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MMT proponents argue that central banks can print money without triggering dangerous levels of inflation. This claim not only overlooks the theoretical considerations outlined above, it also ignores the dark history of debt monetization leading to hyperinflation. As Thomas Sargent famously documented in his 1982 classic, The Ends of Four Big Inflations, printing money and monetizing debt — even when that debt was partly denominated in local currency — led to devastating inflation in Austria, Hungary, Poland, and Weimar Germany during the first half of the 20th century.

Austria and Hungary — two states formed through the dissolution of the Austro-Hungarian Empire — found themselves greatly diminished in both size and power following WWI. Since Austria-Hungary was deemed an aggressor of the war, its successor states owed the Allies substantial amounts in war reparations. To pay off the reparations while alleviating large-scale food shortages and unemployment, the Austrian government ran significant deficits — which it financed by selling treasury bills to the Austrian section of the liquidated Austro-Hungarian bank. At the same time in Hungary, political turmoil led to considerable budget shortfalls, which the government financed by borrowing heavily from the Hungarian section of the bank and increasing the volume of low-interest loans issued to private entities. As a result, both the Austrian crown and the Hungarian krone depreciated rapidly while domestic prices rose. This led to flight from each currency by domestic actors and foreign investors alike and, ultimately, to hyperinflation in both countries.

Generations of American policymakers have been right to protect the dollar’s key currency role for economic reasons. Most notably, dollar hegemony affords the U.S. the ability to run large and prolonged budget and balance-of-payments deficits. The dollar represents 62 percent of allocated foreign exchange reserves, is used to invoice and settle roughly half of world trade, and accounts for 42 percent of global payments. Because governments, banks, and businesses worldwide need lots of dollars, the world market always stands ready to absorb new U.S.-dollar-denominated debt without charging higher interest rates.

Adler and Bessner correctly point out that the rest of the world considers the dollar’s role as the world’s reserve currency to be an “exorbitant privilege,” a term coined in the 1960s by then French Finance Minister Valéry Giscard D’Estaing. The ability to spend beyond its means has enabled the U.S. to fund its impressive military might, whether one views that power as the fountainhead of Pax Americana or the source of illegitimate military adventurism.

What does this German experience have to do with the U.S. and with Modern Monetary Theory (MMT)? While there is no direct applicability to the U.S. yet, there are certain parallels which need to be explored, namely, the enormous increase in federal deficit spending over the past two decades and the Fed’s huge expansion of the money supply. In 2000, total U.S. federal debt was $5.7 trillion. Currently it exceeds $27 trillion. The chart below chronicles the growth in the U.S. federal debt since 2007

The total national debt (including the debt owed to government agencies like Social Security) roughly doubled from $5 trillion to $10 trillion during the George W. Bush administration, and it doubled again during the eight years of the Barack Obama administration. And in fiscal 2020, the stimulus spending stemming from the lockdown of the economy due to COVID-19 resulted in the largest deficit in U.S. history — $3.1 trillion. The chart below shows the deficit as a percentage of GDP going back to the first year of the Financial Panic of 2007-2009:

Indeed, liberal internationalism may have played a causal role in extending the ‘third wave of democratization’ that rolled from the mid-1970s through to the 1990s.43 During a good deal of that struggle, Washington actively worked against democratization in much of the developing world, to the point of backing coups in a number of countries that put anti-communist autocrats in power.44 But as the superior fitness of democratic capitalism to communism or state socialism became evident in the 1980s—a fitness enhanced by the LIO—US administrations began to drop their autocratic clients and to strike bargains with centre-left parties, as they had done in Europe earlier in the Cold War.45 Furthermore, lobbyists and Congress put pressure on administrations to make continuing close relations with security partners conditional on the latters' implementing human rights and other reforms.46 Late in the Cold War, then, authoritarian states evidently felt some pressure to move into the liberal democratic international niche.

As for the Soviet Union, owing to inadequacies in its communist political economy, here too the ideological balance of power began to tilt towards democracy in the 1980s, leading first to Gorbachev's reforms and then to the state's collapse in 1991. In the 1990s, much of the world—including countries such as Brazil and democratic India, that had long been partial ‘members’, belonging to the IMF and accepting western investment—joined the LIO wholeheartedly. There appeared no alternative to its combination of market economics, democracy and multilateralism.47

Liberals espouse a wide array of views depending on their understanding of the intended purpose of liberal principles. As such, the meaning of ‘liberalism’ diverges in different parts of the world. In the United States, liberalism is associated with the welfare-state policies of the New Deal programmes initiated by President Franklin D. Roosevelt,2 while the ideas of laissez-faire economics exist simultaneously within current American conservatism.3 In Europe, liberalism is most commonly associated with a commitment to government responsibility and social welfare, whereas in Latin America and many post-Communist countries it often relates to socialism, and is hence, generally referred to as social liberalism.4 In China, liberalism refers politically to Western democracy and economically to a market economy.

