schools, from which they are otherwise all but indistinguishable: that MMT seems to make no distinction between monetary and fiscal policy. So, if MMT is correct, why do we still need the Fed?
Second, if, as MMT proponents claim, preventing inflation is simply a matter of ensuring that productive output rises at a consonant rate with the increase in the money supply, so that the same proportion of dollars are chasing the same proportion of goods and services in the future, it would seem to me, then, that all that needs to be shown is that letting individuals, businesses, and corporations spend their money how they want is more efficient in terms of ensuring total future production than taxing it out of existence to make way for more of its own spending. This is something that should be no more difficult to evidence than trips to the local post office and FedEx store, respectively. Far from suggesting that we raise taxes, the MMT framework seems to suggest the opposite: so does this mean we should lower taxes, too?