Does MMT have an inflationary bias?

10 Jan, 2022 at 15:31 | Posted in Economics | 22 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.

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 that view 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.


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  1. Kingsley says:
    《The huge budget deficits of most governments due to the 2008 financial crisis and the 2020 pandemic were “financed” by newly “created” aka “printed” money, not by bond issues. To the contrary, there were massive open market purchases of bonds called “quantitative easing”, which is the 180° opposite of new bond issues.》
    Why is Treasury still holding bond auctions, then?
    Bruce said:
    《Inflation, like deflation, may be a means and instrument to shape and redirect the distribution of income and risk.》
    May I replace “the redistribution of income and risk” with “power”?
    Henry keeps mentioning real resource constraints, but is resource scarcity really the problem, or is capitalism failing to allocate resources efficiently due to politics and psychology? Is there a constraint on natural gas production, or is Putin merely flexing his muscles? Would a Kasparov or Navalny have different policies, indicating how much “real” constraints are dependent on personalities, not physics?

  2. I like the way that MMT economists discuss the empirical evidence about how a problematic inflationary episode happens in practice. It nearly always happens because of supply shortages and / or firms having too much price-setting power due to lack of competition in their sector. It hardly ever happens because the national government spends too much.

    • Becuz Inflation due to “over spending” almost never happens. Well, ok, never happens. See the 2008-’09 “crisis” where O’bummer dumped $12 Trillion on Wall Street to “save the meltdown.”
      Inflation didn’t follow. And, if it didn’t follow then… when will it ever?

  3. The politics in political economy is a contest or struggle over the distribution of income and risk. Inflation is a by-product in most cases of that struggle. As the case may vary, inflation may be the outcome when the opposing demands of different classes or factions cannot be satisfied out of output. Another possibility is that forces that may fail to achieve their objectives within the corridors of state power may continue the pursuit out-of-doors, exercising their market power. Inflation, like deflation, may be a means and instrument to shape and redirect the distribution of income and risk.
    All of these possibilities and more are difficult to admit in economics as an academic discipline, which must strive for detachment from the dirty business of politics when not apologizing for the few rich dispossessing the many.

  4. May I propose Modern Mother#*@%ing Monetary Theory (MMMT), in which we index incomes to price rises, thus maintaining stable real purchasing power no matter how high nominal prices may rise?

    • I can’t imagine lenders would enjoy seeing rampaging inflation or perhaps you propose to index all financial assets.

      • Don’t inflation swaps effectively do this now?
        《The linkage system was very successful. In major economies around the world, consumers often feel the pinch of just 2-7% annual inflation. But Israelis, who had to deal with a much higher inflation rate, went about their business practically unaffected. For three and a half decades, their real income was protected by this index-linked mechanism. Furthermore, over this period the standard of living rose at an average rate of close to 4% annually.》
        Do we have better technology today to automate the manual processes that eventually led Israel to give up on indexation in the 1980s?

  5. Modern Monetary Theory, explained
    A very detailed walkthrough of the big new left economic idea.

    By Dylan Matthews


    “Indeed, from our view, excess demand is rarely the cause of inflation. Whether it’s businesses raising profit margins or passing on costs, or it’s Wall Street speculating on commodities or houses, there are a range of sources of inflation that aren’t caused by the general state of demand and aren’t best regulated by aggregate demand policies.

    Thus, if inflation is rising because large corporations have decided to use their pricing power to increase profit margins at the expense of the public, reducing demand may not be the most appropriate tool.

    In other words: Inflation doesn’t usually result from too-high aggregate demand, which taxes can help cool. Instead, it comes from monopolists and other predatory capitalists using their market power to push prices higher, and it can be tackled by directly regulating those capitalists.

    But even when too much demand does result in inflation, Fulwiller, Grey, and Tankus say we shouldn’t necessarily jump to taxes as a solution. “When MMT says that a major role of taxes is to help offset demand rather than generate revenue, we are recognizing that taxes are a critical part of a whole suite of potential demand offsets, which also includes things like tightening financial and credit regulations to reduce bank lending, market finance, speculation and fraud,” they write.”

