Friday, August 7, 2020

Is the US Currently Conducting an MMT Lite Experiment?

Note to readers: The article below was prompted by the input my daughter gave me in a recent interview I posted here on the blog. I thought she had some thoughtful comments and raised some worthwhile issues to consider on the fairness of various economic systems that I believe are on the minds of many millennials today. With that in mind, I offer the article and questions below for your consideration in an effort to encourage an honest discussion of these issues for anyone interested in them.


Recently, I have commented on this blog that it seemed to me that the US is already implementing a version of MMT (Modern Monetary Theory) with the central bank/government response to the COVID-19 pandemic. 

Perhaps another way to approach this is to ask: Is the US currently conducting an MMT lite experiment? We have the Federal Reserve stating that they plan to be near zero bound on interest rates for as far as we can see into the future. We have the Federal Reserve stating that their capacity to supply liquidity to the system in response to the current crisis is "unlimited". We have the Federal Reserve directly intervening in all kinds of markets with asset purchases.

I came across this article from last year in The New Yorker that examines the Modern Monetary Theory (MMT) as proposed by economist Stephanie Kelton. I encourage readers here to read this full article. Below I have extracted a few excerpts and further below I added a few thought questions that arose from reading this article along with a few comments.


. . . "the basic principle of M.M.T. is seductively simple: governments don’t have to budget like households, worrying about debt, because, unlike households, they can simply print their own money. So M.M.T. proposes that the constraint on government spending shouldn’t be debt but inflation: How much new money can you pump into the economy before prices rise?"

. . . . 

"Onstage, Kelton lamented, “There’s so much pressure on candidates to pay for everything. I don’t see anyone—I mean, I’ll just be honest, I don’t really see any Presidential candidates putting forward ambitious agendas and saying, ‘We’re not going to try to pay for any of this.’ ”

. . . 

"Kelton often hears the same concerns about M.M.T., and most are about inflation. How soon will we become Zimbabwe, which printed so many Zimbabwean dollars that inflation peaked, in 2008, at an annual rate of ninety sextillion per cent? Never, according to Kelton; under M.M.T., the focus is sustainable inflation, whereas fiscal traditionalists worry about the deficit and don’t consider inflation at all. Doesn’t M.M.T. then require accurate forecasting of inflation risk? Yes, and, Kelton conceded at the festival, the models aren’t perfect, “but we can do a pretty good job.” And, anyway, government spending, she believes, is responsible for just a small part of inflation."

. . . 

"John Carney, is an economics columnist at Breitbart, who considers himself a “fellow-traveller” of the M.M.T. movement. “I think, functionally, Donald Trump has a lot of M.M.T. in him,” Carney told me. “He doesn’t think we need to cut Social Security. He doesn’t think that the deficit is a problem for the United States government right now. He thinks that if you can borrow cheaply you should and that interest rates should be low. Those are all positions that the M.M.T. people would agree with.” The idea for the job guarantee, he added, is “very close to what Make America Great is. We don’t want welfare, we don’t want handouts, we want good jobs for the American people.” Carney predicted more support for M.M.T. from the right once politicians realize that it can justify deep tax cuts.

This shift, if it is to occur, seems far off. Earlier this year, Alexandria Ocasio-Cortez publicly expressed interest in M.M.T. Subsequently, five Republican senators, led by David Perdue, of Georgia, introduced a resolution that sought to offer an official condemnation of M.M.T. The resolution demonstrated M.M.T.’s growing clout, but it also underscored the fact that Kelton’s battle is over M.M.T.’s legitimacy, not its politics. Allies are valuable. “Maybe just the fact that she’s e-mailing with a Breitbart editor is a sign that she wants a broad evangelism for M.M.T. and not just to be a darling of the left,” Carney said. But he noted that there are fraught political decisions to be made. “The way I put it is, can the government build a gun range? Is that an O.K. job-guarantee job? Can the job guarantee be used to build a border wall?

I asked Kelton if she worries at all about these fights, further over the horizon. “At the end of the day, what I really hope for is just a better debate,” she told me. “Let both sides put forward their best ideas.”

My added comments: After reading this article, the following thought questions came to mind:

1- Are the policies being implemented right now by the Federal Reserve in response to the pandemic crisis a "lite" version of MMT?

2- Is President Trump actually somewhat in agreement with some of the basic tenets of MMT as this article in The New Yorker suggests?