Despite the above differences, the liberalism in any country generally affirms the principles of equality, freedom, democracy, civil rights, secular government, international cooperation, and the resultant programmes in support thereof. Liberalism first became a distinct political movement after achieving a degree of popularity among Western philosophers and economists during the Age of Enlightenment. In the first half of the 20th century, Western liberalism spread from European democracies to other parts of the world, mainly due the dominance afforded by their victories in both world wars. In the aftermath of WWII, the United States became the de facto leading exponent of liberalism, and its hegemonic power signified the influence on international norms of the American liberalist values of equality and freedom. This is exemplified in Chapter I, Article 1, Clause 2, of the United Nations (UN) Charter reflecting the UN directive: ‘To develop friendly relations among nations based on respect for the principle of equal rights and self-determination of peoples, and to take other appropriate measures to strengthen universal peace.’5

The United States and China are now locked in a geopolitical competition that is structural and deepening. How this contest evolves will determine the rules, norms, and institutions that govern international relations in the coming decades. Should the United States fail to rise to the China challenge, the world will likely see the emergence of an illiberal and expansive Chinese sphere of influence. This is not to suggest that Beijing should be denied a voice or sway commensurate with its position as a major power—but there’s a substantial difference between greater Chinese power (even China being the most powerful country in the region) and a situation in which Beijing exerts illiberal hegemonic control over Asia and beyond.

It is incomplete to view U.S.-China dynamics as a disparate set of competitive domains. Instead, we should be principally concerned about the aggregate and mutually reinforcing consequences of a China-led order if Beijing gains dominant control of vital regions and functional domains. Core features of this order would include the People’s Liberation Army administering the South and East China Sea; regional countries sufficiently coerced into not questioning or challenging China’s preferences on military, economic, and diplomatic matters; the de facto unification of Taiwan; Beijing with agenda-setting power over regional institutions; a China-centric economic order in which Beijing sets trade and investment rules in its favor; and the gradual spread of authoritarianism in the developing world, reinforced by the proliferation of China’s high-tech surveillance state.5

That gloominess is now back among many in American strategic circles, and the conversation between Zumwalt and Kissinger fifty years ago could just as easily have happened today. Then, as now, the United States was facing enor- mous domestic strains while a rising power loomed over the horizon. And then, as now, some believed that US policy should be less provocative and competi- tive, reflect the fact that “historical forces” were supposedly arrayed against the country, and seek the best deal possible with an ascendant rival. A refashioned version of Kissinger’s argument today might point out that China dominates global manufacturing, increasingly rivals the United States in high-technology, boasts an economy larger than the American one in purchasing power terms, fields the world’s largest navy, and has weathered a once-in-a-century pandemic better than most others—the only great power to avoid recession in 2020. The United States, by contrast, seems to many in Beijing and even in Washington hopelessly divided and gridlocked, with its governance and institutions deteriorating. As of this book’s publication, it confronts a years-long pandemic, industrial erosion, burgeoning debt, a wounded democracy, and a diminished global reputation. Might Kissinger’s pessimism be warranted?8

A descent into fatalism is likely premature. American declinism is a tradition with a rich but often inaccurate history, and there have been four declinist waves in the last century. In each of them, the country displayed what the political sci- entist Samuel Huntington once called “an unusual capacity for self-correction,” with declinists ironically playing “an indispensable role in preventing what they are predicting.”9

Napoleon is said to have predicted that, when China woke from its slumbers, it would "astonish the world." The Little Corporal was a loquacious fellow who got much wrong but he seems to have gotten this right. In a mere three decades, China has risen from impotence and backwardness to a leading position in global affairs. This year it will become the second biggest producer of goods and services, something projected just five years ago to happen only in 2020. China is clearly on the way to regaining its historic position as the world's largest economy, displacing the United States. (Given continued rapid growth in the Chinese economy, slow growth elsewhere, and progressive revaluation of the Renminbi Yuan, this could happen much sooner than many expect.) The prospect of transcendent Chinese wealth and power, coupled with America's devaluation of its own political and economic prestige, has led to mounting speculation about China's emergence as a global hegemon to rival and, perhaps in time, surpass the United States.

Not so long ago, in the Cold War, the world order was defined by the relationship between the Soviet Union and America as the overlords of rival blocs of nations. Recalling this, some pundits foresee the reemergence of a bipolar world in which the United States and China exercise joint leadership in a so-called "G-2." With the collapse of the USSR, there have been no rivals to American leadership when Washington has chosen to lead. The United States — which spends more on its military than the rest of the world combined — has enjoyed absolute military superiority in every region of the globe. Some imagine China as a "peer competitor" for global dominance.

