Modern Monetary Theory puts forth the idea that the Federal Government can engage in highly expansionary fiscal policy without inflationary consequences so long as the additional money is directed in an appropriate manner, there are no significant supply constraints, and a nation has its own free floating national currency. Many astute financial and economic thinkers do not significantly dispute MMT’s conception of the money creation process or their conception of the financial system, they do, however, dispute the space available for fiscal expansion without consequent inflationary pressures.
MMT has solid answers to the inflation concerns but there is not much of a commitment among those opposed to MMT to thoroughly explore MMT’s arguments. It is the Old Guard, content in its ways, comfortable in its dogma, which seemingly does not spend time or effort to understand the thoughts of this next generation of important economic thinkers.
MMT concerns itself with the utilization of real resources. Their fiscal expansion plan revolves mostly around a Jobs Guarantee program which would both stabilize the wild swings in the system, and build human capital which will strengthen the Nation and add to its wealth. Orthodox economic thinkers believe the above approach is inflationary; they are willing to sacrifice human capital development in order to prevent inflationary pressure. What gets lost in their thinking is that the sacrifice of human capital development through either unemployment or under-education is itself inflationary. A certain level of existence must be provided by the state to those left unemployed within the system. This, they must do, in order to maintain stability within the system. This expense, directed towards that unfortunate class which is not part of the supply chain but which must share the produce of that supply chain, creates inflationary pressure. Their meager support represents additional money creation without a corresponding increase in the supply of goods and services: more money chasing the same amount of goods and services is a recipe for inflationary pressure. This inflationary pressure has not been evident in recent years as it has been overwhelmed by the deflationary forces of technology and trade, but, to the extent that people share in the produce without engagement in the supply, this is an inflationary pressure.
The Coronavirus will speed-up consideration of the MMT approach as massive new federal debt levels, and the corresponding inflationary or noninflationary impact of this debt, will be used to judge the MMT approach. This is unfortunate as this is not the right context in which to measure MMT. MMT relies on the system’s ability to expand production in order to offset the expansion of the money supply. In a crisis in which there are supply limitations, you are then placed into a situation similar to Weimar Germany or Zimbabwe, both of which experienced hyperinflationary episodes. MMT has always rebuffed comparisons of the potential impact of its theories put into practice with hyperinflationary Zimbabwe or Weimar Germany. They do this through the recognition that hyperinflation in Germany was the result of supply constraints which inhibited growth in the supply of goods and services at a rate which could accommodate the much faster pace of money growth. This resulted in a period of hyperinflation. In Zimbabwe, a supply collapse had a similar hyperinflationary effect. In both situations there were supply constraints.
In today’s world, prior to the Coronavirus, there were few supply constraints so that an expansion in the money supply through fiscal expansion would be met with supply expansion thereby creating a noninflationary balance between goods, services, and money. Currently, the huge expansion of money, the result of coronavirus fiscal expansion occurs during a time of significant supply constraints. Mandatory shutdowns and increasing worker resistance at putting their families’ health at risk through continued employment will likely keep a lid on supply for an unknowable period into the future. Depending on the length of time of the supply constraints, inflationary pressures could begin to appear. The ability of supply to grow is important to the MMT approach. MMT will need to cautiously distance themselves from the current fiscal expansion in order to avoid being labeled as theoretically wrong through a false association of their theory with the current economic context.
MMT’S theories are solid, or at least much more solid than the increasingly outdated orthodox economic thinking which has brought us to our current state of affairs. MMT actually offers a substantial refurbishment of the capitalist system: giving capitalism an opportunity to still exist in a non-authoritarian manner, which is where we are otherwise headed if we stick to the status quo. Increasing worker discontent leads either to more progressive economic policies or authoritarianism; there are no other alternatives. The status quo cannot be maintained because the status quo has brought about the worker discontent. A police state is both unpleasant and expensive to maintain so it makes no sense for capitalism to go down this path. MMT offers progressive reform which can salvage the capitalist system, at least for now. There are other flaws within capitalist ideology which make it unlikely to succeed in the long term. However if reform, rather than revolution, is our preferred path forward, MMT offers a good step forward in the reform process.