MMT:s inflationary bias

14 Aug, 2020 at 13:04 | Posted in Economics | 47 Comments

A view yours truly often encounters when debating MMT is that there is an inflationary bias in MMT and that its framework ignores expectations.

Hmm …

It is extremely difficult to recognize that description. Given its roots in the writings of Keynes, Lerner, and Minsky, it is, to say the least, rather amazing to attribute those views to MMT. Let me just quote one source to show how ill-founded the critique is on this issue:

defMMT recommends a different approach to the federal budgeting process, one that integrates inflation risk into the decision-making process so that lawmakers are forced to stop and think about whether they have taken the necessary steps to guard against inflation risk before approving any new spending. MMT would make us safer in this respect because it recognizes that the best defense against inflation is a good offense. We don’t want to allow excessive spending to cause inflation and then fight inflation after it happens. We want agencies like CBO helping to evaluate new legislation for potential inflation risk before Congress commits to funding new programs so that the risks can be mitigated preemptively. At its core, MMT is about replacing an artificial (revenue) constraint with a real (inflation) constraint.


  1. Inflation is what really separates orthodox from heterodox in economics.
    Black called inflation noise. If markets are only efficient to within a factor of two, inflation could be twice as high due to noise. And the factor of two itself is arbitrary, probably more like ten.
    MMT is frightfully orthodox when it comes to inflation. CBO estimates of inflation have been wildly wrong in the past, as has their orthodox predictions that Treasury yields always rise leading to significantly overstated forecasts of the growth of the national debt and the projected costs of various programs.
    True heterodoxy treats prices as arbitrary (to within a factor of ten, say). If prices are that noisy, inflation is best treated by Cost of living adjustments, Treasury inflation protected securities (to protect savings), and inflation swaps to neutralize inflation in private contracts.
    MMT’s proposal to tax inflation away is politically tone-deaf. Higher taxes on top of inflation is just more inflationary, because your real purchasing power is further reduced by the taxes. Reagan won on that platform and others will continue to win on that platform. Reagan cut taxes while inflation was still high, and inflation fell.

    • As I understand the proposal to fight inflation with taxes, it is recommended to use a targeted approach. Put a tax on property purchases by speculators for example. You sound like you see it as a general tax.

      • Remember Proposition 13 in California, which reduced property taxes?
        > Proposition 13 is often considered the “third rail” of California politics, which means that politicians avoid discussions of changing it.
        Voters tell representatives again and again that they do not want more taxes. Obama’s Individual Mandate was repealed by Trump …

        • I write from a largely Cdn perspective and Vancouver put in special taxes on foreign speculators driving up the cost of housing there. Toronto also did that I believe. Americans have been brainwashed against taxes.

          • I don’t like taxes because they reduced my first paycheck, wholly unexpectedly. It felt so unfair. There are better ways. Taxes are spent on things I do not approve of. Thoreau was right to refuse to pay his taxes because he did not support the wars they were used to fund. C. H. Douglas is right to point out the passive-aggressive nature of taxation in “Dictatorship by Taxation.”
            There are better ways than taxes to handle land speculation: create financial instruments with a higher return, that do not need land as an underlying. If the Vancouver land speculators could invest in volatility products with a guaranteed higher rate of return, they could satisfy their money demand without interfering in physical resources such as land …

            • Your assumption is contrary to MMT. Taxes are not income for federal governments able to create their own money. So you are denying a central tenet of MMT. That said a lot of people agree with you about taxes and I do also but not because of what they are allegedly spent on. I believe that they rejig the economy in directions that are negative for people which is another way of saying part of what you said when you talked about fairness. But nobody ever promised you a rose garden.

  2. Is there any way to stop price-hiking and cost-lessening by wage lowering except by guranteeing growing profits for all? And can growing profits be guranteed today, except for to a continously smaller and smaller number of monopolies?

  3. I am reminded of the articles in the popular press of the 70s about defining inflation and its causes. Even measuring is a problem. Now I notice that the Bank of Canada talks about “core” inflation vs. Higher prices and uses the CPI — Cost Price Index to measure it but just because something costs more does not mean it an inflated price.

    William Krehm wrote an article that won a prize from economists in France and then morphed into a book called Price In a Mixed Economy. As I recall he showed that additional costs for government programmes — for example — were included in prices over time thus contributing to higher prices.