Maintain Dollar Dominance amid Challenges from China and New Technology: The dollar’s status as the reserve currency is the backbone of US global hegemony, and it makes it easier for the United States to finance deficit spending, monitor crossborder financial transactions, and implement financial sanctions. The United States might constitute only a quarter of global GDP, but the dollar is 60 percent of global reserve currencies—an advantage amplified by the fact that the United States is open, retains deep and liquid financial markets, and possesses a large and diversified economy. The dollar’s success has brought complications: the United States suffers from a dollar-driven variant of “Dutch Disease,” where reliance on a particular export can cause deindustrialization if institutions cannot properly manage the windfall. In this respect the United States is “the Saudi Arabia of money,” with much of its manufacturing capacity atrophying while its assets skyrocket in price.58 Currency has driven Dutch Disease in other countries in the past—colonial Spain benefited from a windfall of gold from the Americas, for example—but the end of that gold supply brought a disastrous geopolitical fall. Although the dollar’s position is strong, two trends now threaten it, and relatedly, US hegemony. The first is the overuse of financial sanctions, which has already driven some allies and adversaries to unite in (so far unsuccessful) efforts to bypass the dollar system. Second, and more important, China is rolling out a digital RMB to compete with the US dollar that completely bypasses US payments infrastructure. Chinese officials have long worried about the potential of a US-led digital currency that would bolster the US dollar system, and so they have raced for first-mover advantage. Wang Xin, director of the People’s Bank of China’s research bureau, stated that “if the digital currency is closely associated with the U.S. dollar . . . there would be in essence one boss, that is the U.S. dollar and the United States,” which would have geopolitical consequences.59 The United States should carefully study and then consider rolling out a digital currency that preserves its financial advantages and brings about precisely the world Wang Xin was concerned about—a digital currency that complements and is anchored to the US dollar system. Finally, as Mike O’Hanlon notes, maintaining these strengths provides a nonkinetic and nonlethal way of deterring or responding to small Chinese territorial provocations.60

Bring Existing Institutions into Global Infrastructure Investment and Build New Ones to Extend US Economic Influence: Washington should strongly push existing development institutions, especially the World Bank, to play a higher-profile role in global infrastructure investment despite reluctance to do so. At the same time, the United States should consider new vehicles for supporting global infrastructure, particularly in the low-cost and high-impact digital realm. For example, because China’s investments in information infrastructure are heavily subsidized and often lack competitors, the United States could create a digital development bank with allies and partners to compete for those projects, which may induce developing countries to pick infrastructure providers and operators more in line with liberal or democratic values.

With respect to economic instruments, Beijing now sees technology as central to its ambitions to displace American order. A key component of China’s “great changes unseen in a century” is the belief that the world is experiencing a new wave of technological innovation sometimes referred to as the “Fourth Industrial Revolution” that offers an opportunity for China to overtake the West. This term, originally developed at the World Economic Forum in 2015, has now been adopted by Beijing and generally refers to a wide range of technologies: artificial intelligence (AI), quantum computing, smart manufacturing, biotechnology, and even sovereign digital currencies, among many others. Beijing believes that technology’s intersection with supply chains, trade patterns, financial power, and information flows has the potential to reshape order alongside traditional economic instruments more central to past eras of Chinese grand strategy. For that reason, economic instruments—and technology in particular—are increasingly at the center of the US-China contest over global order.

Most references to the “great changes unseen in a century” evoke the idea that waves of technological transformation have occasionally reshaped history. As Xi Jinping argued in a 2018 speech, “From the mechanization of the first industrial revolution in the 18th century, to the electrification of the second industrial rev- olution in the 19th century, to the informatization of the third industrial revo- lution in the 20th century,” each round of “disruptive technological innovation” has reshaped the world.49 Now, China was facing a fourth industrial revolution, and over the next decade, it had an opportunity to seize technology leadership. “The next ten years will be a key decade . . . for the world economy,” Xi argued. “A new round of technological revolution and industrial change, such as in artificial intelligence, big data, quantum information, and biotechnology, are gathering strength” and bringing “earth-shaking changes” while offering an “important opportunity to promote leapfrog development,” bypassing legacy systems and overtaking competitors.50

When states do have grand strategies, however, they can reshape world history. Nazi Germany wielded a grand strategy that used economic tools to constrain its neighbors, military buildups to intimidate its rivals, and political alignments to encircle its adversaries—allowing it to outperform its great power competitors for a considerable time even though its GDP was less than one-third theirs. During the Cold War, Washington pursued a grand strategy that at times used military power to deter Soviet aggression, economic aid to curtail communist influence, and political institutions to bind liberal states together—limiting Soviet influence without a US-Soviet war. How China similarly integrates its instruments of statecraft in pursuit of overarching regional and global objectives remains an area that has received abundant speculation but little rigorous study despite its enormous consequences. The coordination and long-term planning involved in grand strategy allow a state to punch above its weight; since China is already a heavyweight, if it has a coherent scheme that coordinates its $14 trillion economy with its blue-water navy and rising political influence around the world—and the United States either misses it or misunderstands it—the course of the twenty-first century may unfold in ways detrimental to the United States and the liberal values it has long championed.

Washington is belatedly coming to terms with this reality, and the result is the most consequential reassessment of its China policy in over a generation. And yet, amid this reassessment, there is wide-ranging disagreement over what China wants and where it is going. Some believe Beijing has global ambitions; others argue that its focus is largely regional. Some claim it has a coordinated 100-year plan; others that it is opportunistic and error-prone. Some label Beijing a boldly revisionist power; others see it as a sober-minded stakeholder of the current order. Some say Beijing wants the United States out of Asia; and others that it tolerates a modest US role. Where analysts increasingly agree is on the idea that China’s recent assertiveness is a product of Chinese President Xi’s personality—a mistaken notion that ignores the long-standing Party consensus in which China’s behavior is actually rooted. The fact that the contemporary debate remains divided on so many fundamental questions related to China’s grand strategy—and inaccurate even in its major areas of agreement—is troubling, especially since each question holds wildly different policy implications.

