The Nice Limits of Modern Monetary Theory

modern monetary theory, Stephanie Kelton, deficits, fiscal spending, monetary policy

modern monetary theory, Stephanie Kelton, deficits, fiscal spending, monetary policyIn my Twitter feed the other day, I came across a link to a website "dedicated to explaining and promoting awareness of Modern Monetary Theory." The site is called "We CAN Have Nice Things," and its summary of MMT seems to me to represent reasonably well how MMT is understood by many of its fans, if not by MMT experts themselves. That summary also "nicely" shows just how cavalier MMT enthusiasts can be when it comes to describing MMT's practical policy implications—and particularly the quantity of "nice things" we can have by heeding its advice. Whether MMT experts themselves are to blame for this is a good question. Perhaps they regret that their fans keep exaggerating their theories' policy implications. But at least some of them seem to make similarly exaggerated, or at least highly speculative, claims.

The Green Land of Cockaigne

The exaggerations I have in mind occur in the "Nice" webpage's opening paragraphs:

We CAN have nice things. We can provide a well-paying job for anyone who wants one. Medicare-for-All. Child care. Tuition-free public college and excellent public schools. Modern infrastructure including high-speed rail from city to city. We CAN have nice things that make our lives better.

We can (and must) implement a Green New Deal to de-carbonize the economy and address the climate crisis.

Because the US government issues its own currency, it can’t “run out of money” or go bankrupt. That means “We the People” can — and should — spend what we need to spend on what we want and need without worrying about “how to pay for it.”

To paraphrase: if governments would only take MMT insights into account, instead of heeding the advice of other clueless antediluvian economists, folks can all enjoy all sorts of extra goodies: better health, education, and welfare; better transportation; a cooler planet; and more besides. Nor need they pay for them. Instead the US government can. And it can do so without having to tax people more, and without burdening the economy with higher interest rates. The government must only take better advantage of the fact that it "issues its own currency." It has, in other words, only to create the necessary paper and digital dollars.

This take on MMT is certainly not unique to the website in question. Nor is it found only among overzealous MMT fans. It's quite similar, for example, to one offered some weeks ago by Stephanie Kelton, one of MMT's leading lights, with which I took issue in a previous post, and it is, I believe, an important reason for the recent surge in MMT's popular appeal.

Real versus Nominal Limits

As every politician knows, promising people the moon is a good way to get their attention—and their votes. But MMT, as represented here and elsewhere, purports to have uncovered otherwise unappreciated truths about the workings of economies equipped with fiat-money-issuing governments—truths that reveal that it's not only possible but easy for politicians to actually deliver on scores of such promises without raising taxes or interest rates. They might deliver on them, in other words, without making the public do without some of the "nice things" they've already got.[1]

What are those unappreciated truths? The technical MMT literature is mainly devoted to arguments concerning the ways in which money is created and particularly the bearing of government spending on money creation. Some of these arguments are themselves dubious, while others do indeed contribute to our understanding of "modern" monetary systems.

But these subtle points about the mechanics of money supply don't supply the ultimate basis for the claims that have made MMT so popular—claims, not merely to the effect that the government can always "pay for" nice things in the sense of not lacking the paper or digital means for doing so, but to the effect that it can also allow us to "have" more nice things.

That essential distinction—one between the limits of money creation and those of real-goods creation—is one that seems to me all-too-easily lost sight of in the oft-repeated MMT-based claim that "paying for" the GND will be a cinch. Admittedly, Modern Monetary Theorists themselves don't see things this way. Instead some claim that drawing more attention to real resource limits is just what they're trying to do. "By reframing the question of 'how are you going to pay for it?' into a question away from financial resources and toward real resources," Nathan Tankus, Rohan Grey, Scott Ferguson, and Raúl Carrillo write, "we move public conversation to new and better terrain."

But with all due respect to these and other Modern Monetary Theorists, that is precisely what MMT has not managed to do. On the other hand, it's what orthodox economists, starting with Hume, have themselves been trying to do from the discipline's earliest beginnings."Though the wages of the workman are commonly paid to him in money," Adam Smith wrote, "his real revenue, like that of all other men, consists, not in money, but in the money's worth; not in the metal pieces, but in what can be got for them." He might well write today that "paying for" the GND properly means, not just paying with bits of paper, but paying with the real resources that can be got for those bits. Instead of serving to make people, and Democratic politicians especially, more conscious of such elementary truths of orthodox economics, MMT, with its repeated insistence that the government can always "pay for" anything, appears simply to have given those politicians an excuse to ignore those classical economics strictures and to instead conclude that the government's capacity to supply real goods is as vast as its powers of money creation.

