The WaPo MMT Post Explosion: Kevin Drum's Take on MMT

Kevin Drum, posting in Mother Jones, [1] also threw his hat into the ring of discussion about Dylan Matthews's post [2] about Modern Monetary Theory (MMT). Kevin begins by characterizing MMT as “. . . . an economic model that, roughly speaking, says government deficits are always good unless there's a risk of runaway inflation.” He then favorably quotes Jared Bernstein's post [3], which I recently evaluated [4], coming out against the idea that deficit reduction is “pure virtue,” and also coming out for the view we need to use Government's ability “. . . to run large deficits in times of market failure” to replace lost aggregate demand. But Kevin doesn't get why Jared says this is MMT's greatest contribution. Kevin wonders why this is any different from what “ Old Keynesianism. And post-Keynesianism. And New Keynesianism” say, and he asks: “If that's really MMT's most important contribution, who needs it?” And then replies:

The more important side of MMT is its insistence that we should run substantial deficits even when the economy is in good shape. Only when inflation appears ready to run out of control should we use budget surpluses to rein things in.

And then through quoting Matthews and Jamie Galbraith as quoted by Matthews, Kevin makes the point that we haven't seen a serious case of demand-driven inflation since World War I and that involved, as Jamie said: “. . . conditions that will never be repeated.” And then Kevin goes on:

In some sense, this all comes down to a question of how scared we should be of inflation. Mainstream economic opinion says that a strong focus on full employment will inevitably risk high inflation, just as our current obsession with low inflation produces generally high unemployment. If we were focused on, say, a target unemployment rate of 4%, we'd see some periods where unemployment fell below that rate and some where it rose above it. But as the chart on the right shows, that's not what we've had over the past few decades. Instead, because our economic policy has been focused strongly on low inflation, we see only a couple of brief periods in which unemployment barely got close to 4%, followed immediately by a recession that kicked it back above 6%.

So should we focus instead on a genuine target of 4% unemployment, reining in budget deficits only when we fall well below that? That depends a lot on what you think the productive capacity of the country really is, and the mainstream estimate of NAIRU, the highest unemployment rate consistent with stable inflation, is around 5.5% right now. If that's the right estimate, then you could argue that we've been doing OK for the past few decades. But if full employment is really more consistent with an unemployment rate of 4%, then we've been wasting an awful lot of productive capacity for nothing.

It is about our fear of inflation and our assessment of the risk of it. But it's also about how we prioritize the risk of inflation against the reality of unemployment other than a “frictional” rate due to job transitions of 1 - 2%. Even 4% Unemployment measured by the U6 would still leave about 7.2 million Americans unemployed after a vigorous post-Keynesian expansion.

Those people would pay the price for the rest of us who are more concerned with containing inflation than with employing them. How serious is this price? Martin Watts and Bill Mitchell (one of the earliest and still leading developers of MMT) offer us a very good idea [5] of how high this price is for those selected to pay the price of a 4% U6 target, much less a 4% U3 target which is what I suspect Kevin is referring to.

Kevin Drum refers to the NAIRU, as if he and all economists agree that there must be a trade-off between inflation and unemployment at a to be determined NAIRU level. But, I wonder if he knows that MMT economists view the Non-Accelerating Inflation Rate of Unemployment, as both “a crock” [6] and as closely tied to the neoliberal economic paradigm that MMT opposes, and specifically to its acceptance of the idea that there must be an unemployed “buffer stock” of people who want to work, but must stay unemployed, in order to contain inflation?

Bill Mitchell points out [7] that MMT argues against such a buffer stock and the NAIRU by:

“. . . proposing a way to achieve full employment with price stability. As Randy Wray noted in the speech referred to earlier MMT, in part, “turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand”. . . . .

“And the way MMT does that is intrinsic to the theoretical framework and logically consistent with it. It is crucial to understand that notions of price stability all have some buffer stock underpinning them. . . . the mainstream NAIRU theories deploy a buffer stock of unemployment to control price inflation. . . .