As shown below, MMT’s macroeconomic policy assertions follow from its oversimplified and incomplete Keynesian analysis. The lack of a dynamic economic model with behavioral content is a glaring professional failure. Unfortunately, instead of addressing that failure, MMT proponents have responded by claiming critics either do not understand it or have misrepresented it. The difficulty of confronting MMT about those failings is compounded by its practice of walking back its positions and adopting those of its critics without acknowledgment. Examples include replacing the full employment threshold model of inflation (Wray, 1998) with the Keynesian Phillips curve model, and also recognizing that capital controls may be needed to contain international economic forces that can potentially disrupt fiscal policy. Recently, Kelton (2019) has slipped in another longstanding Keynesian argument that stability of the debt-GDP ratio requires that the nominal interest rate be less than the nominal rate of growth (i < g). In doing so, she tacitly admits another financial constraint on government and continues the walking back process. On one hand, the walking back process is reasonable: on the other hand, it dissolves MMT’s claims regarding government being financially unconstrained. 3.2 Macroeconomic constraints and adverse policy feedbacks The second column in Figure 2 concerns macroeconomic constraints and adverse policy feedbacks which MMT ignores and which undermine its claim that government is financially unconstrained. Though government has the formal technical ability to finance all spending by creating money, that technical ability is a will-o-the-wisp because government is constrained by the reality of potentially high economic costs of doing so. Using the “printing press” to finance spending can create subsequent problems that leave government worse off measured in terms of its objective function. In the real world, economic policy and policy outcomes are subject to multiple economic concerns and constraints. Those include concerns about government bond rates, private credit market long-term interest rates, financial market stability, the balance of payments and the exchange rate, the inflation constraint imposed via the Phillips curve, and policy implementation and policy credibility constraints. Those various concerns and constraints impact the economic costs and effectiveness of deficit financed fiscal policy. However, they are all absent in MMT’s over-simplified theoretical framework. In particular, MMT’s framework is static and has little to say about how policy affects expectations of the future, and how expectations of the future have important immediate consequences. 3.2.a Financial markets, the complex of interest rates, and asset prices Government is likely to face significant financial market blowback if financial markets believe it is engaging in excessive money issue. In particular, long-term interest rates will tend to rise if financial market participants anticipate risks of future financial turmoil or higher future inflation. Current financial market conditions are affected by 15 expectations about the future, which means the future is always already here and in the present. Consequently, inflationary bias in MMT’s reliance on money financed deficits will creep into present financial market conditions long before full employment.

Yet there are reasons to wonder whether this is indeed the path that China will take, if in fact it seeks global superpower status. In international affairs, there is always great peril in mirror-imaging—in assuming that an adversary sees the world the same way that we do, or will try to replicate our own experience. This is particularly the case here because it must be apparent to Beijing by now that it will be far harder for China to subdue its regional periphery than it was for the United States.

The United States never faced a Japan—a significant regional power allied to an even greater power—in its own hemisphere, and getting beyond the first island chain means getting beyond Japan. It never had to deal with the number of rivals—India, Vietnam, Indonesia, and many others—that confront China along its territorial and maritime peripheries. It never had to face a superpower that viewed the United States as its greatest challenge, as opposed to simply viewing it as an annoyance or a lesser rival that should be appeased to ensure its support against more pressing threats. Making a bid for regional dominance risks focusing the strategic competition on a challenge at which the United States typically excels—winning high-end, high-tech military competitions—and simply driving China’s neighbors further into Washington’s arms. So far, in fact, Beijing’s efforts at seduction and coercion have been partially successful in shifting the geopolitical orientation of the Philippines and Thailand, but they have backfired in dealing with Australia and Japan. In short, it is not clear that Beijing can successfully take a regional path to global power—which raises the question of whether there may be a second road to Chinese global leadership.

