Modern monetary theorists have no answer to raging inflation
Our inflation woes continue.
New data indicate that the Federal Reserve’s preferred price index rose 5.8% from a year ago, the largest increase in nearly 40 years. But as economics commentators, business leaders, and policymakers sound the alarm, one group has surprisingly little to say. Modern monetary theorists loudly defended printing-press finance when inflation was low. But now they claim surging prices are beyond our control.
Modern monetary theory turns public finance on its head. Advocates of MMT care little about the national debt. Governments that borrow in their own currency can’t default, they note. Hence Uncle Sam faces a resource constraint but not a fiscal constraint. Nothing prevents the public sector from massively expanding to combat the blight of idle resources, including unemployment. Furthermore, MMT proponents urge, government outlays should be funded by money creation. After Congress decides how much to spend based on social and political priorities, the Fed should buy up all the bonds necessary to finance this new spending.
Stephanie Kelton, economist and author of The Deficit Myth, is arguably the leading proponent of MMT. Her recent discussion of inflation reflects MMT supporters’ uncomfortable position. What’s the solution to current inflation? Her answer leaves much to be desired: “There isn’t one.” Small wonder the advice has largely dried up!
Kelton insists MMT bears no responsibility for current inflation. MMT is merely a paradigm, she tells us, not a policy prescription. In her defense, MMT is a minority position among economists, including at the Treasury and the Fed. Yet it’s hard not to notice the similarities between how MMT says policy should work and how the federal government’s response to the pandemic actually worked. As Judy Shelton pointed out in the Wall Street Journal, the Fed purchased $3.3 trillion in government debt in the past two years. That’s more than half of the deficit over that same period. There were good reasons for this extraordinary monetary expansion, but that doesn’t change its resemblance to printing-press finance, which Kelton recently acknowledged.
Inflation is one reason for MMT advocates’ reticence. Another is that in their system, there’s really only one way to curb it: taxes. If total spending is increasing faster than the economy’s ability to keep up, the government must soak up the excess liquidity. Of course, this is traditionally what monetary policy is for. But the Fed can’t finance the government and tackle inflation at the same time. Instead, it falls to the IRS to fight inflation. This prescription is understandably unpopular. Americans are already hurting due to inflationary bracket creep. Raising tax rates on top of this would increase the burden and enrage voters.
While Kelton claims fighting inflation with taxes was “never the MMT solution,” it’s the only arrow left in the MMT quiver. Given well-known tax disincentives for working, saving, and investing, fiscal crackdowns on inflation would further exacerbate supply problems. Comparisons of today to the 1970s are overblown, but if we continue down the MMT path, that decade’s troubles could return.
We should limit new spending based on economic trends, keeping spending growth below economic growth. This indirectly improves monetary policy too. Printing-press finance isn’t as tempting if the government lives within its means.
Fortunately, the MMT crowd’s powerlessness before inflation doesn’t mean we’re stuck with it. Instead of MMT’s permanent revolution in public finance, we need sound budgeting and monetary restraint. This isn’t complicated. It’s what Nobel laureate James Buchanan called the “old-time fiscal religion,” and it works.
Bryan Cutsinger is an assistant professor of economics in the Norris-Vincent College of Business and a research assistant professor at the Free Market Institute at Texas Tech University. Alexander Salter is an associate professor of economics in the Rawls College of Business at Texas Tech University, a research fellow at TTU’s Free Market Institute, and a senior fellow with the American Institute for Economic Research.