Modern Monetary Theory is correct in stating that a sovereign currency issuer cannot “run out” of the money they alone can produce. This means that the true constraint for a currency issuing nation is inflation and not solvency. But if this is true then what does MMT say about how it will control inflation?
At its core MMT is a quantity theory of money. In the MMT world T-Bonds are a type of high powered money. But instead of using reserves or cash to control the policy variables, as a Monetarist might prescribe, the MMT advocates believe we should focus entirely on fiscal policy. In fact, they believe we should restrict Monetary Policy almost entirely by setting a permanent Fed Funds rate of 0%. In doing so they are pure advocates of setting policy via fiscal measures.
This is a rather strange view for a school of thought that understands that banks create loans endogenously (as opposed to multiplying reserves as the money multiplier falsely claims). That is, banks (and all private sector actors) leverage their credibility (usually from capital) when they create new financial assets and liabilities. In the MMT world the money multiplier is wrong, but if you view T-Bonds as a form of reserves then MMT is using a money multiplier model by claiming that the state issues state money and the private sector leverages other forms of money on top of this. This is precisely backwards. And this explains why MMT cannot explain a statistical relationship between government debt and inflation – it is simply not there.
MMT policies would very likely result in a significant increase in the size of the government given their desires for a national Job Guarantee and their tendency for Liberal policies. So the worry about inflation under a MMT regime is a legitimate one.
MMT has several claims about how they would control a high inflation:
- The MMT Job Guarantee is supposedly a “price anchor” that will create full employment with price stability.
- MMT claims you can reduce inflation by increasing taxes.
These are bold claims given that there is virtually no evidence that supports these claims. First, the MMT Job Guarantee has never been tested anywhere in a developed economy. And there is significant evidence that it would act more as a “price buoy” as opposed to a price anchor. This makes sense since it would set a floor under wages.
Second, there is no empirical evidence showing that tax increases necessarily reduce growth and/or inflation. And more worrisome is the fact that MMT does not believe in running budget surpluses. In this sense they are not true countercyclical Keynesians. So one must wonder – how can you control inflation if you are increasing the deficit at all times?
These are untested questions that raise very legitimate questions about how a MMT regime would be managed. In this sense MMT deserves criticism since they have no empirically tested theory of inflation.