    So it seem to me that prices should be a measure of value to begin with and that increases should be a measure of increased value. Inflation is a measure of increased prices without increased value.

    At one time, the CPI researchers would look at the price of a product that was $1 — for example a package of Kraft dinner. It would go to $1.50 showing a 50% increase. When it returned to the $1 price the decline was measured as 33% thus showing it still as inflated. I am told that has been corrected but it raises questions in my mind of the validity and reliability of the measures of inflation.

  4. Amazingly people still do. All the time! Martin Wolf and others now, finally, admit (sic) MMT is right in the economics, but it is too dangerous, because if people knew the truth politicians would not be able to restrain themselves from offering inflationary policies!

    Amazing line of argument. Preposterous even. Nevertheless that seems to be the latest line of defence from those who would describe themselves as ‘mainstream & orthodox’.

  5. the main plank of MMT is that inflation is a constraint yet they have no coherent theory of it. MMT is basically politics leading theory.

    • If you read Kelton’s book there is a lot about politics and policies, yes. But her views are founded on an economic theory on open display! Some of the policy proposals are up for discussion, but to say that MMT is basically a “politics leading theory” is simply wrong.

      • Again they have no theory of inflation. Here’s ones to ponder, inflation was meant to be a constraint prior to the financial crisis but it didn’t stop a massive misallocation of credit/money along the horizontal axis. That’s despite the horizontal axis having a real debt constraint. Now flip that to the vertical axis that MMT is so enamoured with, this axis wouldn’t even have a debt constraint under the MMT paradigm, which puts even more pressure on the notion “inflation is a constraint”.

        • As I pointed out earlier NOBODY has an adequate theory or even definition of inflation. If you read Kelton’s book there is an entire chapter on Inflation reviewing the theories about it and the problems with them. You still do not appear to actually understand MMT because the debt constraint is not a valid notion in their thinking. Inflation is the constraint. And it is up to governments to identify the causes as best as possible.

          Kelton explains clearly the problem with the current practices around inflation fighting — it is non-existent for reasons yet to be understood by anybody — where creating misery by putting people out of work and businesses out of business (or at least constraining them) is the current practice. That is a major thrust of their work and why they have a job guarantee proposal.

          • MMTers always think you don’t understand their view, I’ve followed this for over ten years, I’ve attended lectures by Randall Wray. I’m not defending the mainstream who are a disgrace, I’m criticising politically lead economic thinking.

          • well aware of this article, after years telling everyone inflation was the constraint without clarity on what they thought it was, this article was a land mark, but it hardly represents a theory and is certainly inadequate given how key the constraint idea is to MMT.

        • antireifier,
          “…. where creating misery by putting people out of work and businesses out of business (or at least constraining them) is the current practice.”
          It would also be the practice of an MMT disciplined government.
          Taxes would be raised to quell aggregate demand. Unemployment would increase. Inflation would be expected to fall.
          The JGS would then soak up the newly unemployed.

          • I know all that. I have watched and read most of the MMTers. An MMT disciplined government would NOT be using the misery of people to fight inflation should it arise — whatever that may be. So your point is ….

          • My point is that MMT is up for creating unemployment if necessary.
            Just because there is a JGS, does not mean misery is not created.

            • Thanks for the clarification. Do you have a better idea for fighting inflation? Seems to me that the MMT approach is better because it is likely to be less harmful and at least will avoid fighting a non-existent inflation. Currently the NAIRU theory dominates the central bankers thinking who see labour costs as the inflation driver. We know better.

            • My point is not about dealing with inflation but that MMT isn’t as benign as is made out.

          • It think the taxation issue needs more definition under a MMT – PK framework as its a loaded term with many meanings to some E.g. Pigouvian taxation vs. those that consider it theft et al.


            Understand the landscape is tortured at best.

            • The MMT position on taxes is pretty clear to me. Do not use them to balance the budget or create surpluses and target them to inflationary effects if that is the best solution. They are not looking at taxes in the aggregate to respond to inflation as I understand it.

              For example the province of British Columbia with the City of Vancouver imposed a tax on property purchased by non-Canadians in that jurisdiction which apparently has stabilized prices somewhat.

