I recently finished reading Stephanie Kelton’s The Deficit Myth which, judging by the number of reviews it has generated on amazon alone, has been a huge seller, at least for a popular economics book. Whether one agrees with her arguments or not, it was an enjoyable read.
The book makes accessible to a general audience the main ideas of Modern Monetary Theory (hereafter MMT), which has created much heat, and perhaps some light, across social media and the blogosphere. According to Michael Hudson, MMT sees money and credit as a public utility, and a creature of the state, which can potentially be used by governments to achieve all sorts of progressive goals, particularly full employment with moderate inflation, but also reduced inequality and poverty, a Green New Deal, improved public health, education and infrastructure, and so on. The mainstream focus on balancing the government budget, either over the economic cycle, or even, for some economists, at all times, is apparently shown to be misguided. Instead, the main economic constraint facing the government is inflation due to inadequate aggregate supply or a shortage of resources in the face of expanding aggregate demand, whether that is a shortage of labour or other factors of production.
Many MMTers argue that full employment can be achieved and sustained by a Job Guarantee (JG) scheme, so that all those otherwise unemployed who wish to work should be offered a public sector job at the minimum wage providing useful goods and services. In a recession with private sector employment falling, the JG scheme would automatically expand, employing the otherwise unemployed in the public sector. This would also cushion the economy from the usual recessionary fall in aggregate demand. As private sector employment recovers, the JG scheme would shrink, so that JG workers would transfer to higher wage jobs in the private sector.
Contrary to some popular criticisms, MMTers argue that their ideas are not an excuse for the government to print money and forget about budget deficits. If inflation rises above target, policymakers should raise taxes to reduce aggregate demand and shrink the deficit, reducing inflation that is believed to be mostly caused by a limited supply of real resources, as already mentioned. The JG scheme, since the jobs it provides pay the minimum wage, should help to stabilize inflation by anchoring wages across the whole economy to those set by the (public sector) scheme. To the extent that inflation can be caused by wages rising faster than productivity, with firms passing on such cost increases to output prices, the JG scheme can act as a sort of incomes policy by restraining wage inflation.
So MMT potentially offers all sorts of public policy goodies to the left, with apparently little cost economically.
This then is the introduction to a series of posts on MMT which aim to explore and critique (rather than criticise) some of its aspects. The series does not aim to be comprehensive. Instead, I will write about aspects which I find interesting, whether I think they are correct or otherwise. It will be set out as a series of questions and answers, which can be an appealing format, and one which focuses the mind on whatever topic is being suggested.