  6. Kelton writes:
    ” At its core, MMT is about replacing an artificial (revenue) constraint with a real (inflation) constraint.”
    The question I have is, in a practical economic outcomes sense, what is the difference between the two constraints?
    Both mainstreamers and MMTers, if they are to be believed, believe that debasement of the currency is to be avoided and in the case of the former, is to be avoided at all costs.
    In the case of MMT, I wonder how serious MMTers are about keeping inflation at bay, given they believe that the Phillips Curve is moribund.
    That being said, given they are ostensibly both committed to holding inflation at below excessive levels (however that might be defined), I am suggesting there is no difference in the levels of net government spending that can be tolerated.
    In effect, there is no practical difference between mainstream and MMT policy prescriptions.

    • One can see the difference between the constraints of finance and resources in the planning for D-Day. No one said (ever!) “Sure, the Japanese attacked Pearl Harbor, but we’re a little short of cash, so we won’t respond.” In subsequent (wartime) years, the government took over 50% of the U.S. economy. No shortage of money constrained spending dollars, just as the bureau of weights and measures did not (ever!) run out of inches.

      But D-Day posed a different problem. Even straining at 100% employment, the U.S. simply could not produce the goods and services needed for this massive enterprise, no matter how much money it spent. It reached a real resources limit, and had to wait a year before invading Normandy.

      As for that perennial question: “Is government spending inflationary?” … It depends on what the spending does. If it’s competing with the private sector and simply must have the goods/services on the market, then, as a sovereign, fiat money creator, it can always bid higher, and win that bid. Inflation!

      On the other hand, if government spending employs idle resources (~30% of the current economy, says the Fed) it’s bidding against no one else. One potential example would be MMT’s job guarantee–who else is bidding for the unemployed? We buy surplus soybeans, why not surplus labor. There is absolutely no shortage of work to be done.

      • The difference between Henry and Adameran stems from ambiguities in the word “mainstream”.
        When Kelton talks about an “artificial (revenue) constraint” she is probably referring to pre-Keynesian mainstream ideas about balanced budgets such as those which were prevalent in 1929.
        In contrast Hennry is concerned with mainstream economic policies in recent decades.
        Today’s mainstream has become essentially Keynesian, eg the huge budget deficits resulting from the 2008 financial crisis and the 2020 pandemic.
        As Henry points out, “today the mainstream has “no difference [from MMT] in the levels of net government spending that can be tolerated” and “there is no practical difference between mainstream and MMT policy prescriptions”.

      • Kingsley,
        I am actually referring to the standard mainstream neoclassical approach to government spending.
        The mainstream budget constraint has it equal to the sum of taxes that a government can raise and bond issues.

        • Henry,
          The Oxford dictionary definition of mainstream is “normal or conventional ideas, attitudes, or activities”.
          A century ago the standard mainstream approach of economists and governments was that government budget deficits (G-T) should be balanced (G-T = 0) or entirely financed by bond issues (G-T <= B).
          Today holders of such opinions are sometimes called “Deficit Hawks”.
          Maybe, as you suggest, this approach might be described as “neoclassical”.
          However, the views of “Deficit Hawks”are certainly not “standard” or “mainstream” today.
          The huge budget deficits of most governments due to the 2008 financial crisis and the 2020 pandemic were “financed” by newly “created” aka “printed” money, not by bond issues. To the contrary, there were massive open market purchases of bonds called “quantitative easing”, which is the 180° opposite of new bond issues.

          The new mainstream is thus essentially Keynesian like MMT and called “Deficit Owls”.
          “Deficit Owls” hold that fiscal policy should not be constrained by any financial constraints.
          As just described, there are enormous practical differences between the policy prescriptions of “Deficit Hawks” and “Deficit Owls”.
          There is a further species called “Deficit Doves”.
          Compared with “Hawks”, “Doves” advocate less strict rules/financial constraints on government deficits, for example the rule that budgets must balance summed over a run of years: Σ(G-T) = 0
          Such rules permit temporary Keynesian counter-cyclical fiscal measures provided they are followed by subsequent cutbacks/austerity, but there are still enormous practical differences between the resultant policy prescriptions and those of MMT.

