Arnold Kling  


Another Book Review... Cato Journal Immigratio...

A reader asked me for my thoughts on so-called Modern Monetary Theory, as described here, for example.

As I understand it, the central dogma of MMT is that a government that prints its own currency and accepts that currency as payment for taxes can run up massive deficits without having to default. It can always just print more money.

Technically, MMT is true. As a practical matter, it would be suicidal to ignore the debt problem because of it. Some critics of MMT use the Zimbabwe example. But you don't even have to go that far. Look at Israel in around 1980. Because they were printing money to cover a deficit, inflation got up to an annual rate of 100 percent. The result was that the dollar became the store of value, with Israeli currency a medium of exchange--and at that, it was being used with greater reluctance every day.

Having your currency start inflating so rapidly that it no longer becomes a store of value is very, very costly. People have to put a lot of time and effort into obtaining alternative stores of value. All sorts of relative prices get distorted.

Consider another group of crackpots, the gold standard advocates. They say that a dollar should be a physical unit of measurement, meaning x grams of gold. Having the value of the dollar fluctuate is like having the length of an inch fluctuate--how can you conduct business when that is happening?

I would much rather turn my country over to gold-standard crackpots than to MMT crackpots, thank you very much. (By a crackpot, I mean someone with the characteristics that Huemerassociates with irrationality. I expect to see a lot of comments on this post with those characteristics.)

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COMMENTS (26 to date)
Nickolaus writes:

What about the group of people that wants legalization of competing currencies? Crackpots as well?

Kevin L writes:

I'd say that if the Fed were stripped of its monopoly, the private currencies that evolve would eventually be indexed to physical commodities (probably gold, maybe something else).

Kevin L writes:

I also think that's a misrepresentation of gold standard proponents. Anyone with a shred of economic understanding realizes that tying money to a weight of gold does not fix its value, because even gold has "shocks". The draw of gold-backed currency (at least among the economically literate - consider Rothbard et al) is decentralization of monetary authority. Consider that if the supply of gold (i.e., ownership of gold mines and refineries) were nationalized, a gold standard would have no essential difference from fiat currency.

joeftansey writes:

Gold prices don't fluctuate relative to themselves, only relative to the dollar. A large part of the volatility in precious metals can be explained by the uncertainty of central bank policy.

I think if we used gold for currency, there wouldn't be a lot of price fluctuation. I mean, gold is a pretty simple market once you take out fiat inflation, right? You mine it, and, that's not too difficult or variable...

Also, competing currencies > all other ideas. Bring on the bitcoins.

Rick Hull writes:

> Consider another group of crackpots, the gold standard advocates. They say that a dollar should be a physical unit of measurement, meaning x grams of gold. Having the value of the dollar fluctuate is like having the length of an inch fluctuate--how can you conduct business when that is happening?

I'm not sure how to interpret the "fluctuation" of the dollar relative to a gold-mass standard, as written here.

Are g-m critics saying that, since the price of gold in today's dollars fluctuates, that the "value" of g-m dollar would thus fluctuate? Or are the g-m proponents saying that the "value" of today's dollar fluctuates and that this fluctuation would cease under a g-m standard?

kebko writes:

"Having the value of the dollar fluctuate is like having the length of an inch fluctuate--how can you conduct business when that is happening?"

Hmmm... This is completely hypothetical, since obviously we're in pie-in-the-sky crackpot territory here. But, maybe there would be markets that fluctuated in real time where dollars could be bought and sold against other measures of value. Possibly some of those markets would even reflect future values. But, maybe I'm getting too crazy with that idea, since we're already through the looking glass here.
Possibly, there would develop a kind of "premium" in conracts that involved cash over time that would account for possible fluctuations.

Ahh, who am I kidding? It couldn't work. As usual, when Arnold starts calling people names, it's only after he's really thought the topic over.

kebko writes:

Oh dear...I might have misread what Arnold was saying, and now I'm buried under layers of ironic comeuppance...umm.....hmm....

DPG writes:

Thanks for the quick response.

Charles R. Williams writes:

MMT is a crude version of Keynesian style macro-economics. It shares with all these systems a belief that aggregate demand is important and that there is some policy lever that can be used to manipulate aggregate demand in a way that stabilizes the economy. MMT contends that the fed is powerless because the economy is indifferent to the mix of government liabilities. AD is manipulated by spending versus taxes. The Sumnerites think that the deficit is irrelevant but the fed can control AD through open market operations. Then you have the other flavors of Keynesianism, which all suffer from the same problem.

