What Do Modern Monetary Theorists Think About Inflation?

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Advocates of Modern Monetary Theory (MMT) say that we should understand all government spending as being funded by seignorage, which is the technical term for when a government creates new money and then spends it. This then allows them to say things like “taxes don’t fund spending” and other bumper-sticker type slogans that mostly just confuse people.

Once you understand what they are saying, the natural question becomes: how much seignorage can we realistically do? If you create a bunch of money and spend it into the economy, won’t that cause inflation? To this question, they reply that if seignorage leads to inflation, then you can just use taxes to take the money you spent into the economy back out of it and bring the inflation down. When framed this way, “taxes don’t fund spending; seignorage does” but also “taxes are necessary to offset the inflation of seignorage.”

On its face, this seems like a tedious rhetorical exercise that has no practical implication for policy: whether taxes are needed to “fund spending” or “offset the inflation caused by seignorage” is in the eye of the beholder, but either way of saying it still concedes that taxes are necessary.

As scrutiny on MMT has increased in recent days, the new trick of some MMT advocates appears to be to simply obfuscate on the question of inflation, turning it into a sort of unknowable, exotic quantity. Perhaps this is the new MMT position on inflation, but it didn’t used to be.

Until recently, advocates of MMT were remarkably forthright in claiming that creating a bunch of money and then spending it into the economy leads to inflation. All you had to do to get them to be so forthright was to ask them about whether a universal basic income (UBI) program is a good idea.

Due to some random personal connections (Hyman Minsky, who hated the welfare state and the basic income in particular, was Randy Wray’s advisor), MMT advocates adopted the view that a UBI is bad even though that position has nothing inherently to do with their descriptions of monetary and fiscal operations. This coincidental alignment means that they had to develop arguments against the UBI and the one they landed on is that the program will cause dangerous inflation.

Here is Stephanie Kelton:

If you start multiplying [the basic income amount] across the number of people who would receive that, this is a huge share of GDP. And so if you push [basic income advocates] and say ‘how are you going to put that much money into people’s hands and fuel spending in the economy without setting off a massive inflationary problem?’

Here is Pavlina Tcherneva:

If the [basic income] program is implemented as an ‘add-on,’ rather than a replacement for existing government programs, spending on UBI could be as high as 20–35% of GDP annually. UBI would be an enormous fiscal impulse by any measure. The worry is not that it would compromise the government’s budget, but that the expenditure represents vast purchasing power and command over real resources, equivalent to a fifth or more of the US economy. Would the economy produce the needed additional output to satisfy this new demand? If not, how would the resulting real resources be distributed and priced, in order to soak up the additional purchasing power? If output does not adjust sufficiently, the program would prove to be inflationary.

Here’s Randy Wray:

The value of the dollar is determined on the margin by what must be done to obtain it. If money “grew on trees”, its value would be determined by the amount of labor required to harvest money from trees. In an ELR [Employer of Last Resort] program, the value of the dollar is determined on the margin by the number of minutes required to earn a dollar working in the ELR job. Assuming that BIG [Basic Income Guarantee] provides a payment of $20,000 per year to all citizens (equivalent to a JG [Job Guarantee] job paying $10 per hour for a maximum 2000 hour working year), the value of the dollar on the margin would be the amount of labor involved in retrieving and opening the envelope containing the annual check from the treasury, divided by 20,000. For a couple of minutes of labor effort, you get $20,000. Obviously, the purchasing power of the dollar in terms of labor units required on the margin would be infinitesimally small. Remember that everyone gets this check. It might not happen overnight, but this would be your mom’s equivalent to money growing on trees, and would raise the price of labor (or devalue the currency—depending on how you want to look at it).

As BIG sets off inflation, it erodes the purchasing power of the BIG check. In order to maintain its policy goals (i.e. pull people out of poverty or maintaining a decent standard of living), the basic income payment must necessarily increase to compensate for the inflationary pressures. If the payment is not increased, we will have a “one-off” inflation when the recipients receive their check; but this check will not be able to buy the (now) more expensive goods necessary to maintain the desirable standard of living. If policy keeps the basic income at the original level, the benefit will be deficient—so it would have to grow over time.

All three have a fairly straightforward quantity theory of inflation where inflation occurs when there is more money chasing the same number of goods. What this means is that creating new money and spending it into the economy will lead to inflation to the extent that it increases demand without a corresponding increase in private sector output. When the economy is below capacity, you have more space to spend new money without risking inflation if that spending stimulates more output (basic Keynesian insight). But when the economy is at or near capacity, you have very little space to spend new money without creating inflation and necessitating offsetting taxation.

Here is Warren Mosler from last month making this point clear as day:

I was sitting with a guy in 1999 or 2000 from the Pentagon and he said ‘we really need to increase the military.’ And I said ‘OK fine, but right now we just had unemployment at 3.8 percent. If you start building the military now, you are going to be taking people out of the private sectors.’ Capacity utilization was at a low [he means high] level. All the steel was going into private sector uses. We were building buildings. We had that whole dot-com boom remember. In 1999, I said ‘there is not a lot of excess capacity now to start building the military. We should have done this 8 or 10 years ago in a recession when we had excess capacity and steel and I don’t know how many million people unemployed.’ That would have been the time to build the military when we had this excess capacity. But now it’s going to be problematic. It’s probably going to be highly inflationary to do that because you are going to have to pay higher and higher prices to dislodge people who are already doing something productive in the private sector.

What’s so remarkable about all these quotes is that they use a generic quantity theory of inflation to say a basic income or military spending increase would be dangerously inflationary, but at other times these folks advocate things that are basically identical to the dangerously inflationary basic income.

For instance, both Mosler and Kelton have suggested that we could do Medicare for All without raising taxes, and even suggested we might need to cut taxes to do it. But if we eliminated all private spending on health care and printed new money to replace it, then that would mean individuals and businesses would now have money in their pockets equal to the current level of private expenditure on health care. Private spending on healthcare is currently 8.8 percent of GDP, or $1.8 trillion, or $5,500 per capita. Thus, using seignorage to pay for Medicare for All without offsetting taxes would be equivalent to paying out a $5,500 UBI with newly created money every year.

You could argue of course that we are currently so far below capacity that, along with the small disemployment effect of Medicare for All, a $5,500 UBI will not be inflationary in the extremely short term. But do they really mean to say we could sustain such a UBI over the medium term without increasing taxes? If so, then they are at odds with their prior statements on inflation. If not, then once again pointless word games are making people believe things MMT advocates do not themselves believe.