This morning I jotted the following note to James Mackintosh, who authored a weekend article on MMT and my former professor, L. Randall Wray.

Mr. Mackintosh

Thanks for the article on MMT; as a former student of Randy Wray during the 1990s, I appreciate seeing the consistency of his thought, even though I still see it as greatly wrong-headed.  Perhaps the two best things about your article are showing 1) that we are already embracing MMT in practice if not in principle, and 2) that MMT’s policy prescriptions of taxation on those that do the spending is politically untenable.  Politicians will always take the candy of any economic theory, but they are seldom willing to take their beans and carrots.  In the call for balancing out inflationary spending with tax increases, MMT is not really that much different from the conventional Keynesian “Functional Finance” of Abba Lerner from the 1940s, as I’ve blogged here.  The only difference is that Wray and other MMT’ers call for direct money printing rather than borrowing–a difference I find without distinction when the Fed directly monetizes the debt.  

A few of the lowlights of your article could be these.  First, you (and Wray) apparently see MMT emerging from the pandemic.  It’s true that this was a more mature weed that has grown up, but the initial sprout was clearly when the Fed began QE a decade ago. Your note that “Central banks that struggled for a decade to boost inflation using monetary tools found that fiscal tools were far more powerful” is misguided.  You always need to watch what central banks do, not what they say they are trying to do.  The Fed effectively sterilized the QE in the last decade (to a large degree) precisely so they would not have an inflationary effect with their increased asset purchases.  You can simply look at the rates of monetary aggregate growth (say M2) over the last year and compare it to QE in the last decade.  If the Fed would have wanted more inflation, they could have easily obtained that by not paying interest on reserves, and incentivizing the banking system to make more loans.  This should beg the question of why the Fed wanted to engage in QE if it didn’t want the monetary base it created to actually get into the economy.  And the answer is that the Fed wanted to take what were then considered to be toxic waste mortgages off the books of the banking system, and put it onto the Fed’s balance sheet to make sure we didn’t end up with Japanese style zombie banks of the 1990s. But they couldn’t publicly say they wanted to bail out the big banks.  But this was the genesis of enabling MMT, because if you can use the printing press to buy toxic mortgages as a national policy, you can buy student loans as a national policy, or a green new deal, or anything else. And this leads to the second lowlight, everyone knows that the Fed’s monetary policy over the last decade has spiked asset prices wildly beyond traditional value metrics, which is a prime source of the growth of income inequality.  Your article attributes the move toward average inflation targeting as shifting policy “in favor of running the economy hot to reduce inequality” without even mentioning the Fed’s role in creating that very inequality.  A final criticism is related to the first.  You correctly note that politicians have lost their fear of debt, and that is true.  But they lose their fear of debt when there is no penalty towards going into debt, and the Federal Reserve has been the prime enabler of fiscal profligacy with the last decade of artificial near zero interest rates, and negative real rates.  We’re shocked that politicians would willingly embrace spending when there is no cost?

Overall your article was nicely done, but much more could–and should–be said about the Fed and the massive implications of their abandonment of sound central banking theory.  

Soli Deo Gloria!

Jeffrey E Haymond

Dean and Professor of Economics