All the aff tricks about Congress controlling inflation are wrong---it’ll be a disaster in practice

One of the most vehement critiques of MMT comes from Larry Summers, formerly Treasury Secretary and president of Harvard University. His opinion piece about MMT, titled, “The left’s embrace of modern monetary theory is a recipe for disaster,” was published in The Washington Post March 5, 2019.

His chief complaint was that, “contrary to the claims of modern monetary theorists, it is not true that governments can simply create new money to pay all liabilities coming due and avoid default. As the experience of any number of emerging markets demonstrates, past a certain point, this approach leads to hyperinflation.”

But of course, Kelton says that the central concern of MMT is inflation – especially as opposed to balancing the budget.

Nevertheless, all of the critiques – Summers’s, Wolf’s, Cochrane’s, and even Paul Krugman’s, which I’ll come to in a moment – are concerned that embrace of MMT will cause too much inflation.

Why is that, when Kelton says that the purpose of MMT is to provide a framework for ensuring that too much money is not chasing too few resources, thus avoiding inflation, while also employing those resources as fully as possible?

Because those critics don’t believe it. They don’t believe MMT’s efforts to control inflation by funding full employment – but not more – will work. For example, Martin Wolf says, “it is hard to know where ‘full employment’ lies. Excess demand may exist in some sectors or regions, and deficient demand elsewhere. Full employment is a highly uncertain range, not a single point.”

But then couldn’t you fine-tune things by observing and adjusting? Cochrane rejects Kelton’s suggestions about how Congress could tell if there is slack in the economy. He says, “Really her answer is: Don’t worry about it.”

As for Krugman, he and Kelton carried out a running public exchange last year in the pages of The New York Times and Bloomberg. Much of that debate is too technical to be covered here, but one of Krugman’s main arguments baffles me.

In an article with the tagline, “Their agenda still needs to be tax-and-spend, not just spend,” Krugman argues that if Medicare for all means replacing private insurance with free public coverage, you need offsetting revenue.

But let’s look at it from the MMT perspective – would replacing private insurance with free public coverage make more intensive use of resources than leaving things as they are? Would it mean too much money chasing too limited resources? No, it would replace one resource with another, in fact probably the same one – many of those who work in the private health insurance field might instead work for the government.

Krugman seems to be missing Kelton’s point.

Why do the critics think that belief in MMT will fuel inflation and why are they so worried about it?

Notice that Summers’s warnings focus on the hyperinflation that occurred in emerging markets where governments promised too much and gave too much to their constituencies.

One of Kelton’s main proposals is to take the task of balancing inflation against resource exploitation (i.e. employment) away from the Fed and give it to Congress. Congress would decide whether there is slack in the economy. It would decide whether to make use of that slack by spending more, without regard for whether that spending is “covered” by taxes. If there were no slack at all and the economy was tightly wound, then Congress would decide whether to mop up the excess dollars by raising taxes. It would do this, of course, by drawing on expert advice, for example from the Congressional Budget Office. But that advice would not be couched in terms of balancing the budget, but in terms of determining the extent to which national resources were fully utilized and inflation was emergent.

The critics are freaked out by two things.

In her book, Kelton devotes a lot of pages to waxing optimistic about all the things we could do once we realize that the spending doesn’t have to be paid for by additional taxes. This raises fears that those who embrace MMT will, in fact, go on a spending bender, exceeding the available resources and causing inflation – just as in Summers’s developing countries like Argentina, Brazil, and Zimbabwe.

The deeper issue

But there is an even more basic issue raising those fears. They don’t trust Congress to make the appropriate adjustments. Would Congress, observing that – or being advised that – the economy was overheating therefore raise taxes to mop up the excess dollars, as MMT advocates? Would it restrain itself from spending programs once Congresspersons had to deal with lobbyists for various programs who had learned that MMT tells you that you don’t have to raise taxes to do it?

No, they don’t trust Congress to do that – in fact they don’t trust democracy to do it. And for good reason.

Democracy has a Tragedy of the Commons problem. A Tragedy of the Commons is, for example, a fish pond shared by many anglers, each of which, in their own self-interest, catches as many fish as they can, with the unfortunate collective result that the pond gets fished out.

If each person votes his or her own financial interest, they will vote for more government spending and less taxes. But collectively, it will cause too much spending chasing limited resources – hyperinflation.

The current structure of the U.S. government is one that dodges this problem, but it requires believing a fiction. It requires that Congress – and its constituencies – believe the budget has to be balanced, and it requires an undemocratic committee of elites, the Federal Reserve, to manoeuver, however inefficiently, to keep inflation in check.

Any threat to that arrangement is dangerous. To keep the unwashed masses from prevailing upon – or electing – a government that tries to provide all things to all people, as in a populist state, we must perpetuate the fiction that all new expenditures must be immediately paid for by new taxes. And we must delegate the management of the supply of money not to a democratic process, but to a quasi-authoritarian government arm, the Fed.

Kelton recognizes this tension and raises the question of whether we can trust Congress to properly allocate resources. But she does not provide a clear answer.

Nor do the critics of MMT. They believe – but can’t say directly – that such power leads to disaster.