Content uploaded by Scott Fullwiler
Author content
All content in this area was uploaded by Scott Fullwiler on Apr 10, 2019
Content may be subject to copyright.
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 1/14
ALPHAVILLE
HOME MARKETS LIVE LONG ROOM
By: Guest writers
This week in testimony to the Senate Banking Committee, Jay Powell,
Chairman of the Federal Reserve, offered a verdict (https://www.cnbc.co
m/2019/02/26/fed-chief-says-economic-theory-of-unlimited-borrowing-su
pported-by-ocasio-cortez-is-just-wrong.html) on modern monetary theory.
"The idea that deficits don't matter for countries that can borrow in their
own currency I think is just wrong," he said. It was a victory for the
movement, of sorts: modern monetary theory is now unavoidable. It now
must be addressed in a committee hearing of the US Senate.
It's an idea being contested right now on finance and economics Twitter,
which sounds like a silly thing to say but is not, because the people who
read and write econ Twitter are the people who explain economics in
newspaper articles and academic papers for the rest of the world.
Which is how yesterday we got an emai from three MMTers: Scott
Fullwiler, Professor of Economics at the University of Missouri, Kansas
City; Rohan Grey, a Doctoral Fellow at Cornell Law School; and Nathan
Tankus, Research Director of the Modern Money Network. They wanted a
chance to respond to several recent articles, our piece on how the US
financed the second world war (https://ftalphaville.ft.com/2019/02/13/15
Macroeconomics US Inflation
An MMT response on what causes inflation
11
MARCH 1, 2019 4:00 AM
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 2/14
50057130000/How-the-US-actually-financed-the-second-world-war/)
among them. Here, in their own words:
For two decades we and our like-minded colleagues have been putting
forward the idea that a monetarily sovereign country like the United States
with debts denominated in its own currency and a floating exchange rate
cannot “go broke”. We have been writing about this and all the myriad
implications this has for macroeconomics under what has come to be known
as Modern Monetary Theory.
Excitingly, last month representative Alexandria Ocasio-Cortez brought
attention to our views when she said that MMT should be “part of the
conversation (https://www.businessinsider.com/alexandria-ocasio-cortez-o
mmt-modern-monetary-theory-how-pay-for-policies-2019-1)". This set the
economics and finance media ablaze with renewed commentary. In a major
step forward, the broad consensus of these pieces in a series of outlets has
been to agree with my colleagues and I that the only limit on government
spending is inflation. The acceptance of this crucial tenet of MMT is very
welcome and new. It was not too many years ago that throughout the
economics press it was commonplace to present MMT as a wild new theory
and speak in worried uncertain terms about the possibility that bond
markets would refuse to buy US treasury securities, causing a debt crisis.
We are thrilled to move past this stage in the public macroeconomic debate.
Unfortunately, while the press has been willing to agree with this major
proposition, it has not been willing to follow its implications. Josh Barro
writing in New York Magazine (http://nymag.com/intelligencer/2019/01/
modern-monetary-theory-doesnt-make-single-payer-any-easier.html)
particularly articulates what seems to be the emerging response to MMT in
the press:
If the government prints and spends money when the economy is at or
near full employment, MMT counsels (correctly) that this will lead to
inflation, and prescribes deficit-reducing tax increases to reduce
aggregate demand and thereby control inflation. See how we have
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 3/14
Contrary to Barro’s assertions, we have not “ended up back where we
started." MMT’s approach to budgeting and designing a macroeconomic
policy framework for a Green New Deal with price stability is radically
different from current Congressional practice and there are no other
modern proposals like it.
First, when we suggest that a budget constraint be replaced by an inflation
constraint (http://neweconomicperspectives.org/2015/01/replacing-budget
-constraint-inflation-constraint.html), we are not suggesting that all
inflation is caused by excess demand. Indeed, from our view, excess demand
is rarely the cause of inflation. Whether it's businesses raising profit
margins or passing on costs (https://www.sciencedirect.com/science/articl
e/pii/B9780444532381000065), or it’s Wall Street speculating on
commodities (https://academic.oup.com/rfs/article/28/5/1285/1867225)
or houses, there are a range of sources of inflation that aren’t caused by the
general state of demand and aren’t best regulated by aggregate demand
policies.