Both historical precedents and an attempt to measure the impact of the MMT programme in the USA through public debt monetisation provide strong cautionary tales against such an approach. According to Edwards (2019), Almost every one of the Latin American experiments with major central bank-financed fiscal expansions took place under populist regimes and all of them ended badly…. In most of these episodes…, policy makers used arguments similar to those made by MMTers to justify extensive use of money creation to finance very large increases in public expenditures (3). Ocampo (2020) also mentions the case of Argentina under Peron (1946-1955) or Peronist regimes, particularly the years 1946-1948, 1973-1974, 2007, 2012 and 2020, and the one of Nazi Germany between 1937 and 1945.2 Palley (2019a) evaluates that the full monetisation by the central bank of the increase in the public deficit caused by the implementation of the MMT programme in the USA would imply a fiftyfold increase in the monetary base-to-GDP ratio relative to the 2018. He highlights that those money supply dynamics “would almost certainly trigger high inflation in both asset markets and goods markets, as well as causing significant inflationary and destabilizing exchange rate depreciation” (Palley, 2019a, 153). Indeed, already in 1982, Sargent had studied the end of four big inflations (Austria, Hungary, Poland and Germany in the 1920s) showing that it was not simply the increasing quantity of central bank notes [in modern economies, reserves] that caused the hyperinflation…, it was the growth of fiat currency that was unbacked, or backed only by government bills, which there never was a prospect to retire through taxation (89). A limitless “fiscal space” Lerner’s (1943) Functional Finance Theory (FFT) builds on Knapp’s STM and on Keynesian theory, and has provided the fundamental building block for MMT’s fiscal doctrine. Lerner adds a radical fiscal doctrine, referred to as “functional” because it focuses on the macroeconomic outcome of fiscal policy rather than on its budgetary impact (Wray, 2018). Fiscal policy should be judged only by “the results of [its] actions on the economy and not by any established traditional doctrine about what is sound or unsound” (Lerner, 1943, 39). Lerner (1943) prescribes three principles to achieve full employment and price stability: public spending should be increased when aggregate demand is too low and taxes increased when aggregate demand is too high; public borrowing should be adjusted “in order to achieve the rate of interest which results in the more desirable level of investment” (41), i.e. the level conducive to full employment; the government should “print, hoard or destruct” (41) money as needed to carry out the first two principles. Lerner sees no reason for assuming that the government must always be borrowing more money and increasing the national debt because the application of functional finance would maintain the proper level of total demand for current output and provide an automatic tendency for the budget to be balanced. Moreover, he sees “no danger for society” of a continually increasing national debt because debt “is not a burden on the nation in the same way as an individual’s debt to other individuals is a burden on the individual” (Lerner, 1943, 42-43). However, Lerner acknowledges that FFT would be invalidated if government debt were foreign held or denominated in foreign currency. The level of debt would then be a constraint because the government would not be able to print money to service the debt. According to Lerner, FFT is only applicable to countries that can borrow long term in their own currency. Fiscal policy and aggregate demand management MMT’s fiscal policy doctrine builds on FFT’s dismissal of debt constraints on government borrowing (Mitchell, 2020). It also argues that a sovereign currency issuer (i.e. with debts denominated in its own currency and a floating exchange rate) is financially unconstrained, rejects the “orthodox” notion of fiscal sustainability and adopts a very specific conception of “fiscal space”. Within this approach, when the economy is at full capacity, the emergence of inflationary risks can be controlled through a tax increase. Tax adjustments serve to control aggregate demand, not to finance the fiscal deficit, because whenever the government spends, money is created (as mentioned above, MMT confuses money with the monetary base, i.e. currency and reserves). Following the same line of reasoning, bond sales are not viewed by MMT as financing operations. As indicated above, bond sales are considered as interest rate management in which the issuance of government debt, weighing on bank liquidity, increases interest rates as if the central bank were not neutralising these effects, precisely in order to make its monetary policy stance prevail. MMT rejects the orthodox loanable funds theory, deemed irrelevant for understanding the inflationary risk attached to fiscal expansion. The crowding out effect on private spending does not exist in MMT because an expansionary fiscal policy is supposed to lower interest rates by providing liquidity to banks rather than raising them by crowding out the private demand for debt financing. Therefore, interest rates do not reflect the size of the current or expected future levels of deficits and debt as posited by the loanable fund theory (Fullwiler, 2007). The conclusions drawn by MMT are overstated: Even a temporary monetised fiscal stimulus could trigger expectations, especially from the government, that a one-time use could easily become permanent. In turn, a permanent recourse to monetary issuance would lead to a flight from currency and to hyperinflation. MMT’s claim that government spending is only constrained by the “inflationary” ceiling, which binds when all productive resources are fully employed (Mitchell, 2020), is incomplete. MMT does not address the opportunity costs and distributional consequences of the monetisation of deficits by the central bank, e.g. its impact on asset prices, that may affect both the demand and the supply side of the economy and therefore the inflation constraint, even before full employment is reached. MMT argues that the normal interest rate for government debt should be very low or even zero. This assumption begs the question of the plausibility of interest rates permanently below the growth rate of the economy. A government deficit may lead to an increase in longer-term interest rates (Lavoie, 2019; Palley, 2019b) if financial markets expect high future inflation well before full employment has been reached. If the debt is not willingly absorbed by the market, the recourse by the government to financial repression would not prevent interest rates rising in private credit markets with adverse consequences in terms of monetary and financial stability. The assumption that a sovereign currency issuer will not default on a debt issued in its currency because the central bank can always print the money needed to service and repay this debt is overstated (Buiter and Mann, 2019; Ocampo, 2020; Palley, 2019b). MMTers believe that fiscal policy is much more effective than monetary policy at managing aggregate demand. Therefore, fiscal policy should be adjusted when necessary to maintain full employment and moderate inflation while monetary policy should passively support the financing of the fiscal deficit by printing money and keeping interest rates at very low, near-zero levels. A major criticism that can be addressed to MMT is that its proponents are unable to prove their claims given the lack of formal modelling. In line with this criticism, the following appraisal reviews MMT’s key assumptions on inflation, monetary policy, fiscal policy and their (lack of) feedback. According to Palley (2019b), MMT is especially dismissive of the problem of inflation and lacks a doctrine. For instance, Wray (2019) writes: “Fortunately – or unfortunately depending on one’s view – modern economies usually operate with sufficient slack that even large boosts to aggregate demand are not likely to put much pressure on wages and prices. Our critics continue to fight an inflation battle that was won almost two generations ago” (7). As regards monetary policy’s role in managing aggregate demand, MMT’s discarding of interest rates as a tool of stabilisation policy is problematic. First, Tymoigne and Wray (2013) posit that the “sensitivity” of aggregate demand to interest rates is low. As interest rates are seen as affecting the cost of borrowing, which influences costs of production and prices, low interest rates may lead to lower inflation; however, such a cost-push argument is purely short term in nature. Second, discarding interest rates as a stabilisation tool would create political economy and instrument shortage problems (Palley, 2019b). From a political economy point of view, monetary policy is the preferred instrument to manage aggregate demand because fiscal policy is difficult to use to stabilise the business cycle. In addition, the loss of an instrument would compound the difficulty for a policymaker to achieve her policy targets. Third, MMT’s prescription to keep nominal interest rates at a very low, near-zero level would also foster macroeconomic instability, with, during the upward phase of the cycle, real rates falling and potentially causing higher inflation, which would in turn lower real interest rates. Structural policies focused on full employment in the USA In MMT’s view, full employment would be achieved through a government job creation programme, which would act as an automatic stabiliser, and by large-scale spending on infrastructure, climate adaptation and the environment, i.e. the “Green New Deal”, which would employ workers in the job creation programme. The Public Service Employment Programme and the Green New Deal MMT believes that a modern capitalist economy, which is inherently instable, will fail to produce and maintain “true” full employment; involuntary unemployment is a persistent characteristic of such economies (Fullwiler, 2007; Tcherneva, 2012; Haim, 2021). Therefore, MMT advocates for the implementation of a US public job creation programme funded by the federal government, called the Public Service Employment (PSE) programme (Wray et al., 2018). The PSE programme is a job guarantee programme that provides employment to all who need work by drawing from the pool of the otherwise unemployed during recessions and shrinking as private sector employment recovers.…[T]he PSE programme would pay a wage (whose level would be gradually incremented to reach $15 per hour in 2022) for full- and part-time positions and offer benefits that include health insurance and childcare. In addition to guaranteeing access to work on projects that serve a public purpose, the PSE programme establishes effective minimum standards for wages and benefits (Wray et al., 2018, 1). The programme would not aim at competing directly with private sector employment: Jobs created would provide public services in non-profit community organisations, public schools, and state and local governments. According to MMT economists, the implementation of PSE would bring many benefits (Tcherneva, 2012; Wray et al., 2018; Ehnts and Höfgen, 2019). It would stabilise economic activity and household incomes. The government’s budget would also move in a countercyclical manner as spending on the programme would fluctuate with the cycle, which would further help to smooth cyclical fluctuations. Moreover, the PSE programme would provide a price and wage anchor. The Green New Deal (GND), a resolution introduced by US Congresswoman Ocasio-Cortez and Senator Markey, is a comprehensive programme calling for an economic mobilisation in the USA at a scale not seen since the New Deal era. Its chief aims are to radically decarbonise the US economy with a set of policies combining public investment by 2030 while significantly reducing economic inequality. The goal of creating “millions of good, high-wage jobs and ensure prosperity for all” would be achieved through a job guarantee, a central component of the GND (Galvin and Healy, 2020). A central role but an uncertain success Palley (2019b) notes that the government job creation programme is much more central for MMT than would seem at first glance, because fiscal policy, as envisaged by MMT, would have trouble fine-tuning the economy. Therefore, the PSE would function as a counter-cyclical automatic stabiliser, delivering productive non-inflationary full employment. However, the success of such a programme rests on a number of conditions (Buiter and Mann, 2019) that may not all be met. In particular, the authorities must manage a permanent inventory of productive, meaningful jobs and job openings, ready to be filled at short notice in the public sector. By contrast, public sector employment in activities that add little economic value or maintenance of skills at a guaranteed wage would simply be equivalent to unemployment benefits in disguise. The PSE may have other drawbacks, such as the displacement of private sector production if workers prefer better paid or less intensive PSE jobs. Moreover, the fact that the PSE sets the effective minimum wage floor for the entire economy may have inflationary consequences and cause job losses in other parts of the economy. Finally, the GND and the PSE nevertheless reflect MMT’s view that government intervention is more desirable and sustainable than private sector action in responding to climate change.