              • It was directed at Henry somewhat because MMT is quite clear, especially on the revenue side of being a developed sovereign issuer, albeit it gets more complicated outside that instance. I should have been more concise and stated that others seem to project views onto MMT from the past or due to the ad hoc nature of the currant system.

                I get the same sort of difficulty when say conversing with sound money proponents [A – political solutions] or American Keynesian’s when discussing the IS-LM theory, after so many were operating for quite some time on a false presumption, but are quite doctrinaire about it all.

                Now we have Covid showing all the weaknesses built up in the past economic administration for all to see and experience, even then some are adamant about their past positions due to path dependency or personal need.

    • Preft should refer to their textbook, Macroeconomics, where there is a fairly thorough description and analysis of what inflation is. As good as anywhere else I believe. That said it seems to be a complex issue not well understood by economists (including MMTers) who have lots of theories about it. I pointed to a writer above and there are others who have posited a link to interest rates.

      • Preft and antireifer seem agreed that there is available no adequate theory of inflation, which is almost to say, no adequate theory of money. A theory of fiat money has to be able to explain what institutions and institutional management policies give money desired or undesired properties, such as stability of the unit of account relative to the exchange value of goods and services. Another way to put it might be to ask, how should a political society manage its payments system to efficiently facilitate commerce and industrial investment. Some basic questions ought to have some kind of formal conceptual frame, questions like what does it mean for a money to be efficient. There are some good attempts lying around in the history of economics, but it surprises me that there is so little interest.

        • Money is a tool of measurement or to put it another way for measuring value. Like inches you cannot run out of it and like inches it has not value in of and itself. Because of the archaic gold standard, we have conflated the value of commodities with the metaphor or representation — an abstract idea — we call money. We use it to measure the value of our transactions with each other and between government and commercial entities. In a sense we have reified money as a if it were real. We deify objects as gods and REIFY money as objects.

        • agreed

          • I do not agree that there is no theory of money. MMT is clear that it is a measure of the value of transactions, goods, services, credit, debt and assets. I hold that to be sufficient. If people wish to reify that money itself is a store of value, that is their mistake.

            Inflation is still poorly defined and may be derived from various causes. But measuring it with the CPI is not sufficient nor appropriate. The sub-categories of the CPI start to make the distinctions that matter like unemployment and employment both of which also have sub-categories.

            • I would call it score-keeping, rather than measurement, but let’s go with the measurement metaphor for a moment. A meterstick or yardstick works because its length does not normally vary much in the range of practical circumstances. Rapid and unpredictable changes in the value of the unit of account are certainly possible, as historical experience establishes, and defeats the usefulness of money as a standard of measurment. It is a reasonable task for a theory of money to both analyze the cost of inflation with regard to the loss of a measurement standard and to explain how stability in the unit of account is to be achieved, technically.

              • I have tape measures that can be extended to great distances plus lazers that measure greater distances — all in two basic scales until we get into space where there are others. And temperatures can be measured using three different scales. But,

                We are still left with an inadequate definition of inflation and poorly conceived measures of it. I understand inflation to be a measure of that part of the price that does not add value to the goods or services being provided. And as I have noted before, that some price increases include hidden or unknown values such as health care or other mandated government services — see below. Thus, the Bank of Canada (and likely other central banks) talk about core inflation which also seems to be poorly defined because I understand that only refers to a commonly used “basic basket of goods.”

                The Money concept can be used to measure both the costs of bringing products and services to market as well as to measure the price structure that does not include those costs but are inflated because of supply and demand factors without added value. When steps are taken to reduce demand or increase supply to restore such prices to an equilibrium reflecting the costs plus a reasonable profit, too often those steps — higher interest rates — impact many who rely on those goods and services but are now unable to purchase them because of their diminished income or fear of same. They are too broadly based. Animal spirits become a bigger factor.

                For example, raising interest rates increases mortgage costs so that somebody who was managing well is suddenly faced with higher housing costs — part of the “basket of goods” measuring inflation — when they renew their mortgage at the time of an increase but their neighbour not renewing is not forced to suffer the same way — and their housing costs are neutral or benign with respect to the housing portion of the basket of goods. Thus one neighbour cuts back on consumption while the other does not unless fearful — Animal spirits. Neither may have been contributors to the higher demand of the inflation part of prices — energy consumption for example if they both used public transit — but one pays while the other doesn’t. Presuming that in each case neither loses their job.

