A thorough defense of Modern Monetary Theory

Originally published at: https://boingboing.net/2019/03/06/austerity-doctrine.html


I remember hearing about competing theories of what atoms were like. Thompson had the plum pudding model, Rutherford had the nuclear model. The gold foil experiment showed that the plum pudding model didn’t explain reality.

So when I read:

I think, well, has deficit spending been inflationary? Like, we’ve been doing it for a long time, with different countries doing it in different degrees. Can we actually figure out the answer to this question?

If not then I genuinely wish economists would all just shut up and stop trying to get us to run our actual lives based on their highschool love poetry.


Summers, for example, simply waves his hands at MMT proponents and calls them “fringe economists” without substantively engaging with their arguments.

Don’t ever change, Larry. With his consistently dickheaded attitude it’s a wonder he hasn’t yet gone full GOP.


I really appreciate the implicit criticism of the whole mythology of “job creators.” The fact is, if you give Apple a trillion dollars, they will not hire a million workers. But if you buy a million iPhones, they will. It is demand that creates jobs.


That observation itself has huge implications on the economy. For example, in a country like the US, where the government is itself the largest employer, austerity is guaranteed to crash the economy, because less government spending and fewer government workers means fewer people spending money on goods and services.

Probably the strongest argument that economics isn’t a science is that, in science, once there is enough evidence that a theory is a POS, it is abandoned by the scientific community. No matter how many times trickle-down economics has been proven to be BS, there are still proponents of it influencing policy.


I am not qualified to critique either MMT or Thatcherite economic theories as science, but then, it’s an open question whether anyone is. The problem with all reductive models of How The Economy Works is that the economy is a human system; if you change the prevailing theory of its behavior, that affects the behavior itself. There are ways to be wrong that don’t exist in physical sciences.

(And that’s assuming that the whole field is immaculately objective and free of motivated reasoning, which would be a naïve thing to think about a field with literally all the money in the world riding on its conclusions)

I can see why people want to counter neoliberal economic dogma on its own terms, but it’s like trying to use the Bible to argue with Christians – you’re just reifying their faulty premise, and not changing their minds because they weren’t being honest about their motives anyway.

The economic argument against “austerity” is simply: science does not justify it, so if that’s all you got, you ain’t justified shit.


A ditty:

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Your example of atom theory is apt. Thompson and Rutherford both had models, one is clearly more correct. But both are useful for explaining behavior and both are flawed. We’ve refined the model greatly since then, but they are still models. No one, genuinely no one, truly understands what the hell an electron is. We can measure it, model it, write equations, etc. But those are still just attempts to best explain behavior.

And that’s for just a small number of particles. A step up from the spherical cow in a vacuum, but in the same vein.

Economies and the humans that create and live in them are vastly more complex. We have lots of models that explain different sorts of behavior. But we should never confuse the model for the real thing. An economic model can only give us a best guess as to cause and effect. Reality might differ.

Related anecdote: I work on a product that resonates at a known frequency (call it X). I design and make them for a living. One day a post-doc comes to me to show me his work proving that they shouldn’t resonate at X, they should resonate at Y. I tell him he made a mistake. He insists he didn’t and that our product can’t resonant at X. Round and round we go. But he can’t let go that reality beats theory every time.

I get what MMT says, and it makes some good points. It gives some interesting insights that could affect policy. But let’s never forget that reality gets final say in how things work.


Fracking experts, what do they know. Oh, yeah, they’ve studied it and thought about it and come up with theories, but my ignorance is what will really save the day!

I’ll be honest: I don’t 100% agree with MMT, but it does make a lot of good points. It is a good model for some things, and a bad model for others. But I think we can all agree that Austerity was a tire fire for everyone except the people who it transferred wealth to, which is why most economists who still agree with it are paid to agree with it, coincidently enough.


Equating economists with other experts is one of the things that has undermined public confidence in experts.

Which is exactly why I actually think a random person’s ignorance is better than “expert” opinion when it comes to economics. I’m extremely annoyed by the idea of a theory-based debate about whether deficit spending causes inflation. Facts or gtfo.


My take on this is that, early on in the ongoing process of chartalism getting introduced to the mainstream, a number of writers were disingenuously arguing that MMT shows that large amounts of government spending can be deficit-financed without consequence. It, naturally, caused a lot of pushback from the other side (much of which was every bit as ill-considered), and that led to a number of the chartalists clarifying their arguments. This is all as it should be.

We can now see that the real problem is political: namely, do we truly want to rely on Congress having to raise taxes during boom years, when the explanation to constituents involves monetary concerns that have never been part of our political process?

Personally, ever since I read ‘Capital in the 21st Century,’ I’ve been of the opinion that we should actually welcome inflation, since it would be the simplest way out of our wealth inequality predicament (it’s what happened in the early 20th century). I’m not sure why, but I’ve yet to encounter anyone else who thinks about it that way. Is this not the logical point of view for a U.S.-based socialist? Are people just pretending to not like inflation as some sort of ruse, given that neoliberals hold all the power? I mean, I’m like: look, you can have inflation or guillotine: take your pick.