Thus, if inflation is rising because large corporations have decided to use
their pricing power to increase profit margins at the expense of the public,
reducing demand may not be the most appropriate tool. The recent
controversies over rising housing rents (http://citeseerx.ist.psu.edu/viewdo
c/download?doi=10.1.1.555.3043&rep=rep1&type=pdf) and drug prices
demonstrate that we need alternative tools in place to manage the power of
big business and ensure their pricing policies are consistent with public
purpose. The experience of the last decade inadvertently reflects the
potential strength of alternative inflation-fighting tools, as one of the
reasons inflation has remained below target for the past ten years is
legislated cuts to medicare and medicaid payments (https://www.frbsf.org/
ended up back where we started? Whether you take a Keynesian view or
an MMT view, if the government spends more, it’s likely going to need
to tax more, sooner or later. [...] Whatever the Federal Reserve’s
demerits, the idea of depending on Congress to pass surplus-generating
tax increases in order to keep the economy stable and prevent runaway
inflation gives me hives.
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 4/14
economic-research/publications/economic-letter/2017/november/contribu
tion-to-low-pce-inflation-from-healthcare/).
Because of the pricing power of big companies, whichever administrative
agency or agencies is responsible for managing aggregate demand should
not be responsible for overall inflation on its own. It should either share
joint responsibility for keeping inflation on target with other agencies
responsible for regulating business pricing power (https://hdl.handle.net/2
027/mdp.39015016798764?urlappend=%3Bseq=51) or new price indices
should be constructed that exclude concentrated markets where prices are
clearly acyclical (https://www.frbsf.org/economic-research/publications/ec
onomic-letter/2017/november/contribution-to-low-pce-inflation-from-heal
thcare/).
Second, we do not believe that any and all inflation that does result from
excessive demand can and should be addressed by higher taxes. This is a
distortion of our view, as years of publications can attest. When MMT says
that a major role of taxes is to help offset demand rather than generate
revenue, we are recognising that taxes are a critical part of a whole suite of
potential demand offsets, which also includes things like tightening
financial and credit regulations to reduce bank lending, market finance,
speculation and fraud.
Assessing the potential inflationary effect of new spending proposals also
requires seriously assessing how underutilised our existing resources are.
This requires detailed, expert analysis from a range of industry analysts; not
just statistical regressions on aggregate economic data by macroeconomists.
At the same time, we must also confront the fact that the fossil fuel, real
estate, defense, and financial industries are too large, too dirty, and eat up
too much of our national resources. They must be shrunk one way, or
another. Thus, another way to offset excessive demand pressure is to tighten
environmental and other forms of regulation, which would disemploy
people and resources in those industries, and free them up to be redeployed
in green production as part of the broader economic transformation of the
Green New Deal. Our current political leaders tend to oppose such an
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 5/14
approach on the grounds that demand is limited and jobs are a rare, scarce
commodity, so each existing job must be preserved at all costs. MMT allows
us to recognise that the government can commit to real full employment.
We can instead focus on increasing the quality of jobs and ensuring our
economy generates prosperity for everyone.
In addition, we must recognise that the Green New Deal is about creating
new resources over the medium term, which will in turn expand green
output to further accelerate the decarbonisation process. This is not our
current approach. Instead the Congressional Budget Office continually
defines potential capacity down from what it actually is (http://jwmason.or
g/slackwire/the-big-question-for-macroeconomic-policy-is-this-really-full-e
mployment/), creating a vicious self-fullfiling cycle defined by low
productivity and lost output. To address this failure, the Congressional
Research Service (as well as other budget advisory organizations) will need
to be enlarged to do the analysis necessary to find the right mix of inflation
offsets that best move forward the task of decarbonizing our economy.
There is no alternative if we are going to succeed at averting climate change.
Regardless of which policy tool is used in a particular context, demand
management in general needs to lean much more heavily on the appearance
of bottlenecks in specific industries instead of simply tracking changes in a
general price index. The immediate signs of bottlenecks are large and
sustained rises in unfilled orders for specific goods and services. Preventing
shortages is after all what demand management is first and foremost about
and price indices are misleading policy targets when they include factors
that are insensitive to demand and would be counterproductive to manage
with demand. The more actively we regulate big business for public
purpose, the tighter the full employment we can achieve and the more
resources we can devote to the Green New Deal while preserving price
stability.