          • Henry,
            This is a continuation of my last comment.
            “Deficit Owls” such as MMT have an inflationary bias compared with “Deficit Hawks” for economies like the USA and UK who tend to have have budget deficits when aggregate demand approaches the inflation barrier (aka NAIRU).
            [At these high levels of aggregate demand their G-T ≡ S-I + M-X > 0].
            For such economies “Deficit Owls” would advocate expanding the economy right up to the inflation barrier (NAIRU) whereas “Hawks” (and probably also “Doves”) would advocate austerity measures (lower G or higher T) well before the economy reaches the inflation barrier.
            However, there are other economies which still have budget surpluses at the inflation barrier.
            For these cases neither “Owls” nor “Hawks” would restrain the expansion of aggregate demand prior to reaching the barrier.
            The latter cases may be the economies you have in mind when you say “there is no practical difference between mainstream [deficit Hawks] and MMT policy prescriptions”.

        • Kingsley,
          I think we have to distinguish between theory and practice.
          You are talking about practice. I am talking about theory.
          Mainstream economic theory such as that which has been taught in the universities for the last 40 years says that government spending is limited by a budget constraint defined as the sum of taxes and loan issues.
          MMT on the other hand has real resources/inflation constraint.
          What governments and central banks actually do is altogether something else.
          Various governments around the world at various times have engaged in massive quantitative easing, which, rather than increasing commodity inflation as designed, has created one of the great asset bubbles of the last 100 years.

    • Adameran,
      War is an exceptional circumstance. As you say, the US government created resource space by commandeering a significant proportion of productive capacity and by rationing.
      It also introduced price and income controls, so inflation was not a major issue.
      “One potential example would be MMT’s job guarantee–who else is bidding for the unemployed? ”
      At less than full employment, inflation is not of concern, particularly to the extent the Phillips Curve is considered to be inoperative.
      But at full employment, a JGS will not mitigate inflation. It will exacerbate it.
      Bill Mitchell says he conceived of an employment buffer (viz. JGS) when studying the Australian Government’s wool market stabilizing scheme. However, as far as I understand he has omitted to say that the scheme eventually failed, as have most if not all commodity buffer schemes.

  7. Well, I haven’t studied MMT. But those who recommend it tend to stress that “government can make as much money as it wants to”. I.e, this is the popular view, raised in the struggle with the bookkeeper politicians who claim that “we have no money to do this or that”.

    Which may seem like an inflationary bias. At least if you have a lot of things you want the government to pay for.

    • Jan,
      I think the problem is that there are devotees of MMT who believe it is the universal panacea for all our macroeconomic ills.
      It appears that they don’t understand MMT’s inflation constraint.
      The question is, how serious are the proponents of MMT about the inflation constraint?
      It seems to me they are stronger on eliminating unemployment and given their belief that the Phillips Curve is dead, they have been unconcerned about inflation.
      MMT has spent 20 years arguing that inflation has not been a problem, despite huge increases in created money.
      However, inflation has reared its head recently and to rescue their position, it now seems MMTers are proposing price controls to deal with it.

      • ‘I think the problem is that there are devotees of MMT who believe it is the universal panacea for all our macroeconomic ills.’

        So you assess the value of MMT based on the opinion of some misguided ‘devotees’? That’s odd.

        ‘The question is, how serious are the proponents of MMT about the inflation constraint?’

        Well maybe MMT proponents say one thing and think something else. But again, that’s a bizarre argument against MMT.

        I’m not sure what you’re trying to say exactly about the current inflation.

        • AlexH,
          No, I am not assessing MMT based on its supporters interpretation.
          This is a problem for MMT’s credibility.
          Read what Jan wrote in the first instance, then see how I responded.

      • As I haven’t studied MMT I don’t have any fixed view on it at all.

        But I do agree that it is better that politically responsible persons create money than that banks do it. In the latter case we will have an inflation in housing prices (housing being what people lend money to buy).

        And it should theoretically be possible to turn on the money creating machine at about the speed production volume allows for. Or is there anything that makes it impossible?

      • “Or is there anything that makes it impossible?”
        As I understand it, from the MMTer’s point of view, the real resource constraint is paramount. If spending does not exceed the available real resources then inflation shouldn’t be a problem,
        Where it becomes unclear is that MMTers believe that the inverse relationship between inflation and unemployment (the Phillips Curve) is inoperative.
        If the Phillips Curve was operative (as I believe) then even before the real resource limit is approached inflation would become a problem.
        I would argue that the Phillips Curve has appeared to be inoperative because of globalization and the gross mal-distribution of income evident across the western economies.

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