MMT’s lack of formal modelling and doctrine ignore opportunity costs of using taxation to control inflation

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”