Real Limits Matter, Theoretically

This isn't to say that MMT enthusiasts, experts and amateurs alike, don't recognize real resource constraints. They do. "Of course, there are limits," the "Nice" homepage says. "Our spending limit is inflation; we mustn’t exceed the time, materials and human resources available to produce what we fund." This couldn't be more explicit or more correct; and similar statements are common in the MMT literature.

But when one recalls the "Nice" homepage's earlier paragraphs suggesting, not merely that the government might offer some additional goodies to its citizens without running into any resource constraints, but that it might offer many trillions of dollars worth of such goodies without doing so, one realizes that the real resource constraint that our MMT fans recognize is one that they regard as so unlikely to become binding that we need hardly be concerned about it. Yes, inflation becomes a problem as the output gap narrows. But never mind: just now that gap is is as wide as the ocean.

Keynes, admittedly, took the same approach when he wrote the General Theory. But there's a difference, and its a lulu. The General Theory was written in the midst of the Great Depression, when the US unemployment rate, as conventionally measured, was 15 percent or more. The unemployment rate today is just 3.6 percent. That's lower than it's been at any time since 1969, and also a full-percentage point below the CBO's current NAIRU ("Non-Accelerating-Inflation Rate of Unemployment") estimate. It doesn't follow, of course, that we're presently at, let alone above, full employment: for one thing the CBO estimate is notoriously unreliable. Still it's far from obvious that the government can start spending several trillion dollars more each year before it reaches it.

I say "several trillion dollars," because no one can say with any greater accuracy just what the broad set of Green New Deal programs will cost. The center-right  American Action Forum's much publicized figure of $93 trillion over a decade is regarded by its own authors as an upper bound only, their lower-bound estimate being $50 trillion. One estimate places the costs of making the US power-grid  emission-free alone north of $13 trillion. Noah Smith, who considers himself "libertarian-left," puts the back-of-the-envelope cost of the whole GND package at $6.6 trillion a year, or closer to the AAF's lower bound, most of which would be spent not on the GND's environmental initiatives but on its social programs. Even by this relatively conservative estimate the GND would, according to Smith, "spend the US into oblivion," for the figure amounts

to about 34 percent of the U.S.’s entire gross domestic product. And that’s assuming no cost overruns — infrastructure projects, especially in the U.S., are subject to cost bloat. Total government spending already accounts for about 38 percent of the economy, so if no other programs were cut to pay for the Green New Deal, it could mean that almost three-quarters of the economy would be spent via the government.

Is it plausible that programs costing 34 percent of current US GDP can be financed by money creation without running up against those pesky real resource constraints, or by exceeding them only by a margin consistent with a tolerable level of inflation? I very much doubt it, which is another way of saying that I doubt that GND can be paid for without diverting substantial amounts of presently-employed real resources from their current uses.[3]

But Not Really

Perhaps some MMT experts doubt it as well, even if some of their enthusiastic fans don't. Perhaps some will even express such doubts publicly. But I'm not holding my breath, and especially not after reading the response of three of the smartest MMTs (Scott Fullwiler, Rohan Grey, and Nathan Tankus) to Josh Barro's observation that

If the government prints and spends money when the economy is at or near full employment, MMT counsels (correctly) that this will lead to inflation, and prescribes deficit-reducing tax increases to reduce aggregate demand and thereby control inflation.