MMTers seem to favor government spending rather than tax cuts and Sumnerites tend to favor control over government spending because they focus almost exclusively on the economic distortions resulting from big government and fiscal stimulus - which they believe to be ineffective. Neither tendency follows automatically from either theory.

MMTers seem almost completely oblivious to supply side issues which gives their approach a certain naive and crude quality. In their basic insight, however, that monetary policy is ineffective, they are correct - at least in the current banking environment.

Don MacLean writes:

The problem is the MMT crackpots have had some influence on crackpot Pelosi and the White House, encouraging the crackpot loot the economy/grow the government stimulus fiasco.

I would assign the MMTers the penance of reading Hazlitt for the rest of their lives.

Mark Little writes:


Thank you. I had come across references to MMT casually, and while it sounded nuts I was wondering if it was something I should take time to read the arguments for. I'll consider that question answered.

One quibble.

Technically, MMT is true.
Yes, but only if you don't consider hyperinflation a form of default.

Curt writes:

I think it would be helpful to better nail down the true causes of high inflation. Clearly just running government deficits is not enough... (not to say you can't overdo it, but deficits at some level don't seem to cause high inflation). So what level of deficit spending is OK? Does it need to correlate in some way to population growth or other indices? Does it matter how the deficit spending is done? As Huemer points out, without some reasonable guidelines based on evidence, we are all just relying on preset biases.

James writes:


In what way do you see gold standard advocates as similar to Huemer's description of the irrational? Are you suggesting that gold standard advocates disregard information sources that they disagree with? That's hard since most information sources take fiat money as given. On the other hand, fiat money advocates say the most outrageous things like "BTW, please don’t ask me to read such and such a book on Austrian economics." -- S. Sumner in his blog FAQ

Or are you saying that gold standard people are less than fully aware of the arguments for fiat currency? "They say that a dollar should be a physical unit of measurement, meaning x grams of gold." -- A. Kling

That's just scratching the surface. For starters, you trust the state less than you trust the board fo directors of IBM and you would never accept that IBM's board of directors should have the authority to decide what you must accept as payment for debts owed to you. Beyond that, fiat money invites a price control on interest and impairs contracts. Also despite the claim that fiat money allows for stabilization policy, there is no evidence that economies with fiat currencies are stabler.

Or are you saying that gold standard advocates become angry when discussing monetary regimes? Well, who is calling names?

FDO15 writes:

The only thing you need to know about MMT is that the theory involves a program they call the "Job Guarantee". This is a permanent government program where the government would hire anyone who wants a job (and by job they list street cleaner and babysitting) at $16/hr with full benefits.

They're not Keynesians. They're something far worse.

Major_Freedom writes:

You mean the money that the free market tends to result in, the money that has been chosen for over 6000 years of history, is "crackpot"?

Today I learned A. Kling is a crackpot monetary communist.

Blake Johnson writes:

Arnold, the value of the dollar fluctuates day after day, year after year. People still manage to somehow conduct business in spite of that. You seem to be making the same mistake that you criticized the IGM economists for making just a few weeks ago: comparing the idealized fiat money system to a real world gold standard. As you note in your post, both Fiat and Gold have their crackpots, but it is important to distinguish between them and to ridicule or take their arguments seriously accordingly.

One of many relevant questions here is what matters more, short run stability of inflation or long run stability of the price level? Lawrence H. White has noted that the incidence of long term commercial paper, i.e. with a maturity of greater than 30 years, has basically become extinct under fiat standards. The loss of efficiency in investing among other things has to be considered when trying to discern the relative costs of a gold standard vs a fiat standard.

A free banking system based on gold would be my ideal, but a central bank that followed the gold standard in the long run but was willing and able to change policy in times of recession (i.e. NGDP stabilization, and possibly a temporary suspension of the gold standard a la Bordo and Kydland) would also work.

I also don't deny that a well run fiat standard could at least match the results of a government run gold standard if not exceed it. The question is how feasible it is to implement well run policy for each system. If you buy into Sumner's claims that the current recession is largely the result of poor monetary policy (which I know you don't), then a gold standard starts to look relatively better.

Consider that if the supply of gold (i.e., ownership of gold mines and refineries) were nationalized, a gold standard would have no essential difference from fiat currency.

