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Hey, everybody! Today's post is about MMT, and about government budget deficits, and about what happens if you keep running infinite budget deficits.
bloomberg.com/opinion/articl…
bloomberg.com/opinion/articl…
A theory called MMT (a new name, but not a new idea) is rapidly gaining currency (heh) among some segments of the left, especially the DSA. Alexandria Ocasio-Cortez has spoken highly of it.
businessinsider.com/alexandria-oca…
businessinsider.com/alexandria-oca…
MMT's central idea is that the government has no budget constraint. And, therefore, that you don't need taxes to pay for government spending. 
Why does that work? If you keep piling on debt, don't your debt service costs go through the roof?
Answer: Not if you get the Fed to set interest rates at zero and keep them there forever.
Answer: Not if you get the Fed to set interest rates at zero and keep them there forever.
Is it really OK to peg interest rates at zero forever?
Are we 100% sure that we'll never have any pressing need to raise rates?
Are we sure that permanent-zero rates don't reduce productivity or damage the economy in some way not yet captured by our models?
I don't know.
Are we 100% sure that we'll never have any pressing need to raise rates?
Are we sure that permanent-zero rates don't reduce productivity or damage the economy in some way not yet captured by our models?
I don't know.
And you can't just *set* rates at zero, you have to promise to *keep* them at zero forever, because if you have an incredible pile of debt, even a small rise in rates would make debt service costs explode upward.
But OK, suppose we do this. What *else* could go wrong?
But OK, suppose we do this. What *else* could go wrong?
Well, suppose investors start believing - for whatever reason - that U.S. sovereign debt is a default risk. This would make them pull back on lending to U.S. companies too.
So what do we do? We either have the Fed lend directly to companies, or give people government jobs.
So what do we do? We either have the Fed lend directly to companies, or give people government jobs.
OK so what ELSE could go wrong?
Ultimately, if investors decide to stop buying U.S. debt altogether, the Fed will step in and buy U.S. debt directly.
In effect, this means the government is creating money to pay for as much real stuff as it wants to buy.
Ultimately, if investors decide to stop buying U.S. debt altogether, the Fed will step in and buy U.S. debt directly.
In effect, this means the government is creating money to pay for as much real stuff as it wants to buy.
What happens if the government simply pays for more and more real stuff?
Eventually, we run out of real stuff. That's called a "real resource constraint".
Eventually, we run out of real stuff. That's called a "real resource constraint".
What happens when we hit our real resource constraint, and the government keeps trying to buy real stuff with money that it creates?
One possibility is that hyperinflation would be the result.
One possibility is that hyperinflation would be the result.
Hyperinflation basically destroys the entire formal economy and makes everyone really poor and desperate.
bloomberg.com/news/articles/…
bloomberg.com/news/articles/…
Do MMT proponents acknowledge the possibility that infinite government deficit spending, enabled by infinite Fed money creation, could lead to hyperinflation?
Yes.
neweconomicperspectives.org/2015/01/replac…
Yes.
neweconomicperspectives.org/2015/01/replac…
But the recent experience of the U.S. and Japan - low and stable inflation, despite massive quantitative easing, large-scale deficit spending, and long periods of low interest rates - makes hyperinflation seem like an extremely remote fear! Almost a silly fear.
If inflation began to appear, what would MMT people do in order to stop it?
One option would be to raise taxes. @jbarro discusses this option in an excellent article:
nymag.com/intelligencer/…
Another option is to force banks to stop lending, etc.
One option would be to raise taxes. @jbarro discusses this option in an excellent article:
nymag.com/intelligencer/…
Another option is to force banks to stop lending, etc.
But would the government be willing to suddenly raise taxes a huge amount, or crack down on bank lending, in the event that inflation started to appear? Would it be willing and able to do so *in time* to prevent inflation from spiraling to infinity, as it has in Venezuela?
The specter of the U.S. becoming Venezuela is incredibly remote right now.
That's why MMT works so well as a marketing technique for much much much much much higher deficits!
That's why MMT works so well as a marketing technique for much much much much much higher deficits!
But in effect, what MMT would have us do is to shove all the macroeconomic risk into the tails.
To skate close to the edge of a precipice whose location we don't really know, but which recent experience seems to suggest isn't very close to our feet.
To skate close to the edge of a precipice whose location we don't really know, but which recent experience seems to suggest isn't very close to our feet.
MMT, in effect, calls on us to fund lavish expansions of government by daring the United States economy to do something that it's never done before - collapse into hyperinflationary disaster.
Is that a good idea?
I don't really know, to be honest.
I don't really know, to be honest.
But people who look to MMT to save us from hypocritical Republican deficit scolds, or from the public's reflexive, instinctual fear of government debt, should realize what that alternative entails.
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