Every empirical data point is neg---MMT can’t control inflation when the economy’s below full employment, and won’t rein in spending when necessary

In recent years, politicians on the far left have leaned on Modern Monetary Theory (MMT) to justify offering increasingly exorbitant spending proposals without plans to pay for them. Then roughly $6 trillion in deficit-financed stimulus approved by Congress in 2020 and 2021 provided policymakers a natural experiment to evaluate the claims proponents of MMT made. The results exposed the critical flaws in their approach, and rather than being able to take a victory lap, MMT is now on its last legs.

The idea that government should use deficit spending to support an economy in crisis is not unique to MMT – economists across the political spectrum supported an aggressive fiscal response in 2020. The core tenet of MMT is that a monetarily sovereign nation, like the United States, can always simply print however much currency it needs to buy whatever goods and services programs require. This is the lens through which proponents of MMT have argued that the only constraint on deficit spending should be inflation that materializes when the economy is utilizing all available resources.

A new paper published by Dr. Eric Leeper for the Progressive Policy Institute deconstructs the problems with this approach. Leeper writes that the modern financial system rests upon certain norms, namely that 1) government spending is financed by either collecting taxes or debt that will be repaid with revenue from future tax collections and 2) the Federal Reserve will operate independently to fulfill a dual mandate of full employment and price stability. Adherence to these norms is what has allowed to United States to enjoy low borrowing costs, a reliable currency, and robust economic growth.

Proponents of MMT want to turn the system over by having Congress use fiscal policy to achieve inflation and employment goals while monetary policy simply plays a supporting role. In other words, the Fed will keep interest rates low to enable Congress to run large deficits indefinitely – at least, until inflation materializes. In her book “The Deficit Myth,” Dr. Stephanie Kelton, one of the thought leaders behind MMT, writes, “for evidence of overspending, look to inflation.” She goes on to say that below-desired inflation signals insufficient spending while above-desired inflation signals excess spending.

But as Leeper explains, MMT has no comprehensive theory of what determines the inflation rate when the economy operates below its resource limit (as it usually does) nor do its advocates have any actionable proposals for managing inflation that has already materialized. It’s telling that, after a year in which prices rose nearly 7 percent for the first time in decades, no prominent MMT advocates are calling for deficit-reducing tax increases. Perhaps it is because they know that elected officials are loathe to enact the measures needed to rapidly reduce deficits at a time when workers are already seeing their hard-earned wages eroded by inflation.