Kevin, I'm afraid that is not correct. The entire point of the gold standard is that the supply of gold is relatively inelastic in the short run. Who owns the mines is irrelevant to that fact. State owned mines could not increase gold production significantly at will no matter how much their leaders wanted them to. In fact, once one takes into account the disincentive effect on private search efforts to discover new gold mines, it is quite possible that nationalization of gold mines would cause the supply of gold to become even more inelastic.

tomichmanu writes:

Ok, so the leader of these crackpots disagrees (and I don't mean Murphy)

Gene Callahan writes:

"Having the value of the dollar fluctuate is like having the length of an inch fluctuate--how can you conduct business when that is happening?"

Well, obviously one can, because the value of the dollar fluctuates all the time, and there is no possible way to stop it from doing so!

mark writes:

The most absurd thing I find in MMT is, why go through the step of borrowing at all, if you explicitly have decided to print all the money needed to pay the debt? It's inefficient for the fisc to pay any interest or transaction costs at all in that case. There is no point in going to the market to price the debt because the amount of debt issuance appears to be 100% price-inelastic. There is no point in an independent central bank - think of the savings! There is no point in secondary markets for the sovereign's debt. Just print what you want to spend, when you want to spend it! Of course, no one needs to worry about the price of imports or anything like that.

R Richard Schweitzer writes:

MMT Issues:

Governments (or central banks?) may "print" Legal Tender, but, a controlling factor in the effect of the "printing" is the means by which that "Money" gets distributed into an economy.

If that occurs as "monetization" of government debt (or its equivalent), quality of credit issues arise, affecting the "unit of account" function, as well.

And then, there is that old underlying issue - what is the function of government and how is it served through "printing?"

JeffM writes:

In reference to your comment about being technically right, I once got into an argument with Randall Wray. After I thought about it over night, I realized that he was technically correct IF YOU CONSIDERED ONLY THE IMMEDIATE EFFECT.

I sent him an email ackowledging that the next morning, but the fact that immediate effects may (and usually do) have longer term consequences did not impress him. That I think is the whole problem with MMT: it is focused almost exclusively on the immediate.

Jeff writes:

As Charles implies above, MMT people think monetary policy doesn't really matter, because Fed liabilities are not different from Treasury liabilities on any attributes that matter. When the Fed pays interest on excess reserves that is as high or higher than the rate paid on short term T-Bills, they have a point.

However, if the Fed doesn't pay interest on excess reserves, this is a kind of knife-edge equilibrium result. If there is a bit of inflation, nominal rates on T-bills rise and now Treasuries are not the same as non-interest bearing currency and reserves. If the Fed buys Treasuries on the open market, inflation is likely to increase further, and take nominal rates even higher. And off you go.

So part of MMT really just boils down to the old crude Keynesian liquidity trap stuff that people like Patinkin demolished 50 years ago, and most of the rest is trivial. A country that can print the currency its debt is denominated in need never default. Do they really think is a startling new insight? Sure, it's not a legal default, but the bondholders who get repaid with a now-worthless currency are not going to fall for that more than once. All of the real economic effects are going to be the same as if there was a legal default.

If MMT were right, there would never be any reason to collect any taxes at all, and Zimbabwe would be the richest country in the world.

Joe Cushing writes:

I'd like to see a currency tied to a basket of commodities that people actually consume on a large scale. Gold is somewhat useless. Better stated, the value of gold is derived from the idea that it is valuable in a kind of circular way. It's valuable because it's valuable. I'd prefer to store my currency in something that is valuable because people want to consume it. There is competition between storing it and using it. With gold, there is some use but hording definitely wins over using.

DPG writes:

JeffM, you express my sentiments very closely. MMTers pay a lot of attention to static accounting identities. They have the appearance of a strong argument because the accounting identities are true in a trivial sense. However, they ignore changes in prices and expectations that would result from massive bouts of deficit spending and confiscatory taxes.

Floccina writes:

I think that you are unfair to both MMTers and Gold standard people.

MMTers say that you should track inflation and sell bonds only to prevent inflation rather than to roll up debt solely though money creation. This is very close to what we have now. Now the fed buys the bonds to create money until inflation starts up, the only diffidence is that the fed gov debt is tracked as debt now.

As for the gold standard people many of them do not really want a gold standard but on whatever people want there money backed by. They want competitive currencies in free banking.

Kristjan writes:

Technically, MMT is true. As a practical matter, it would be suicidal to ignore the debt problem because of it.

Well, if there is some problem with the debt then stop issuing It. Now that't inflationary right? Demand pull inflation occurs from excessive demand. Government only needs to deficit spend because demand is depressive and taxes need to be higher when demand picks up and ecomomy is overheating. MMT is logical. Mainstream economics is not. If government is currency issuer then taxes don't pay for anything, taxes function to regulate demand/keep inflation under control.

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