Third, when we do advocate using tax increases to address inflationary
pressure, we are not suggesting that Congress attempt to raise taxes in real
time after inflation has already emerged. Indeed, our approach is precisely
intended to avoid a situation in which Congress merely spends without
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 6/14
paying attention to inflation dynamics until it is too late. Thus, we argue
varying tax rates and other inflation offsets should be included in the
budgeting process from the outset. In our approach, an MMT-informed
Congressional Budget Office would produce detailed reports of how specific
spending or lending proposals would increase demand and which sectors
and regions would be most affected, and would monitor inflationary
pressures closely to determine the appropriate policy response based on
specific conditions. This would be a radical improvement over the current
CBO scoring process, which looks only at dollar values in aggregate, and
treats all sources of revenue as equal. This crude approach can easily lead to
mistaken conclusions, like that Elizabeth Warren’s wealth tax could
adequately “pay for” large spending proposals, when in reality, such a tax
would not be likely to reduce overall demand by very much in the areas that
the new government spending would be directed towards (even if it was still
desirable from an equity standpoint).
Beyond an improved Congressional budgetary process, there are well-
established approaches to policymaking that can assist us in managing
inflationary risks. For example, we have long recommended strengthening
automatic fiscal stabilisers. Indeed, our principal policy recommendation is
a Job Guarantee (which is part of a Green New Deal) which automatically
creates more jobs as people need them, but does not continue to spend
greater and greater amounts once the economy reaches full employment.
Other ways we can strengthen automatic stabilisers include savings policies
(https://www.unz.com/print/Colliers-1949apr30-00082/) and no longer
indexing tax brackets or indexing them to an inflation target instead and
introducing more tax brackets so that as incomes rise faster than the
inflation target a higher percentage of income is progressively taxed. With
these tools there is much less need to rely on day-to-day discretionary
decision making like is currently the case with the Federal Reserve’s
management of interest rates.
That said, we are not against one or more agencies being given additional
tools to collectively manage demand on a discretionary basis. It is unclear
where this myth came from but it doesn’t come from our extensive
publication record- in academic journals or in the blogosphere. One of us
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 7/14
long ago suggested in the Financial Times (https://ftalphaville.ft.com/2013/
08/06/1593422/guest-post-dual-mandate-right-goals-wrong-agency/) the
goal of delegating responsibility for day-to-day demand management to an
independent agency was a good one but that the Federal Reserve was the
wrong agency. As we said then:
Commenters are not wrong that some of these proposals and tools will be
controversial. What is ignored by this criticism is the fact that our current
approach of managing inflation on the backs of a very indebted and
underemployed public is also controversial. Indeed, the Federal Reserve has
historically been a conservative institution biased against full employment.
To ensure the Green New Deal creates and maintains true full employment,
we will need a new macroeconomic framework that brings in many
currently excluded institutions and stakeholders, and abandons our reliance
on interest rate adjustments as a primary tool for stabilising demand.
Modern monetary theory has a range of policy implications that bring us to
an entirely different policy world, rather than back where we started. A
Green New Deal must include some mixture of the policy instruments we’ve
laid out if it successfully plans a new green full employment economy with
price stability. Budgeting the traditional CBO way will focus attention on the
Whereas Bernanke only hinted at the need for a fiscal partner, former
Fed Chairman Marriner Eccles openly advocated the use of fiscal policy
as the most effective way to fight both unemployment and excessive
inflation. In the depths of the Great Depression, Eccles pushed for a
payroll tax cut, calling it ‘the most important single step that can be
taken’ to stimulate consumer buying power. Years later, just prior to the
near tripling of US war expenditures, Eccles urged lawmakers to raise
the payroll tax in order to stave off an inflationary episode. Indeed, as
his Special Assistant made clear in the following letter, Eccles
considered adjustments in fiscal policy (in this case an increase in the
payroll tax) to be ‘the most effective anti-inflationary means of reducing
purchasing power.
3/1/2019 An MMT response on what causes inflation | FT Alphaville
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/ 8/14
wrong issues and fail to offset the inflationary potential of this necessary
new spending. As we’ve said, there are a number of taxes -- especially on the
rich -- which offset much less GND spending than their dollar amounts
would imply. This does not mean that we shouldn’t tax the rich -- they are
too rich. It just means Congress needs to look elsewhere if they’re going to
fully offset the inflationary potential of this spending. We can afford a Green
New Deal and we can accomplish it as well. We just need the right policy
tools to make sure it's successful.
Copyright (http://www.ft.com/servicestools/help/copyright) The Financial Times Limited 2019.
All rights reserved. You may share using our article tools. Please don't cut articles from FT.com
and redistribute by email or post to the web.
Print a single copy of this article for personal use. Contact us if you wish to
print more to distribute to others. © The Financial Times Ltd.
11
Read next:
Tesla: 'Surprise! You're fired!'
Read more articles in
Part of the Billions of Blistering Barnacles series
BILLIONS OF BLISTERING BARNACLES SERIES
