MMT perspective on Biden’s $1.9-trillion big spend

3 Mar, 2021 at 10:18 | Posted in Economics | 7 Comments

The Deficit Myth: Modern Monetary Theory and the Birth of the People's  Economy: Kelton, Stephanie: 9781541736191: BooksMMT is about identifying the untapped potential in our economy, what we call our fiscal space … How we choose to utilize that fiscal space is a political matter …

The point is that we run our economy like a six-foot-tall guy who wanders around perpetually hunched over in a house with eight-foot ceilings because someone convinced him that if he tries to stand up tall he’ll suffer a massive head trauma. For too many years, we’ve been crouching down when we could have been standing strong. Irrational fears about government debt and fiscal deficits caused policy makers in the US, Japan, the UK, and elsewhere to pivot away from fiscal stimulus toward austerity in the years following the global financial crisis. This forced immeasurable pain on tens, if not hundreds, of millions worldwide.

The U.S. has a deficit. That’s true. But the problem is not the budget deficit. The real deficits are in the climate, healthcare and infrastructure. How do we tackle those deficits? By spending!

MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfil our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much of government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.


  1. Learn To Love Trillion-Dollar Deficits

    “Politics aside, the only economic constraints currency-issuing states face are inflation and the availability of labor and other material resources in the real economy.


    If any government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. So there are limits. However, the limits are not in our government’s ability to spend money or to sustain large deficits. What M.M.T. does is distinguish the real limits from wrongheaded, self-imposed constraints.”


    Modern Monetary Theory in Canada

  2. If Keynesian uncertainty applies to pricing, how can you know that inflation is due to supply constraints and not arbitrary noise trading in options markets? Gamma squeezes drive oil prices up, not supply or labor constraints. MMT remains oblivious to options markets, where prices are actually formed. Inflation, being arbitrary, is thus best treated with Cost of Living Adjustments to maintain real income purchasing power, Treasury Inflation Protected Securities to protect savings. Central banks should also buy and sell inflation swaps (and TIPS) to set inflation expectations.
    MMT’s inflation theory is blandly orthodox.

  3. MMT inflation theory is NOT orthodox, but I think it should be criticized for making far to little use of Keynes ideas on fundamental/genuine uncertainty.

  4. Lars,
    ” At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government.”
    So is price stability a limit or not as far as MMT is concerned?
    “MMT rejects the traditional Phillips curve inflation-unemployment trade-off”
    I think this is one of the weaknesses in MMT.
    They are argue this because of their doctrinaire position that unemployment should be as close to zero as possible. This is, of course, a desirable aim. However, it blinds MMTers to the fact that there is a relationship between unemployment and inflation. I think to argue otherwise is just plain crazy. They have to face up to the fact that this relationship exists.
    They also invoke the JG to cover residual unemployment. But that is not the main aim of the JG. MMTers state that the main aim of the JG is to foster price stability.
    I think your second paragraph is perhaps a little confused and unintentionally misleading.
    ” as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s ”
    Interestingly, Lerner’s views had changed by the 1970s.

    • Some historical thinking about the Job Guarantee

      Bill Mitchell:

      “So while I saw the Job Guarantee as principally my answer to dealing with the inherent inflationary propensities within capitalism, I also understood that for some, the jobs would be permanent and so it could not be a stop-start sort of program.

      Which meant that I saw it as being the most basic part of a progressive economic policy structure that could help in the inflation struggle without creating unemployment but also provide accessible and stable employment at socially inclusive wage rates to those who the private market wouldn’t touch.

      That latter cohort though important was typically relatively small.

      And that is why I don’t use Warren’s terminology of a ‘transitional job’. For those who would occupy the Job Guarantee pool almost permanently it would be their careers.

      But both Warren Mosler and myself were always clear that the first thing a government should do if it wants to create work is spend to create well-paid, high productivity jobs in the regular public sector.

      And that is especially the case if there is no stagflation problem.

      In a normal economic downturn, which arises because the non-government sector becomes pessimistic, relying purely on a Job Guarantee to solve the unemployment problem that arises, is likely to be a poor policy choice.

      It would be there for sure to absorb some workers.

      But overall governments should be about creating high-paid jobs not minimum wage jobs.


      We want to create as few of those type of jobs as possible and only rely on the Job Guarantee in any significant way if inflation is rising fast.

      Otherwise, our attention is not on disciplining the distributional struggle but on spending up to full employment.”

    • “MMT rejects the traditional Phillips curve inflation-unemployment trade-off”

      Henry, the way I look at it is that MMT rejects that traditional Phillips curve- if a Job Guarantee was in place. MMT might say that with a JG you are always going to have close to full employment in some sense. Maybe it would be more accurate to say we would have little involuntary unemployment with a JG. So that Phillips Curve relationship would change with a JG and you could have full employment as it is currently defined even while you had some people being laid off in the private sector due to the business cycle and that ‘looser’ state of full employment would not put the same price pressures into play in the economy as might happen with actual full employment and excess demand would do right now.

      I don’t know if that makes much sense. Or if Mitchell would agree with it. But that is my take on it.

      • The MMT idea is that with a JG, unemployment is zero. Not zero percent. Zero.

        There is also the logical and natural thesis that low unemployment causes low inflation. This is the opposite of the Philips curve, which was just an artifact of the exceedingly indirect Rube Goldberg “fine-tuning” of the postwar era. This should not be surprising, because if they are looked at properly, inflation and unemployment are almost the same thing.

        Most of the MMTers – the Kansas City school – do not envision a JG that is necessarily as small as Mosler & Mitchell. While Mitchell rhetorically is often to the left of the US MMTers – he is actually significantly to the right. The larger WPA style & size Job Guarantee – is (a) more egalitarian, thus more left and (b) far more politically practical in the USA.

        Mitchell says relying to much on a JG is likely to be “a poor policy choice. It would be there for sure to absorb some workers. But overall governments should be about creating high-paid jobs not minimum wage jobs.”

        That’s an illogical and false dichotomy. Overall government should be about creating jobs which are BOTH high-paid and minimum wage. A high minimum wage, which is a true one because everyone can get it because of the guarantee of a job. The first minimum wage the US had during the New Deal was high – 80% of the average wage. And it had teeth because of the work programs, a partial JG.

        I don’t know Australia, maybe Mitchell’s is the way to go there. But I do know the USA. Mitchell’s vision would be far easier to dismantle, corrupt and destroy – and the plutocracy damn sure would try, with all their might. It’s a comparative loser in the USA, with no significant benefit from being small, with the genuine negative of not decreasing inequality as quickly – and of not being as good an anti-inflation buffer. Even the Biden administration gets it, at least verbally – go big!

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