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Questions for the MMTers

Summary:
As their adherents readily, and fairly, remind me, there’s a lot I don’t understand about modern monetary theory (MMT). So, let me ask about some aspects of the theory and see if I might get me some education. First, I’ve stressed that, as I understand it, there’s no distance between my views and a core principle of MMT: the need for deficit spending when the economy is below full employment. This, of course, as Dean Baker points out, is as much Keynesian as anything else, but as the Chinese saying goes: black cat, white cat; as long as it catches the mouse. The sad, underappreciated, fact is that for much of the last 35 years (about 70% of quarters, using unemployment minus CBO’s NAIRU; (u-u*)>0 70% of the time since 1980), the US economy has operated below its potential. This is the

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As their adherents readily, and fairly, remind me, there’s a lot I don’t understand about modern monetary theory (MMT). So, let me ask about some aspects of the theory and see if I might get me some education.

First, I’ve stressed that, as I understand it, there’s no distance between my views and a core principle of MMT: the need for deficit spending when the economy is below full employment. This, of course, as Dean Baker points out, is as much Keynesian as anything else, but as the Chinese saying goes: black cat, white cat; as long as it catches the mouse.

The sad, underappreciated, fact is that for much of the last 35 years (about 70% of quarters, using unemployment minus CBO’s NAIRU; (u-u*)>0 70% of the time since 1980), the US economy has operated below its potential. This is the fundamental problem of macro, the fundamental argument against budget austerity or monetary hawkishness, and the reason why MMT or whomever else argues on behalf of expansionary fiscal policy is correct.

But here’s what I don’t get.

Overheating is possible, and taxing is a lousy mechanism for dealing with it. Though it seems a pretty distant problem given the apparent flatness of the price Phillips Curve, everyone agrees, I think, that economies can overheat. To dial back fiscal stimulus, MMT’ers argue for tax increases.

That’s fine in theory, but how does that work in the real political economy? The president goes to Congress and proposes a tax increase to bring us back down to potential, and Congress says, “sure, boss. We’re on it!”? Presidents and Congresses don’t like tax increases, and they don’t happen quickly (yes, the last tax plan came together pretty quickly—because it was a cut!), they have distributional implications, and there’s a huge industry to fight you tooth and nail.

That’s why we have a Federal Reserve that can quickly and without political interference decide to take money out of the economy (to be clear, monetary policy also has distributional implications). That seems like an immeasurably more reliable way to handle the overheating problem, but I don’t think the MMT crowd agrees, or at least I don’t understand where the Fed and interest rates exist is their cosmology.

What about the Fed? The central bank introduces another piece of the MMT framework about which I’m confused. Suppose, even if the economy is below potential, the Fed decides it doesn’t like all this money-printing and deficit spending advocated by MMTers. Consider current events. Though we’re closing in on full employment, I don’t think we’re quite there yet, and I suspect MMTers and I agree that some deficit spending could be useful right now, as I argued here. To be clear, I’m arguing for, e.g., target jobs programs for people and places left behind even in year nine of the expansion, or a more generous EITC, not cuts in the damn estate tax! But, due to the tax cut, we are going to see considerable deficit spending over the next few years.

The Fed is already pushing back. And they may well decide to push back harder, i.e., speed up their “normalization” campaign by adding more rate hikes, even if the rest of us think there’s still economic room-to-run.

We can argue all day that the Fed is making a mistake to raise in the absence of inflationary pressures, but my point is simply that the Fed exists and has the independence to offset any self-financed government spending as they see fit. For all the MMTers logic around the privilege of sovereign, fiat currency, I don’t understand how they incorporate this reality into their model.

Krugman’s “finance-ability” point: Krugman argues that self-financing is more inflationary that bond issuance, but he’s not making the above points about MMTs flawed (IMO) assumption that tax cuts could handily deal with accelerating prices. He’s worried about currency debasing:

“The point is that under normal, non-liquidity-trap conditions, the direct effects of the deficit on aggregate demand are by no means the whole story; it matters whether the government can issue bonds or has to rely on the printing press. And while it may literally be true that a government with its own currency can’t go bankrupt, it can destroy that currency if it loses fiscal credibility.”

One could argue that the government doesn’t have to sell bonds—it can just print money—but it does sell bonds, it always has and probably always will. Moreover, it doesn’t just sell them to itself. It sells them to open markets of investors who could, under conditions triggered by printing-press reliance, decide not to buy them without an exorbitant risk premium. A model that assumes otherwise may raise interesting ideas, but, like discounting the role of the Fed and interest rate policy, risks being of limited real-world utility.

Timing issues re revenue raising vs. printing money: A theme of my work, to which MMTers often object, I think, is that we need to raise more revenues to pay for public goods. I recently wrote, for example, that, given our aging population, it will take something like 3% more of GDP to meet our obligations to Social Security and Medicare/Medicaid by 2035. MMTers push back that as long as we’re below potential, we can print the money to support government spending, so stop getting so wound up about “payfors.”

But while assuming full employment is a mistake, so is assuming a) enough slack to warrant all that printing, and b) even more so, the political will to do so. Though we should always be willing to deficit spend in the near term when economic conditions warrant it, should we not structure long-term fiscal policy to avoid structural deficits (a structural deficit is one that persists even at full employment)? At least in a political sense of protecting vital social insurance programs, isn’t the prudent approach, as difficult politically as it may be, to try to lock in a level of revenue collection that meets our future obligations?

Such queries seem often to get under the skin of the MMT crowd. But I come in peace and stress our shared recognition of the horrors of budget austerity. I ask these questions in the spirit of better understanding your arguments.

Jared Bernstein
Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute, and between 1995 and 1996, he held the post of Deputy Chief Economist at the U.S. Department of Labor.

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