by Thomas Palley claims MMT fails to provide plausible macroeconomics Modern Money Theory (MMT) asserts society can enjoy a range of large government programs for free via money financed deficits, all without inflation … Recently, progressive Democrats have called for a range of programs … All of them can reasonably be argued for. However, there is also the question of how they will be financed. Proponents of MMT assert that is a non-problem and the programs can be financed by “printing” money and without causing higher inflation … However, simple back of the envelope macroeconomic arithmetic shows that assertion to be completely implausible … Keynesians have long recognized that money financed deficits can be used to finance programs when the economy is
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Thomas Palley claims MMT fails to provide plausible macroeconomics
Modern Money Theory (MMT) asserts society can enjoy a range of large
government programs for free via money financed deficits, all without inflation …
Recently, progressive Democrats have called for a range of programs … All of them can reasonably be argued for. However, there is also the question of how they will be financed. Proponents of MMT assert that is a non-problem and the programs can be financed by “printing” money and without causing higher inflation … However, simple back of the envelope macroeconomic arithmetic shows that assertion to be completely implausible …
Keynesians have long recognized that money financed deficits can be used to finance programs when the economy is away from the full employment-inflation boundary. However, that financing option is temporary to the extent that those deficits generate developments which ultimately drive the economy to full employment. The case for progressive programs rests on their own merits, which should constitute their political foundation. Financing of those programs should be rooted in plausible macroeconomics, which MMT manifestly fails to provide.
Palley argues that “money financed deficits” will generate inflation if they are part of a permanent program unless they are paid for with taxes. It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off (in part influenced by Abba Lerner’s Economics of Employment (1956) and its discussion of what has become known as stagflation) 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.
That government s can spend whatever amount of money they want is a fact. 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.
Much of the critique that Palley delivers was also waged against Abba Lerner’s ‘functional finance’ approach — on which much of MMT is based — back in the 1940s and 1950s. Even if some of today’s ‘Keynesian’ economists do not understand Lerner, there once was one who certainly did:
I recently read an interesting article on deficit budgeting … His argument is impeccable.
John Maynard Keynes (CW XXVII:320)