There is a growing sense that more needs to be done to help improve economic outcomes for many Americans. To that end, some on the left have begun to call for what is being called a “guaranteed jobs program”. The influential Center for American Progress released a new proposal on this, signaling at the very least that it is no longer a fringe idea. Unfortunately, I think this plan is full of tensions and problems. Unless I am missing something -and I could be- the proposal is extremely light on details yet also extraordinarily broad. The plan lists several jobs that apparently are a good fit for the currently non-working and also in high demand: home care workers to aid the aged and disabled, affordable child care, teachers’ aides, and EMTs. So the basic plan, if I understand it correctly, is that the federal government will pay for jobs for people to work in the public or private sector, and the government will also pay for training as needed. Crowd out is obviously a big problem here. Will the employers being paid to create these “guaranteed jobs” actually create new jobs or just replace existing ones? Or perhaps they will "create new jobs" that were going to be created anyway. How will this be monitored, and how are we going to micromanage the number of employees at these firms and local government entities in perpetuity? The incentive to crowd out is strong for local government especially. The CAP piece justifies the demand by pointing out that many local governments are “cash strapped”. And they are, in part thanks to underfunded pensions. But they ignore how eager these cash strapped local governments will be to save money by employing fewer workers. This is just one of the bureaucratic challenges that need to be solved. People complain that the EITC benefits Walmart, but how will we handle the cronyism-prone task of figuring out which private companies get to hire these free workers? Is this going to benefit the big employers who are most able to jump through the high paperwork and monitoring burdens? I hear many concerned these days about declining competition and growing economic rents earned by big incumbents, it seems like this will contribute to that. (By the way, can you be fired from a guaranteed job? If you're guaranteeing everyone can be hired, and nobody can be fired or even it's very difficult to fire them, then that's creating quite the management headache for whoever participates in this program.) Crowd out is also a problem on the supply side of the labor market as well, and failing to accurately consider this means the estimated program costs are way too. The goal of the program is to create 4.4 million jobs that will cost $36,000 a year each. CAP says this will only cost $158 billion. But this assumes there is no crowd out from people who already have jobs. If these are going to be “good jobs with good wages”, then why wouldn’t people who currently have jobs that aren’t as good or have lower wages from trying to get them? About a third of all workers earn less than $15 an hour, and EPI estimates that a $15 an hour minimum wage by 2024 would directly affect 22.5 million workers. So it’s easy to imagine that there would be 20 million people or more who want one of these guaranteed “good” jobs today. How do we decide who gets these jobs, and do we set a cap? So it seems clear the $158 billion estimated cost is way, way too low. I don’t know if advocates know that this plan would result in a large scale nationalization of the economy and don’t care, perhaps even seeing this as a benefit, or if they are just making a mistake. Finally, one of the major problems with a lack of employment is hysteresis. Workers who spend a significant amount of time without a job find it much harder to be re-employed, as firms take this long-term unemployment to be a negative signal about the individual's productivity. If the jobs guarantee works as designed, helping those workers who truly need it, then having a "guaranteed job" spell on a resume won’t necessarily signal anything better than not having a job, and therefore won’t help fight hysteresis. In fact, if this lures people out of regular employment and into the guaranteed jobs program it could make the problem worse. Maybe you can structure this program in a very clever way that solves the litany of problems that it seems to have at a high level. Unfortunately, I see a lot of people talking about how great this idea is, and far too few struggling with it’s glaring problems.

