This morning I responded to leading Modern Monetary Theory (MMT) proponent Stephanie Kelton's Huffington Post op-ed, "How We Can Pay for a Green New Deal," with a tweet observing that
"MMT often boils down to nothing more than an especially naïve sort of Keynesianism: assume an unlimited excess supply of every resource save money balances, and, voila! monetary expansion can costlessly finance all the projects we like!"
My comparison of basic MMT arguments with plain-vanilla Keynesianism is hardly novel: many others have made it, less succinctly but more compellingly: I recommend, in particular, the writings of Thomas Palley—who is himself a self-described (but not at all naïve) Keynesian—on the topic. As for "especially naïve," that has simply to do with the fact that, unlike the situation in 1936, when Keynes published his General Theory, it is anything but obvious today that there's a vast supply of unemployed resources to be drawn upon.
Unsurprisingly my post met with backlash from several MMT fans, starting with Nathan Tankus, who replied that it appeared that I must not actually have read Professor Kelton's piece, since its point was "precisely that our budgeting process needs to emphasize the conditions of the real economy and that the ability to extract dollar revenue tells us nothing about how close we are to full employment." Professor Kelton herself thereupon chimed in, "Incredible, isn't it?," presumably in reference to my clueless interpretation of what she wrote.
Was I in fact so clueless? Well, let us have the truth from the horse's mouth. Here are some relevant passages from Professor Kelton's op-ed, reproduced ad seriatum. I apologize for the number—but then again I might serve my purpose by quoting the entire thing! The italicized words are ones I myself wish to emphasize:
Here's the good news: Anything that is technically feasible is financially affordable. And it won't be a drag on the economy…
We must change the way we approach the federal budget. We must give up our obsession with trying to "pay for" everything with new revenue or spending cuts.
The federal government can spend money on public priorities without raising revenue… . That's the power of the public purse.
As a monopoly supplier of U.S. currency with full financial sovereignty, the federal government is not like a household or even a business. When Congress authorizes spending, it sets off a sequence of actions. Federal agencies, such as the Department of Defense or Department of Energy, enter into contracts and begin spending. As the checks go out, the government's bank—the Federal Reserve—clears the payments by crediting the seller's bank account with digital dollars. In other words, Congress can pass any budget it chooses, and our government already pays for everything by creating new money.
This is precisely how we paid for the first New Deal. The government didn't go out and collect money—by taxing and borrowing—because the economy had collapsed and no one had any money (except the oligarchs).
As long as government spending doesn't cap out the full productive capacity of the economy —what economists call "full employment"—it won't spin prices out of control. Inflation isn't triggered by the amount of money the government creates but by the availability of biophysical resources that money tries to go out and buy—like land, trees, water, minerals and human labor.
Once we understand that money is a legal and social tool, no longer beholden to the false scarcity of the gold standard, we can focus on what matters most… .
Now how could I possibly have reached the "incredible" conclusion that Professor Kelton was telling readers of the Huffington Post that the government could pay for the Green New Deal (GND) by expanding the money stock ("creating new money"), and that it could do so without causing inflation, or otherwise having the GND become "a drag on the economy," thanks to the presence of ample unemployed resources? Go figure!
But let us be serious. It's perfectly evident that Professor Kelton wants us to imagine that the present situation is analogous to that of the 1930s, when the unemployment rate peaked at 25 percent, and seldom fell below 15 percent. It's also perfectly evident that she would have the government take advantage of that fact by expanding what Keynesians call "aggregate demand," particularly by spending money on Green New Deal programs. And it's perfectly evident that she thinks that the government should finance that extra spending by "creating new dollars." Finally, it's perfectly obvious that most of these beliefs are ones to which any garden-variety Keynesian might subscribe. Heck: they're beliefs with which even an old-school Chicago economist might concur!
I said "most of them." And this is where the naïvety of the Modern Monetary Theory comes into play. For its 2019, not 1933; and the (labor) unemployment rate now hovers around 4 percent, rather than above 20 percent. In other words, when both Keynes and those old-school Chicagoites were urging more government spending and money creation, they had plenty of good reason for supposing that those steps wouldn't "be a drag on the economy" and that they wouldn't fuel inflation. Professor Kelton, in contrast, has no similarly solid grounds for assuming that several trillion extra dollars of government spending today or in the near future, however financed, would neither raise prices nor divert resources from other valuable uses. It's true that, although the unemployment rate is low, the labor force participation remains low as well; and reasonable people can disagree about whether we still have some way to go before achieving full employment. But it doesn't follow that one can confidently assert that we are in fact still many trillions of dollars away from that goal.
Nor does Professor Kelton's observation that "Anything that is technically feasible is financially affordable"—with its suggestion that we might fund any "feasible" project without running into resource constraints—hold water. That something is technologically feasible means, not that it's "affordable," but only that it might be done at some finite cost. Perhaps Professor Kelton does not recognize, or does not want her readers to recognize, the difference. But a difference exists nonetheless, and it's a lu-lu. For all I know, we might populate the moon, equip every U.S. citizen with a Ferrari, or fill Lake Meade with champagne, technically speaking. But I'm quite certain we can't afford to.
My criticisms of Professor Kelton's op-ed are, I hasten to add, not criticisms of the Green New Deal per se. Perhaps the programs it entails are worth whatever sacrifices they might involve; and perhaps they, or some of them at least, will ultimately pay for themselves by enhancing productivity, as Professor Kelton also believes. Finally, I don't doubt that many will find Professor Kelton's arguments comforting. According to one of her many Twitter admirers, she is giving the public hope. Perhaps. But she's doing so by promising them the moon.