What good is modern monetary theory?

One of my favorite factoids about gold is that all that has ever been mined could all fit within a modest two-story townhouse (it’s too delicious to fact check, at least given the risks that I’ll get sidetracked from what is, after all, a diversion at the moment). The idea that such a paltry supply could oil and and grease the multitudinous transactions of the global economy seems so laughable I have trouble remembering how it’s possible that people, both now and in the past, take it seriously.

But they did (and they do) and it’s not entirely laughable: a metal as stable as gold and as hard to find and as (now) universally recognized as valuable—these are excellent attributes for an exchange currency that does not depend on government backing. Bitcoin and a plethora of other currencies are trying to do the same thing, but so far have not achieved the kind of pricing stability and ubiquitous markets that exist for gold.

The shift away from the gold standard, and from the Bretton Woods exchange rate system, makes the theory of money that we call modern monetary theory increasingly attractive as a way to describe macroeconomics and guide monetary policy. I first came across it through history of capitalism circles, and it has penetrated the policy circles on the left sufficiently that the man who came awfully close to winning the Democratic presidential nomination is at least MMT adjacent through his advisor Stephanie Kelton, even if he’s playing sphinx-like Franklin Roosevelt on the question.

Here’s what the American left loves about it: deficits, the national debt—it doesn’t matter! We can spend what we want! Even though this is not exactly what MMT says, that seems to be the reason for much of the enthusiasm for it. It’s a respectable way to waive off questions about how we finance universal health care, college education, or basic income.

MMT is not in fact a license to print money nonstop. It reframes the constraints of monetary policy around inflation rather than deficits. Its real value, I think, as currently described by its theorists, is that it nullifies unemployment. Its policy assumption is that you manipulate the money supply to zero out unemployment, rather than considering it a tradeoff along with inflation.

Interestingly, as described in the linked New Yorker article above, the regenerative proponent of MMT—Warren Mosler—has gone about it in a very Koch-like way, pouring money into academic networks to incubate MMT into a full-blown, respectable policy idea.

Reading Kelton and others describe MMT, though, I have trouble figuring out what is so different, besides the fact that the debt is no longer part of the economic dashboard. It still sounds like Keynesianism to me: pump up the monetary supply when the economy slows, soak up money to cool it down when it’s running hot. The federal jobs guarantees sound a lot like what a healthy chunk of politicians favored in the 1970s.

I think that Kelton is effectively arguing that—since the Fed will no longer really tinker with interest rates—Congress will have its job of worrying about unemployment and inflation. It will have to make fiscal policy moves in order to balance that objective, raising or cutting taxes, expanding or paring back public-sector programs.

I don’t think this is a better equilibrium. After all, there’s a lot of benefits to pulling these decisions from Congress and handing them off to a more politically removed (but not entirely independent) body like the Federal Reserve Board. Kelton might like the policy results from an AOC-led Congress, but might not a Republican-controlled Congress tighten its inflationary focus to the detriment of unemployment? It seems like this might just increase the undulations in monetary/fiscal policy, decreasing stability, creating more boom-and-bust potential, increasing business and labor market uncertainty.

What’s missing from the New Yorker article, at least to the level that I need, is a better explanation of how this works with international trade. Balance of trade, swapping currencies for imports and exports—this strikes me as the most muscular constraint on the “Magic Money Tree,” as MMT skeptics snidely refer to the theory. This morning on the BBC, I listened to first a story on runaway inflation in Zimbabwe and a second that discussed an inflationary spiral in Syria. I suppose that a U.S. deficit-denier could argue that we don’t face the same constraints as those countries because, as a large common market with a wealth of natural and human resources, we could operate more autarkicly.

But I don’t see that as a better equilibrium either. I think that trade is good for many reasons, both for the mutual benefit that trade among equals generates AND for the peace-keeping aspect that comes from interdependence. If we fall back into autarky, I only see more miasmas like Venezuela, Zimbabwe or Syria, imperialistic wars to gain resources outside common markets, new colonial holdings, and a replay of terrible moments in 19th and 20th century history.

The gold standard brought on more problems than it was worth. But it did lubricate the nascent global economy that Bretton Woods helped restore with more guardrails. I fail to see how MMT helps us address the shortcomings of our current global economy, with its deficient public governance to harmonize regulatory standards and ratchet up so that we generate fewer losers in developed countries who would blow up the system out of rage and spite.