It's important to draw a very clear distinction about what the jobs guarantee is: it's a program that would give anyone who wants it a good job. Corey Booker's proposal is clear that it's to be a "good job", and that it should pay $15 an hour with benefits. Another recent proposal suggests $24,600 to start and rising to an average salary in the program of $32,500. According to the Census, there are currently 50 million wage and salary workers with annual earnings below $25,000 and 72 million earning below $35,000. So let's stop right there and ask: is this a joke? The idea here is to nationalize what a quarter of the U.S. labor market and therefore economy? Half of it? It's really crucial not to lend credence to this insane idea by trying to water it down in a way that its promoters clearly don't intend. This is a GOOD JOBS program. The core idea is that the government should set a high labor standard and hire all those workers. If you want to try to argue that well maybe the military can do more to hire people in non-combat roles, or maybe the Census Bureau, or some marginal expansion of existing direct government hiring then stop yourself right there. This is not that. Do not try to defend this absurd program by saying nice things about it when you think that what advocates intend is actually a very bad idea but if you totally change what they are proposing then it's not bad. Here is my argument: nationalizing a quarter or more of the labor market is such an obviously bad and absurd idea that it's more interesting to talk about what it's popularity is saying than actually debate the economics. What I think it's saying, as I predicted starting in 2015, is the the Democrats are getting their own Tea Party. The level of absurdity and wishful thinking on display in this idea is easily comparable to conservatives who want us to return to the gold standard or basically get rid of welfare entirely. Part of the problem is that liberals have stopped arguing among themselves enough. You can see this on display among liberals who would rather pretend they agree with a jobs guarantee when what they want is a small marginal program rather than stop to note that what is actually proposed is ridiculous and economically illiterate. This is exactly what Tea Party defenders who knew better did and it's very bad. I said it then and I'm saying it now. If you do not argue with growing ridiculousness on your own side of the political fence, and instead try to paint their actually terrible ideas in the best light by looking at them through a funhouse mirror rather than actually critically examining them, it's going to go poorly for your side in the long run.

#4: Inflation would rise. A sudden increase in the cost of labor for businesses will lead to inflation throughout the economy because of higher business costs that will need to be passed on to consumers. In addition, when only those at the bottom of the income distribution get a defacto raise to $15, there are upstream consequences. Workers who were making $15 an hour may demand $20 an hour now. Workers making $20 an hour might want $25 an hour and so on. This may seem like a benefit, but “this is a story of serious wage-price spiral, unless we introduce other measures,” warns progressive economist Dean Baker.5 We have been very fortunate that inflation has been well under control for the last few decades. A federal jobs guarantee could change that pretty quickly.

