Among economists, rather than between enthusiasts for the idea, there’s a certain weariness about Modern Monetary Theory. That’s the idea that government can just go print money and spend it to create the social democratic nirvana as Stephanie Kelton seems to put it. The weariness being that this isn’t all that new, it’s little more than a repackaging of the monetisation of fiscal policy - very little different from Henry VIII’s debasement of the silver coinage. Or the more modern examples of Zimbabwe and Venezuela.
To be fair to the MMT groupies they do say that there’s a practical limit to the ability to do this, which is when inflation rears its ugly head. At which point the money printing has to stop and should even be reversed either through higher taxation or the more traditional higher interest rates. Or, as others might put it, what about reversing the money creation through the reversal of quantitative easing.
For us the big criticism is that we’re really not sure that the political will to kill off the inflation is going to be there. We think that the same political incentives that led to the Zimbabwe and Venezuela (and Hungary, Wiemar and all the other examples of monetisation going wrong) outcomes are going to apply because, well, political incentives are political incentives:
Joe Biden could soon be facing a headache few presidents have encountered in recent decades. At least that’s what financial markets are beginning to believe.
His plans for a $1.9 trillion fiscal bazooka sent a key gauge of US inflation expectations to its highest level since 2014 on Monday with bets on soaring Treasury yields on the rise. Biden's bumper stimulus package is starting to unnerve economists, even from his own side.
Lawrence Summers, a former Treasury Secretary under Bill Clinton, warned last week that Biden’s plan could ignite “inflationary pressures of a kind we have not seen in a generation”.
We often don’t agree with Larry Summers but we always do take note of him.
Recent events have led to massive money creation to fund government spending. This is pretty much MMT. If - we’d say as and when but let’s allow if - the inflation turns up then do governments reverse the money creation in order to cease the inflation? If not then MMT isn’t in fact a new thing, at least it’s not a useful new thing. It reverts back to being just that monetisation of fiscal policy with all the perils of it.
That is, the next few years are going to be that real world test of MMT. A test we think it will fail but even so there’s nothing like actually testing a theory properly, is there? After all, we are all supposed to follow the science these days, aren’t we?