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A couple of comments:

Inflation is always touted as the major downside to deficit spending. But inflation just isn’t that bad, at least in moderation. Inflation only decreases the value of money, not of stuff. So it is bad for people who sit on money (or gold), but it is doesn’t really affect people whose assets are in houses. Even the stock market is inflation protected, as the value of companies should keep pace with inflation – at least those companies whose value comes from goods and services rather than financial equity. Primarily, inflation increases wages and cost of living by the same amount.

Printing money causing inflation is bad if the money is not going to increase production (such as servicing foreign debt like post WWI germany) or if your de facto currency of exchange isn’t your native currency (like if everyone exchanges US dollars, printing your local currency won’t help).

On the other hand, one important caveat to the idea that government financing only causes inflation if it competes with private industry is that that competition can have secondary and tertiary effects. With the plumbing example, the government hiring out-of-work plumbers could theoretically raise the price of copper used in electronics, or might require factory workers to switch from making cars to making plumbing fixtures.


I have met a few other people who think that, but surprisingly few. Which is really surprising considering how much debt Americans have. Honestly I think it is just because most people don’t think or talk about it. It is just presented and accepted as an basic fact that inflation is bad.


This is what always strikes me, too. If you believe MMT, there’s no way that will fly with our current setup. The Fed pumps the gas and brakes based on the economy, Congress messes with taxes based on political whims. I don’t think anyone can argue that both won’t affect the economy, but I can’t imagine Congress being beholden to economic growth.

Maybe I’m thinking too small and there could be a structural shift like when the Fed was created or moving off the gold standard? I just can’t imagine it.

More than the target 2-3%? I thought that was settled that some inflation is good because it means the economy grows and encourages investment instead of stockpiling cash removing it from the economy. One theory I heard is that the US is hypersensitive to a depression, because of the Great Depression, and Germany is hypersensitive to hyperinflation, because of what happened to them in the 20s. This means they each over correct to avoid them.

It does seem since the 90s inflation has been (intentionally or unintentionally) much lower than before.


Historically, inflation falls on the poor most of all. As a general rule, if you lack the power to renegotiate your wage, then you will feel the effects of inflation to a greater extent than those who do. Your sentence " Primarily, inflation increases wages and cost of living by the same amount." is not quite right. This should say " Primarily, inflation increases wages and cost of living but not always by the same amount and not consistently across all wages and prices."

Of special note, but related are those who’s income is fixed by statute, such as welfare beneficiaries or those making minimum wage. If government does not raise those in lock step with inflation, then the recipients are paying the cost for inflation.

You didnt say or imply so, but i feel its important to dispel the now common myth that inflation somehow hurts the rich. It does not. Pretty much every financial asset worth having is inflation adjusted and businesses are in a better position to pass inflationary costs on to customers than workers are to demand higher salary in response to higher inflation.


Double that amount sounds good to me. I have my doubts that the Fed would be able to spark runaway inflation, even if they tried. The deficit hawks have been wrong so repeatedly, of late, that it is time to at the very least adjust the parameters on what is considered “proper” Keynesianism.

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Im not sure how inflation really helps alleviate wealth inequality. Maybe you could argue that the poor borrow more than the rich, and, therefore, get more relief from the debt reduction aspects of inflation, but im not even sure that is true. The rich have more access to leverage than the poor do, and at much more favorable rates. A slightly higher inflation rate wont help with your 19% interest credit card debt that much, especially if your wages are not inflation adjusted, which is true for most poor people.

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“But if there is a bunch of excess capacity in the economy – factories running below capacity, skilled people who want to work sitting around idle – then the government can buy up all that excess capacity without competing with private spenders and employers, creating full employment and broad, shared prosperity. And when full employment is attained, the government can prevent inflation by taxing some of the money it issued out of existence.”

Ill throw in my gratuitous Austrian point here. Its important to ask why that capacity is idle. If the government starts buying up excess capacity that is obsolete or unneeded, then it ends up preventing the reallocation of the underlying resources. Replace “factory” in your example with “coal mine” and you start to see the issue.

I don’t think that stocks are as inflation-protected as you think they are. Do you really imagine that the high levels of share buybacks that have been occurring recently would continue in an environment of high rates? Companies currently have no reason to put that money toward wages. We need to give them one.

I also think you need to update your opinion on how much job security US workers feel. Look up the recent figures. And if your response is: too many people are underemployed, well then you’re making my point for me!

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Yes, the work has to have actual utility to actually promote growth. Paying someone to dig a hole and fill it back up is exactly equivalent to just giving someone welfare, except that it prevents them from taking on other work. If your welfare system is excessively means tested, it is exactly the same. It isn’t “bad” but it also doesn’t increase economic productivity.

But I think there is a reasonable argument that the “ROI” calculation can be different from a private industry. The government can reasonably pay for something that has value, but is not profitable enough for private industry to do it, or for something that creates public good. Also, we all know that the instantly and freely redeployable workforce and infrastructure is not a real thing. So the government purchasing something that is idle, but can’t feasibly be reallocated (within a given time frame, etc) is reasonable.

But all of these reasons tie into political aspects: welfare, public good, and protecting distressed workers. So I don’t think the position that “if only we could have the fed manage all this for the purpose of economic growth” makes sense: it has to go hand in hand with political goals.