MMTers would have hiked taxes hard over the last three years
The last three years or so have seen the death of Modern Monetary Theory (MMT). This is a theory that starts with a banal observation — that a government that issues the currency its debts are denominated in need never (technically) go bankrupt — and claims that this offers the philosopher’s stone of economics, the fabled “free lunch”: we can just print whatever money we need to cover our budget deficits.
Of course, just printing money in vast quantities raises concerns about inflation. And, in fairness to MMTers, they acknowledged this. In her book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, economist Stephanie Kelton argued:
Just because there are no financial constraints on the federal budget doesn’t mean there aren’t real limits to what the government can (and should) do. Every economy has its own internal speed limit, regulated by the availability of our real productive resources— the state of technology and the quantity and quality of its land, workers, factories, machine, and other materials. If the government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. There are limits. [Emphasis added]
This, of course, is exactly what happened. When COVID-19 hit, the federal government borrowed big and the Federal Reserve printed big, using the new money to buy government debt and keep the government’s borrowing costs down. This tidal wave of new cash is the cause of our recent inflation. As this money growth has slowed so has the rate of inflation.
While MMT tells us not to worry about deficits, it does tell us to worry about inflation. According to Kelton:
A deficit is only evidence of overspending if it sparks inflation.
Finally, the federal government has historically almost always kept its deficit too small. Yes, too small! Evidence of a deficit that is too small is unemployment. Of course, MMT recognizes that deficits can also be too big. But Senator Enzi had it all wrong. A fiscal deficit isn’t evidence of overspending. For evidence of overspending, we must think of inflation.
If MMTers recognized the dangers of inflation, what was their proposed remedy? What would they have been doing since early 2020 to get the rate of inflation down? They would have been hiking taxes, and hard.
Here, Kelton draws on the work of Abba P. Lerner:
To maintain full employment and keep inflation low, Lerner wanted the government to keep constant watch on the economy. If something happened to move the economy out of balance, Lerner wanted to the government to respond with a fiscal adjustment, either changing taxes or altering government spending.
If inflation began to creep up, Lerner believed that Congress could respond by raising taxes or cutting back its own expenditures.
Kelton spends much more time talking about how fiscal policy can be used to boost a flagging economy, defined as one with high unemployment, than she does outlining how it might cool an overheating one, defined as one with a high rate of inflation. This is understandable; when you have told people you can free them from fiscal restraints, it can’t be much fun to have clamp those restraints back on after all. But then MMT always was juvenile and irresponsible.
It is clear from Kelton’s book, however, that if she had been in a position of responsible policymaking over the last three years, as the year-over-year inflation rate rose from 0.2% to 8.9%, she would have been advocating “raising taxes or cutting back…expenditures” — “austerity,” in other words.