MMT abolishes policies to control inflation once it sets in---at best it uses a central planning approach that fails

Kelton has in recent days compared tax increases to “a helmet” – a proactive tool that would prevent inflation from happening, but would have little benefit once inflation has already materialized (without ever producing a model that would plausibly justify the distinction). In a New York Times profile published last weekend, Kelton says that the Congressional Budget Office should “analyze possible inflation ahead of time” and then lawmakers should try to offset the impact of inflation with tax increases. How useful is an economic theory that tells us how to avoid inflation, but has no credible recommendations for reducing inflation once it’s higher than desired?

There is also no reason to believe that advocates of MMT would support such precautionary fiscal restraint. CBO did produce an estimate of the gap between projected and potential economic output in 2021, and it was just one fifth of the size of the $1.9 trillion American Rescue Plan enacted last March. Yet at no point did Kelton or other leading advocates of MMT join the calls of other economists to shrink the bill or propose pairing it with tax increases. In fact, some argued the bill should be even bigger – and they did so without producing any alternative model to suggest CBO was underestimating potential output. Leeper’s paper makes clear that the lack of testable models that can be analyzed and debated is a pervasive problem with MMT.

We now have a scenario in which Congress approved enormous amounts of new spending that was not backed by tax revenues, the Fed supported this debt by creating new bank reserves and keeping interest rates low, and inflation soared as a result. Although most of this spending was essential for enabling the United States to experience a robust recovery from the 2020 recession, the excess came at a cost most Americans were unwilling to pay. Instead of acknowledging those tradeoffs and calling for monetary tightening, as conventional macroeconomists would suggest, or fiscal tightening that is the logical extension of their past statements, advocates of MMT are now proposing to control prices through central planning – an approach that didn’t work in the 1970s and won’t work today. These advocates have faced their first real test and failed miserably.

Until its proponents specify the models underlying their rhetoric and resolve the myriad of practical questions about how to operationalize their proposals, MMT will remain what other critics have likened to “Calvinball” – an incoherent game in which the rules are constantly changing to ensure its creator wins. The past year has proven that policymakers who pursue the misguided prescriptions of MMT advocates without a plan for dealing with the consequences will be following a recipe for economic misery.