“ . . . the theoretical offering that MMT provides . . . is that if we are concerned about efficiency and price stability then there is a superior buffer stock available to a public currency issuing monopoly.

“That is, if we really understand the way the currency works and the way the labour market works then we can have both full employment and price stability by using an employment buffer stock rather than an unemployed buffer stock.

“Then you have a direct route into the current policy debate. The governments think that large deficits are bad so they spend on a quantity rule – that is, allocate $x billiion – which they think is politically acceptable. It may not bear any relation to what is required to address the existing spending gap.”

It may help to note at this point that this is exactly what President Obama did in passing the ARA in 2009. He received advice providing stimulus estimates as high as $1.8 Trillion in deficit spending achieved through either tax cuts or government spending for ending the recession, but he evidently wanted that bill to come in at around $900 Billion and to have some bipartisan support. So, he did the thing that seemed politically expedient using an arbitrary quantity rule, even though he knew, based on the advice he received, that it was unlikely to end the recession and bring the economy to full employment.

Bill goes on analyzing the MMT proposal to offer a Job Guarantee (JG) to any unemployed person who wants a job, and Full Employment with Price Stability:

“MMT shows you how it is far better to conduct fiscal policy by spending on a price rule. That is, the government just has to fix the price and “buy” whatever is available at that price to ensure price stability. But what is the price the government would be fixing?

“Answer: the price it offers labour to enter the employment buffer stock – that is, the JG wage. . . .

“In the face of wage-price pressures, the JG approach maintains inflation control by choking aggregate demand and inducing slack in the non-buffer stock sector. The slack does not reveal itself as unemployment, and in that sense the JG may be referred to as a “loose” full employment. . . .

“So in a fiat monetary system, price stability is maximised using employment buffers rather than unemployment buffers.

“There are those who might consider that the MMT proposal that national governments should first bolt down the nominal anchor via an employment buffer stock amounts to a disagreement with Post Keynesian policies of public infrastructure investment . . .

“Some might even think that the proposal to introduce an employment buffer stock amounts to a preference for “small government” in the Hayekian tradition.

“None of these views would be correct.

“What we argue is that to turn the Phillips curve on its head – and thus thwart the use of unemployment to control inflation – you need a different nominal anchor. Generalised expansion does not provide that.

“Once you have that anchor in place then your ideological preferences will determine what other public spending you might entertain within the capacity of the economy to embrace further nominal demand expansion.

“As I have said in the past I favour strong public sectors with lots of investment in first-class infrastructure to advance the prosperity and well-being of the citizens. Others, who consider MMT to be a valuable contribution (that is, get it) may have different preferences.

“My JG pool would be small (but sufficient for the purpose as a nominal anchor) others might have a larger JG pool and less public sector spending elsewhere.

But the essential point is that independent of our preferences with respect to the size of government we would maintain an effective and highly liquid employment buffer.”

In short, if MMT policies are adopted, including the JG proposal, then there would be no unemployment buffer stock, no one paying the price for one, and no estimates at all of the fictional NAIRU suggesting targets of 4% UE. But there would be Full Employment WITH Price Stability. So, Kevin, and other newly interested writers who are writing about MMT after the WaPo article; please note that the basics include no UE targets, just Full Employment. And no deficits and surplus targets either, just responses to demand-pull and cost-push inflation, and private sector cutbacks in employment, through automatic safety net and taxation stabilizers, and other responses to such effects.

MMT is always about policy, mostly fiscal, not monetary, that will enable certain economic, social, cultural, environmental, and political outcomes, and disable other outcomes in each of these categories. It is never about running deficits or surpluses as targets for their own sakes. Whether deficits, or surpluses occur are byproducts of MMT policy impacts, and are largely endogenous to the economy. In themselves they mean nothing. Only the economic policies and outcomes that drive them are important.