#5: It would be an administrative nightmare. Finally, matching millions of workers to the jobs envisioned under a jobs guarantee would be an administrative nightmare to implement. State and local governments will be tasked with finding the productive work to do, but how do we train millions of people to do these jobs? How does the Department of Labor oversee the millions of new jobs to make sure they’re legitimate? What are the qualifiers for the kind of work that’s eligible? What if a right-leaning state wants jobs done that a left-leaning federal government deems unproductive or socially unacceptable like building an oil pipeline or opening up a coal mine?

As shown below, MMT’s macroeconomic policy assertions follow from its oversimplified and incomplete Keynesian analysis. The lack of a dynamic economic model with behavioral content is a glaring professional failure. Unfortunately, instead of addressing that failure, MMT proponents have responded by claiming critics either do not understand it or have misrepresented it. The difficulty of confronting MMT about those failings is compounded by its practice of walking back its positions and adopting those of its critics without acknowledgment. Examples include replacing the full employment threshold model of inflation (Wray, 1998) with the Keynesian Phillips curve model, and also recognizing that capital controls may be needed to contain international economic forces that can potentially disrupt fiscal policy. Recently, Kelton (2019) has slipped in another longstanding Keynesian argument that stability of the debt-GDP ratio requires that the nominal interest rate be less than the nominal rate of growth (i < g). In doing so, she tacitly admits another financial constraint on government and continues the walking back process. On one hand, the walking back process is reasonable: on the other hand, it dissolves MMT’s claims regarding government being financially unconstrained. 3.2 Macroeconomic constraints and adverse policy feedbacks The second column in Figure 2 concerns macroeconomic constraints and adverse policy feedbacks which MMT ignores and which undermine its claim that government is financially unconstrained. Though government has the formal technical ability to finance all spending by creating money, that technical ability is a will-o-the-wisp because government is constrained by the reality of potentially high economic costs of doing so. Using the “printing press” to finance spending can create subsequent problems that leave government worse off measured in terms of its objective function. In the real world, economic policy and policy outcomes are subject to multiple economic concerns and constraints. Those include concerns about government bond rates, private credit market long-term interest rates, financial market stability, the balance of payments and the exchange rate, the inflation constraint imposed via the Phillips curve, and policy implementation and policy credibility constraints. Those various concerns and constraints impact the economic costs and effectiveness of deficit financed fiscal policy. However, they are all absent in MMT’s over-simplified theoretical framework. In particular, MMT’s framework is static and has little to say about how policy affects expectations of the future, and how expectations of the future have important immediate consequences. 3.2.a Financial markets, the complex of interest rates, and asset prices Government is likely to face significant financial market blowback if financial markets believe it is engaging in excessive money issue. In particular, long-term interest rates will tend to rise if financial market participants anticipate risks of future financial turmoil or higher future inflation. Current financial market conditions are affected by 15 expectations about the future, which means the future is always already here and in the present. Consequently, inflationary bias in MMT’s reliance on money financed deficits will creep into present financial market conditions long before full employment.

What does this German experience have to do with the U.S. and with Modern Monetary Theory (MMT)? While there is no direct applicability to the U.S. yet, there are certain parallels which need to be explored, namely, the enormous increase in federal deficit spending over the past two decades and the Fed’s huge expansion of the money supply. In 2000, total U.S. federal debt was $5.7 trillion. Currently it exceeds $27 trillion. The chart below chronicles the growth in the U.S. federal debt since 2007

The total national debt (including the debt owed to government agencies like Social Security) roughly doubled from $5 trillion to $10 trillion during the George W. Bush administration, and it doubled again during the eight years of the Barack Obama administration. And in fiscal 2020, the stimulus spending stemming from the lockdown of the economy due to COVID-19 resulted in the largest deficit in U.S. history — $3.1 trillion. The chart below shows the deficit as a percentage of GDP going back to the first year of the Financial Panic of 2007-2009:

The worldwide COVID-19 epidemic will not be contained in the near future. Increasingly contagious variants of SARSCoV-2 are already prevalent throughout the United States, and still other potent variants will continue to emerge.[1-3] Even though two-thirds of the U.S. adult population has received at least one vaccine dose, vaccination rates remain highly variable across and within states.[4-6] Cumulative vaccination rates will continue to level off as the supply of vaccines begins to surpass remaining demand.[7] After declining precipitously, the incidence of new COVID-19 cases has now plateaued and even increased in some states.[8] The risks for unvaccinated people appear to be increasing,[9] and new outbreaks continue to be reported.[10, 11]

Under these conditions, the foreseeable risk of an outbreak at a college campus with in-person learning or a worksite with on-site employees remains ever-present and substantial. Such an outbreak would prove disastrous for an educational institution or a business firm, and could have significant negative spillover effects on surrounding communities.[12] When it comes to hospitals, clinics, long-term-care facilities and other healthcare providers, the risk that an infected employee, patient or visitor could in turn cause an outbreak among vulnerable patients is simply too great to bear.