Barro's statement seems like a fair interpretation of what I myself would like to consider the sophisticated MMT position—namely, that the real resource constraint is real, and that it's the same sort of real resource constraint that orthodox economists recognize. But it turns that that isn't their position. Instead, our sophisticated MMT experts reject Barro's interpretation. "When we suggest that a budget constraint be replaced by an inflation constraint," they explain,

we are not suggesting that all inflation is caused by excess demand. Indeed, from our view, excess demand is rarely the cause of inflation. Whether it's businesses raising profit margins or passing on costs, or it’s Wall Street speculating on commodities or houses, there are a range of sources of inflation that aren’t caused by the general state of demand and aren’t best regulated by aggregate demand policies.[2]

Since this is intended to contradict "Barro's assertions" to the effect that if it's not to lead to inflation the GND might have to be financed through higher taxes after all, it can only be understood to mean that our experts do not believe that having the government print and spend money when the economy is at or near full employment will lead to inflation. It follows that the inflation constraint isn't a constraint on government spending after all, since there's no point in trying to regulate inflation by means of "aggregate demand policies," including policies that would limit how much the government spends![4]

Buyer Beware

So yes, the inflation constraint makes an appearance on the "Nice" summary of MMT that I've chosen to pick on, just as it does in many other MMT-inspired arguments for the GND. But the more one looks into it the more it resembles those disclaimers and warnings rattled-off at the end of TV ads for prescription drugs: "Take Zylodrin and You'll Look 20 Years Younger*" (*FDA Warning: Not recommended for persons over 25.) The "nice" stuff is the pitch that sells the product. The disclaimer then explains, to anyone who's still paying attention, that MMT's paper-money prescription may not be all that nice after all.

I know fully-well that MMTs will scoff at these criticisms, informed as they are by passages on an amateur website, and that they will accuse me of not delving into their more academic writings. But I say that criticism misses the point, for my concern here isn't with the fine points of Modern Monetary Theory, some of which are of genuine merit. It's with the way MMT has been and continues to be used, both by the authors of the website in question and by some expert MMTs themselves, to sugar-coat the Green New Deal. Nor am I aware of attempts by any expert MMT to throw cold water on what might perhaps be fanciful interpretations of the implications of their theories. Instead, when I peruse expert MMT writings concerning the GND, I'm led to conclude that the amateurs are doing those writings full justice.

Snake oil, it turns out, isn't all that bad for you; in fact some versions are actually good for you. Still it became a byword for quackery when versions, inferior or not, were pitched as cure-alls. Likewise, no matter how many valuable insights Modern Monetary Theorists have to offer, so long as those insights continue to packaged and sold as painless remedies for long-lists of economic ills, people will have reason to take them with a grain of salt.


[1] Note that I'm not saying that an exchange of "other goodies" for improved schools, public transportation, etc. isn't worth it. I'm pointing out how MMT is understood by many to mean that no such exchange is necessary.

[2] Another sophisticated MMT expert, Randall Wray, doesn't seem to share this view. In answer to the question, "Could there be too much of a good thing?", he says "Yes, and the consequence would be inflation. The problem is not with bonds, but rather the spending behind deficits that exceeded productive capacity." However he adds that "MMT doesn't advocate running up aggregate demand" precisely because "that would cause inflation before reaching full employment." Instead it "relies on the job guarantee. It offers a basic wage (we advocate $15 per hour, consistent with GND), providing a GND job to anyone willing to work." So we come right back to those oceans of unemployed resources.

[3] To put the values here into perspective, 34 percent of current U.S. GDP is about $6.8 trillion. That means that spending on the combined GND programs will amount to about $1.13 million annually for each of the roughly 6 million persons who are presently unemployed. (Note added 5/14/2019.)

[4] I said that the authors of this argument are all "smart," and indeed they are. But I hasten to add that the argument itself seems mistaken. The premise that most inflation is of the cost-push sort is itself controversial, to put it mildly. But the logic of the rest of the argument makes no sense at all. It is like arguing that, because most boiler explosions are caused by corrosion rather than by excessive pressure, we needn't trouble to regulate the pressure. Having gone rounds with MMTer's, I know they will hotly deny that this is a fair description of their position. And it wouldn't be in a different context. But their argument can either be sensible, or it can serve to rebut Barro's claim that GND spending beyond the point of full employment will call for increased taxes to avoid inflation. Both things can't be true. (Note added 5/10/2019 at 1:30PM: The MMTs respond that  part of their response to Barro, not mentioned by me, is that there are other ways than increased taxation by which to offset government-sponsored increases in aggregate demand. This is correct, and I apologize for overlooking it. But it remains the case that some kind of demand offset is needed notwithstanding that excessive demand growth may not be the only cause of inflation.)