                And if the person now facing higher housing costs used to invest in energy efficient companies — presuming their income was sufficiently high — then that investment is lost and that too impacts inflation and the environment.

                Environment costs such as carbon are NEVER counted directly and their role as part of inflation — externalities that government often covers with programmes and services to offset them such as health impacts — is also not priced but may show up in regulation and/or taxation costs and other means that are called inflation but really are not. Another example might be an increase in employment insurance or pension deductions — social and education costs too — that become part of pricing goods and services at every step of the supply chain but are called inflation.

                The main measure of these things is a concept we call money. Deflation or the reduction in prices is also measured with a concept we call money. Some day I might do another post about using percentages and how we conflate that with the notion of money. Because that is also an issue.

                In much of this we are all struggling with unconscious beliefs and ideas and trying to bring them to conscious awareness. We often fail to recognize that is what we are doing. Which is why I chose the moniker Antireifier because too often our theories become reified beliefs. Understandably because our language which determines our thinking is often linear-based but the world is non-linear. But again another topic for another day. Maybe. Getting too old for this s**t! Lol

          • antireifier,
            “If people wish to reify that money itself is a store of value, that is their mistake.”
            Do you have money in your pocket or in a bank account?
            If you do,why?

            • I have $115 and some change in my pocket which I received for selling things including my services and thus do not need to declare it as income which would make it taxable. I use it to buy beer at my weekly Pints and Politics meetings and to purchase 50-50 ticket where the funds go to charities I like. I once won. My barber also prefers cash and sometimes I can pay cash avoiding sales taxes. I sometimes give a portion of it to the homeless.

              The only money in my bank accounts is there to be able to pay my income taxes — the date due was delayed — and other bills. Once those are paid my personal budget will be in balance or maybe with a slight deficit.

              I am happy to utilize the generous credit lines that I have and the grace periods on credit cards for other larger perhaps unexpected expenses.

              At my age, 74, I receive generous defined pensions indexed to inflation.

            • antireifier,
              In other words you have used it as a store of value.
              If it had no value you would throw your paper money in the bin or use it to light your fire. And if you had money in your bank account you could just as easily say to the bank, take my name off the account.

              When was the last time you did those things?

              • Those are ridiculous comments. You must be a mainstream economist. The currency in my pocket is a government issued IOU that I can exchange for goods and services.

                The money in my accounts belongs to the credit union and is their asset and liability while also being my asset and liability. They list it as an asset knowing that it is also a liability owed me and I deposited it from the government and pension fund as an asset knowing that it would shortly become the asset of a my creditors including my government thereby removing all or part of my liability with them.

                A store of value is not temporary. My pictures, tools, furniture and part of my condo are stores of value measured by money. The money has no permanence nor reality.

              • antireifier,
                “The money has no permanence nor reality.”
                For something that has no permanence or reality you certainly have a lot to say about it.
                “You must be a mainstream economist.”
                I’m beginning to think mainstreaming looks attractive……or perhaps I’m confusing it with mainlining.

  6. BTW I am totally fine with scorekeeping as a metaphor for money. Bill Mitchell uses it so why not?

  7. Looking at the discussion here, would any of you cross a bridge where the physics and engineering was in any way up for or close to this kind of discussion? The hubris and pretence on knowledge of macro Econ always astounds me.

  8. Antireifier: “I understand inflation to be a measure of that part of the price that does not add value to the goods or services being provided.”
    Once again, I cite Fischer Black who wrote that markets were efficient to a factor of two, 90% of the time.
    How efficient do you believe market prices to be? If Black is right, our inflation measures should have wide error margins.
    The current inflation measures are ergodic as you depict: one can experience inflation while a neighbor does not. Currently, reported food price inflation in the US is higher than I experience because my basket of groceries does not include meat.
    preft asked: “would any of you cross a bridge where the physics and engineering was in any way up for or close to this kind of discussion?”
    Bridge engineers include safety factors of two or more. They build for twice the specs. If economists doubled the poverty level calculation out of safety, it would be refreshing …
    My main question is: what do you believe the error margins in prices to be? Black thought +100%, -50%. That kind of price “efficiency” makes inflation-targeting silly.
    It reminds me of all the work the Fed put into tailoring fractional reserve levels to assets. They thought they were fine tuning a machine. But the Fed recently dropped fractional reserve requirements to zero for all asset levels. The fractional reserve model has been abandoned and all that busy work trying to manage it was just silly.

