BB: Hey, have you heard of this thing called MMT? It’s all over the media. Is it something important that we need to know about?
MM: I have never heard of this idea until recently. Isn’t the economic adviser of Bernie Sanders, Stephanie Kelton, an advocate? It’s a strange time. Both inflation and unemployment rates are low; it’s debatable whether the Fed is doing their job well, or that something else is at work. Somehow from both the left and the right people think the Fed can do more for whatever.
BB: From the left, I guess the consensus is that the government can spend more to achieve some social goals. Reducing inequality, protecting the environment, or something along that line. It is where MMT fits in: from what I have read so far, MMT is all about not needing to worry too much about government debt. Since the federal government is the only entity that can print money, and debt is written in terms of that printed money, the government can always just print its way out.
MM: Then, what is their principle for monetary policy? I am not one who likes to cry “Inflation! Inflation!”, but it does sound like advocating seigniorage to me. Am I missing something?
BB: First of all, monetary policy will play a secondary role. It is only there to print money out for whatever the government sees fit to spend. If there is a bit too much inflation, the government can again step in and do the opposite: increase taxes to “soak up” the extra money out there. Fiscal policy will have a really big role to play!
MM: This reminds me of a paper by William Poole on how certain monetary policy instrument can accommodate certain type (IS or LM) of shocks. If fiscal policy takes the lead, monetary policy will act accordingly. I suppose MMT assumes a fluid mechanism to adjust the tax rate? But how does it work since federal income tax returns are filed once a year?
BB: Just tax the rich? I am not sure about what new taxes the MMT supporters are thinking of, or just how frequently the tax rates are changed. It seems that MMT is placing a lot of faith on the flexibility of fiscal policy.
MM: Mainstream macro theory is accused of turning a blind eye on the financial market. MMT does not seem to deal with that issue while at the same time undermining the role of monetary policy. By the way, why don’t they call it MFT since the M for money is not that important?
BB: No idea. Actually, I am not 100% true if what we just talked about is the true MMT. There is no “official” model for MMT and we just have to read here and there for bits of ideas.
MM: Oh yeah, Noah Smith talked about that. I don’t think a formal model is always necessary, though I wary about anything that is too good to be true.
BB: By the way, is there empirical evidence on this? I only know about countries that spent and printed themselves to disasters.
MM: The United States had high inflation in the 70s, but nothing at the par of Zimbabwe in 2015 or the current Venezuela… OK, I have changed my mind, I am going to buy gold now.
BB: Gold … now you are getting into another myth that I have a hard time understanding. Let’s deal with that another time!