Modern Monetary Theory Is Actually Mentioned in the Mainstream Media

There’s a very interesting, and fair, article about Modern Monetary Theory (‘MMT’) in The Washington Post. While I’ve written about similar ideas many times before, I think this is a good summary (boldface mine):

In a “fiat money” system like the one in place in the United States, all money is ultimately created by the government, which prints it and puts it into circulation. Consequently, the thinking goes, the government can never run out of money. It can always make more.

This doesn’t mean that taxes are unnecessary. Taxes, in fact, are key to making the whole system work. The need to pay taxes compels people to use the currency printed by the government. Taxes are also sometimes necessary to prevent the economy from overheating. If consumer demand outpaces the supply of available goods, prices will jump, resulting in inflation (where prices rise even as buying power falls). In this case, taxes can tamp down spending and keep prices low.

But if the theory is correct, there is no reason the amount of money the government takes in needs to match up with the amount it spends. Indeed, its followers call for massive tax cuts and deficit spending during recessions…

Economists in the Modern Monetary camp concede that deficits can sometimes lead to inflation. But they argue that this can only happen when the economy is at full employment — when all who are able and willing to work are employed and no resources (labor, capital, etc.) are idle. No modern example of this problem comes to mind, Galbraith says.

“The last time we had what could be plausibly called a demand-driven, serious inflation problem was probably World War I,” Galbraith says. “It’s been a long time since this hypothetical possibility has actually been observed, and it was observed only under conditions that will never be repeated.”

One thing the article doesn’t point out is MMT’s emphasis on employment. Unemployment is a problem, not just for those who lack jobs, but for the economy as a whole: people could be doing productive things. It’s a very relevant point in an economy where fifty percent of the population no longer has to grow food. Rather than worrying about full employment* leading to inflation, we can view it as an opportunity to do more things, such as fund more science, as well as raise living standards through wage growth.

But it also means that we could have very low very unemployment, if one is truly concerned about such things. The tragedy is that our political system is obsessed with deficit reduction for its own sake (or as a cudgel to eliminate social spending). So millions remain unemployed for no damn reason. This is key: as far as I’m concerned, many of our major social problems stem from unemployment, underemployment, and poor wages. We should always err on the side of full employment, not the inflation hawks. Put another way, many areas have been experiencing a lousy economy, and those areas need jobs with decent wages.

Or as I often write, “People have to like this crap.”

Related posts: Stephanie Kelton has some helpful slides. Kevin Drum has some thoughts here. Jared Berstein writes here.

*I would argue that full employment should be around two percent, which is lower than what many economists argue, but hard hit areas will need a very low aggregate unemployment rate to share in the benefits of economic growth.

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