The Phillips curve proves MMT-based spending drives rate hikes

Section 2.3 criticized MMT from a targets and instruments perspective, arguing that the recommendation to park the policy nominal interest rate discarded an important policy instrument. Worse yet, parking the nominal interest rate actively creates macroeconomic problems. Introducing a Phillips curve introduces inflation, and inflation affects the real interest rate. Consequently, MMT’s nominal interest rate parking policy implies real rates would fall as the economy moves up the Phillips curve, potentially creating an unstable situation in which higher inflation drives lower real interest rates which in turn drives higher inflation. The converse problem would hold if the economy moved down the Phillips curve and real interest rates would rise with unemployment, potentially causing even higher unemployment. Recognizing that interest rates matter introduces the familiar fiscal policy – monetary policy mix problem which was a central concern of Old Keynesians, and which is another concern that is entirely neglected by MMT. The greater the emphasis on fiscal looseness, the more the need to raise real interest rates to avoid excessive AD. However, higher interest rates negatively impact investment and growth. Consequently, a government that is concerned about growth and future living standards will be concerned about budget deficits and their implications for interest rates, which in turn means it is financially constrained and concerned about bond market sentiments. The problematic of the policy mix also connects with another neo-Keynesian concern regarding portfolio crowding out (Tobin and Haliassos, 1990, p.893-894), which is different from monetarist crowding out. The latter concerns the impact of deficit financed fiscal policy on AD and output. The former concerns the impact of deficit financed fiscal policy on wealth composition. In particular, if the demand for wealth is finite and government financial obligations are net wealth, government deficits can crowd-out private capital accumulation by increasing the supply of government wealth that must be 17 held in private portfolios. Restoring activist interest rate policy does not save MMT. Indeed, the opposite is true. If policy makers are concerned about interest rates, they need to be concerned about the state of the interest rate spectrum, which the policy rate is part of. That means they need to be concerned about financial market conditions, which implies government is not financially unconstrained. Furthermore, maintaining an interest rate target requires issuing government financial obligations, and government needs to be concerned about the impact of that issuance on AD and financial markets. Again, government is not unconstrained.