It was hard for me not to geek out yesterday. I teach Money & Financial Markets in the spring, and we mostly focus on traditional banking texts with a special look at the financial crisis. Seldom do we get to the specific monetary theories–Austrian, Post-Keynesian or other heterodox approaches. But the wisdom of youth, as represented by Alexandria Ocasio-Cortez, provides just such an opportunity, as her new green deal entered the lexicon of monetary theory.

So how might this happen? It turns out that the Green New Deal’s proponents have a clever, pain-free way to pay for it: they’ll do it the good ol’ fashioned way, just by printing money. Now crass inflationism is not new to economic theory; indeed John Maynard Keynes solution was inflation at its core. In the 1800s, proponents of such theories were called monetary cranks, as the problem in depression was so obviously a lack of circulating medium, the solution was equally obvious–just print more of it. Even with Keynes endorsement of monetary inflation, there was a context of wide scale underutilization of resources; no good Keynesian would suggest that we should have monetary stimulus in the presence of full employment. The so-called Phillips Curve, which showed an inverse relationship between inflation and unemployment, became the standard public policy prescription of Keynesians, at least until Milton Friedman’s (and Edmund Phelps) famous work showing that the so-called trade-off was, at best, short term. The experience of the 1970s pushed those economists favoring inflation into a distinct minority. While the Keynesians were generally in favor of some inflation, they did so not by thinking that inflation was without costs, but rather that they were small in relation to the tremendous social harm of unemployment.

I am at Cedarville and in the economics profession today because of a series of videos that I watched in Econ 221 in the fall of 1982, where Captain Nickerson integrated Friedman’s Free to Choose video series into our class. Friedman made more sense than anybody I’d ever heard on a whole series of ideas, and I subsequently became drawn not only to his economics, but specifically his monetary theory. I took my master’s degree in economics at the University of Denver, and studied monetary economics from a Post-Keynesian named Randy Wray. I enjoyed my time at DU, but it was clear to me that their economic views were wrong. I remember Dr. Wray telling me how capitalism couldn’t survive without inflation, and that the Fed had to passively (or endogeneously) supply all the money that the capitalist system required, since they were the lender of last resort and the alternative would be financial chaos. This didn’t seem to look like the world I new, or significant periods of financial history (such as the deflationary high growth period of the late 1800s) and I was certain that Ph.D. work would be at a school with a free market perspective–I had heard from the Post Keynesians and it was time to hear from the other side, which was full-bore at George Mason University. I subsequently rejected parts of Milton Friedman’s economic methodology, specifically his positivist approach to economics, but never gave up on his essential axiom that “inflation is always and everywhere a monetary phenomenon.”

So it was with particular interest when I read that there was an economic school of thought, Modern Monetary Theory, that was standing squarely behind AOC’s green new deal, and this theory basically argued that if there are any scarce resources, there is no limitation to money printing as a method of finance, without any ill-effect. As George Selgin put it:

“MMT often boils down to nothing more than an especially naïve sort of Keynesianism: assume an unlimited excess supply of every resource save money balances, and, voila! monetary expansion can costlessly finance all the projects we like!”

But Professor Selgin’s critique pails compared to that of a more orthodox Keynesian, such as Thomas Palley, who said (writing in the aftermath of the financial crisis),

In the current moment of high unemployment, MMT makes a valuable contribution as part of the rhetoric of advocacy for expansionary policy. However, as regards macroeconomic theory, MMT adds nothing new warranting its own theoretical label. Instead, its over-simplifications represent a step-back in understanding. In physics, the crank physicist is drawn to the idea of a perpetual motion machine that denies the effects of friction. In economics, the crank economist is drawn to the idea of a money tree that voids financial constraints and macroeconomic trade-offs. MMT constitutes a form of modern money tree economics.

The leading litigant in this approach was Bernie Sander’s Chief Economist from 2016, Stephanie Kelton, who argues in the Huffington Post,

We have momentum ― incoming Democrats, like Reps.-elect Alexandria Ocasio-Cortez of New York and Rashida Tlaib of Michigan, are building support for an ambitious climate plan, and more than 15 members of Congress are calling for a select committee with a mandate to draft comprehensive legislation: a Green New Deal. We have the outline of a plan: We need a mass mobilization of people and resources, something not unlike the U.S. involvement in World War II or the Apollo moon missions ― but even bigger. We must transform our energy system, transportation, housing, agriculture and more. What we don’t (yet) have is the final, vital ingredient ― a critical mass of politicians prepared to unleash the enormous power of the public purse to save the planet.

I was somewhat surprised to find that the leading intellectual behind this new (old!) theory is none other than my old professor, Dr. Randy Wray. His work from 1998 is considered seminal, and he can tell you himself here. I think most of his fundamental assumptions are wrong, and I do so because I believe that money is ultimately a medium of exchange–goods exchange for goods (or services). While it is of course true that there is no limit to the issuance of any money, there is a defined limit to goods and services. With any increase in the supply of money relative to the goods and services outstanding, the value of that currency must fall. So the idea that the government can issue any amount of money is patently absurd, if one thinks that there will be no negative implications to the price level. To cavalierly say that “whatever is technically feasible is financially feasible,” is to make the most simplistic of assessments possible about how money actually works in the economy. The fact that there are underutilized resources in the economy in no way means that any money created will be applied to those resources and only those resources. To think otherwise is to me fantastic. If AOC and her friends drop the $93T of the green new deal on the economy, I think we’ll see just a couple of impacts to the price level.

So yesterday this “new” theory was a point of discussion in Congress, where the Federal Reserve chairman had to weigh in:

I think he has it right–the monetary theory that supports the idea of a painless green new deal is “just plain wrong.”