    • Pervasive uncertainty is a fact of economic life: we simply do not know, or can only guess. Money finance is an adaptation to pervasive uncertainty, a language in which to write speculative fictions that serve to coordinate social cooperation well in advance of the emergence of something like realized truth.
      One critically important function of money finance is enabling people to make deals with the future and to commit to sunk-cost investments in anticipation of returns from economizing on future costs by means of the investment. The returns on innovation thru capital investment, fortunately, dissipate to society as a whole over time, but as they dissipate, they are no longer available to private actors to service the debts incurred. Inflation can provide a buffer for the disappointed expectations of private entrpreneurs, a margin of error favoring the debtor, and in so favoring the debtor, enabling the innovative investment where it might otherwise have been stunted.
      A low, but unpredictably variable rate of inflation may also force firms to experience and work with changing estimates of cost and value. If we cannot know the “true” value with certainty, the experiment with alternative arbitrary price schemes and schedules may well force realization of information that might otherwise remain obscure by reason being fixed administratively.

      • Bruce said: “It is a reasonable task for a theory of money to both analyze the cost of inflation with regard to the loss of a measurement standard and to explain how stability in the unit of account is to be achieved, technically.”
        . is a 1978 paper by Stanley Fischer and Franco Modigliani that tries hard to find costs for fully inflation-proofing an economy, but ends up with “menu costs” as the chief objection. But our technology makes menu costs negligeable compared to 1978.
        Stability in the unit of account is achievable by denominating prices in terms of real income purchasing power, and using COLAs to keep nominal incomes rising at the same rate as prices. Prices will thus remain the same percent of income, even as nominal prices may rise.
        TIPS provide savings and portfolio insurance. Hoping the fuzz doesn’t come down on me again, here is a big bank research report portfolio chart for all scenarios:
        In high inflation times, TIPS replaces regular government bonds. Spreads on top of TIPS are the same as spreads over regular Treasuries.
        Inflation swaps also allow firms to sink costs while locking in an inflation rate they can live with for the term of their loans. If the firm wants inflation they can sell inflation swaps and harvest premiums while inflation remains below their desired level.
        The Fed can ensure liquidity and price continuity in inflation swap markets, thus providing inflation insurance to both those who fear inflation and those who fear deflation.
        Inflation is a solved problem as the portfolio chart attests. COLAs insure non-portfolio incomes. Inflation swaps lock in preferred inflation rates for private contracts.
        So instead of trying to manage inflation we can simply adjust to it, using technology to seamlessly index incomes to rising prices so that real purchasing power remains stable. The Fed could also manipulate inflation swap breakevens through open market operations rather than the more indirect interest rate setting.
        Thus inflation should be no constraint on public policy …

      • Robert,
        So why does every central bank on the planet watch the price indices like a hawk?

        • I don’t know Henry, maybe because in a plutocracy run for the benefit of parasitic oligarchs, a central banker’s bread is buttered by criminal minds hoping for asset inflation and wage defation. Just a thought.

          • bingo!

  9. For all the debate above about money and peoples perspectives about impermanence I’ve always found the historical context interesting.


    Per se Rubin discussing his economics with Bill Clinton only to be interrupted and informed wages vs. productivity diverging whilst not blinking an eye or those that consider Friedman’s 2% inflation targeting to be a quasi gold standard based on political reasons and not economic.


    As for imbibing mythos into objects with attributes which transcend human foibles, I’m always reminded of Constantinian coins losing their fuction, once the state collapsed and only to be reconstituted into base stock, which then functioned as decorative art for weapons, personal, and religious iconography.

  10. Skippy,
    “It was directed at Henry somewhat………..due to path dependency or personal need.”
    Sorry, I don’t get what you are getting at.
    I presume you have an objection to something I said.
    Could you be explicit please?

    • Did not object so much albeit found your use of – benign – in relationship to MMT curious and stand by my statement about the terrain due to past, present, and future context being intermingled.


      *some are adamant* about their past positions due to path dependency or personal need.

      Its a psychological factor which is well understood, but was not leveled at you personally, hence the lead in at the end of my comment.

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