3- What is the wealth gap? What do the latest stats show about this gap? (you can explore that question by various categories using these pretty current graphs from the Federal Reserve)  -- (distribute the graph by generation to see why many millennials feel left out)

4- Do the current easy money policies of the Federal Reserve distort markets? If so, do we really have "free markets" Or do we have artificial markets propped up by central bank intervention (stock market, real estate, etc)?

5- Do these central bank monetary policies/interventions create artificial winners and losers and contribute to the "wealth gap"? If so, is that a true "free market capitalist" system?

6- How long can we use "unlimited money creation" policies before markets and the general public lose confidence in our currency and/or the monetary system itself? Years? Decades? Forever? (Stephanie Kelton says forever).

These are just some questions that come to mind. 

One thing we have learned here in our multi year study of these issues is that our present system is based primarily on public trust and confidence. Our currency itself is not anchored to anything in the real economy and floats adrift in a sea of exchange rates. We have lots of ongoing debate about that situation and also a lot of ideas on how to reform the present system if that is needed in the future.

So, in our view here, the real debate over MMT or other economic proposals is not as much about the actual technical policy alternatives as it is over - Who Do You Trust?

It all seems to come back to a fundamental question of human nature. Do you trust central planning authorities and experts or do you believe that human nature is somewhat flawed and that any system is vulnerable to abuse and corruption due to the flaws of human nature? 

If you lean towards the first camp, you are more likely to accept the idea that we can give governments and central planning authorities the power of "the unlimited ability to create money" and then trust that they will use that power responsibly and fairly. If you have a basic distrust of too much concentrated power in the hands of central planners, you will not likely trust them to administer any system responsibly or fairly and will seek ways to limit that power (this was the prevailing view of those who founded the United States).

This fundamental question is very important. Today we see much discussion about a "wealth gap". This wealth gap is viewed by many as fundamentally unjust and something that society must deal with. On the progressive side of the debate, we see a belief that if we will turn over power to central planners (such as the power to create unlimited money), they will use that power to fairly and responsibly rectify problems like the wealth gap. Opponents will counter that central planners are not inherently more moral or just than anyone else and cannot be trusted with that much power. They will say that those in power will tend to favor certain interest groups over others rather than to be impartial and the eventual result will be an even worse wealth gap.

Perhaps one way to address this debate is to just raise the thought questions below and leave it to readers to decide for themselves:

1- If we look at history, how have economies based on powerful central planners performed? Have they tended to improve the lot of the average person or not? Have they resulted in a more fair and just society or a less fair and just society?

2- Can we trust people in power (central planners) to be fair and impartial and not favor their political friends over their political enemies when making public policy? Can we trust them to make decisions without any personal bias? Can we trust that politics will not impact decisions that are made by powerful central planners? 

3- Using our present US monetary system as an example, have the policies of the Federal Reserve (our current central planner for monetary policy) resulted in free and fair markets and impartial results for the general public? Asked another way ---- Have the policies of the Federal Reserve tended to favor one segment of society over another and contribute to the current perceived wealth gap?

4- Does the soundness of our currency (its ability to retain its purchasing power over time) matter and does it impact the wealth gap; and therefore how fair our system is?

Economists will tend to argue over the merits of one set of economic proposals or another as being more "fair". At the end of the day, how we answer the fundamental questions above about who we trust and how we view human nature will determine our fate. That is our view here. We will continue to follow events and see what happens.
Added note: This is the second article in a series of three related to how millennials view our economy and monetary system, how the wealth gap impacts them, and how to assess all the various political proposals they will see that are supposed to "fix" things (reduce the wealth gap). 

Upcoming is the last article in this series which will take a deeper dive into the actual numbers released by the Federal Reserve that allow us to analyze the perceived wealth gap. If you are going to discuss and debate this issue, it is a good idea to do so using the actual data we have as opposed to common public perceptions. This data is the Distribution of US Household Wealth since 1989 by various categories including % of wealth owned (Top 10%, etc) and by generations. Wealth in this data is total assets less total liabilities in the private sector (excludes government liabilities and assets). 

You can preview the charts we will look at here  that are updated through the first quarter of 2020. Here are some teaser questions to think about based on this actual data:

-  Is the "wealth gap" a real thing? Is it really currently getting bigger? 

-  Has the wealth gap actually expanded in recent years? (the last three for example)

- How much percent of the nations wealth do millennials own? 

- How many millennials are there? What is their share of the total population compared to their share of US household wealth? Is this why many millennials feel the system has failed them?

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