Capitalisn’t: The right and wrong of Modern Monetary Theory

Oct 09, 2020

Sections Economics Public Policy

Collections Monetary Policy

Modern monetary theory has become one of the hottest topics in economics, and deeply analyzing its ideas has become more pressing than ever as we debate, in the middle of a pandemic, whether the government should be adding more debt to support the economy. On this episode of the Capitalisn’t podcast, hosts Bethany McLean and Luigi Zingales take a look at what MMT gets right, what it gets wrong, and how it should change our thinking. They enlist the help of John H. Cochrane, a senior fellow at the Hoover Institution and distinguished senior fellow at Chicago Booth, for additional clarity.

Bethany: I’m Bethany McLean.

Speaker 2: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Speaker 4: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Speaker 5: We ought to do better by the people that get left behind. I don’t think we should have killed the capitalist system in the process.

Luigi: Since the beginning of this podcast, we’ve received weekly emails from a lot of listeners that they wanted us to discuss MMT.

Speaker 6: An unconventional economic theory is gaining some traction, thanks to the policy teams of Alexandria Ocasio-Cortez and Bernie Sanders. It’s called Modern Monetary Theory, MMT.

Luigi: We decided to cave, especially in light of the publication of the book The Deficit Myth by Stephanie Kelton, who has become the superstar of MMT.

Stephanie Kelton: I think most people, when they think of MMT, they think of it as an analytic framework that tries to update the lens through which we understand the monetary system and the policy options that are available, I guess, in the post-Bretton Woods, post-gold-standard era.

Bethany: And Stephanie Kelton is a pretty well-known American economist. She’s a professor at Stony Brook University and a senior fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. 

So, Luigi, I find it pretty stunning that a book about something called Modern Monetary Theory is on the bestseller list. This is a topic that is very of the moment, right? Has it ever been this popular before?

Luigi: No. In fact, I was trying to think about when I heard the term first. And I think it was a couple of years ago. This is a recent phenomenon, largely outside of the academic world.

Bethany: I think it might be helpful if, right off the bat, I try to explain what MMT is from the layperson’s perspective. And then, Luigi, you can just expand on my definition. And it seems to me that at core, it’s a pretty simple concept, which is that deficits don’t matter. That you can spend and spend and spend without being worried about this nasty creature called the deficit that we’ve all grown up being scared of. 

The main reason we always hear about not wanting to run deficits is that it’s going to lead to inflation. And so, the key idea behind MMT is that, if it does lead to inflation—and that’s an if, not an inevitable, but an if—then you’re able to see the inflation coming and stop the spending, and prevent the inflation from taking place. Or at least, you’re every bit as good at preventing inflation and predicting inflation as conventional economists have been, which is to say, not very good.

Luigi: Yeah. I would push it a little bit farther. I would say that, basically, they say that if you have monetary sovereignty, then you can print as much money as you want until you reach full employment. And that money will never lead to higher inflation, it will lead only to higher GDP. So, it seems like a no-brainer to print money up to the point that everybody’s fully employed.

Bethany: So, Luigi, why don’t you explain what the connection is between MMT and inflation? I know that there’s an argument that rampant spending will lead to inflation, but to be perfectly honest, I’m not sure why it is that that’s the accepted viewpoint.

Luigi: When you start to print too much money, people don’t want to hold that money. They want to buy goods; they want to do something else. And the result of that is going to be a drop in the value of money. And the drop in the value of money is nothing else but rising inflation. So, MMT says, don’t worry about the deficit, you can print money and finance all the deficits you can. The traditional view is, if you finance your deficit with money, the immediate consequence of this will be rising prices, so rising inflation. And, eventually, actually, the deficit is going to be even worse, because part of the deficit is paid by what we call, in jargon, seigniorage. The fact that people hold the money for free, but as inflation rises, people will hold less and less money, at least cash. And so, the seigniorage will go down and the deficit will become worse.

Bethany: So, essentially, the core idea is supply and demand, right? The age-old rule of economics, the more money supply you have, the less demand for it there is.

Luigi: Yeah, but there is actually an interesting Keynesian twist to it. If I’m the government, I print money to stimulate more guns, OK? It’s not what Kelton says, but what other people might say. Then I’m going to employ more people. And by employing more people, I increase the GDP. And that increase in GDP will finance the deficit. Because I don’t need to repay the debt, I need to create enough tax revenues to support the debt I created. So, if I issue $100, and that $100 generates enough GDP and enough tax revenues to pay the interest on that $100 from here to eternity, then I’m done. I can keep printing money without generating more inflation. That’s kind of the idea.

Bethany: Gotcha. So, there’s an argument, it’s not just with MMT that you can spend and spend and generate a deficit of any size. There’s a twist on that or a further argument that that money has to be spent in a productive way.

Luigi: For example, the Green New Deal. They think this is very productive, at least in the long term. But just the fact that you employ people . . . Being productive is a bit tricky. Because being productive, you think, are you doing a net-present-value analysis of the return on investment? From their point of view, being productive means that you generate enough GDP that generates enough taxes to support the additional debt you create.

Bethany: Right. Although you could just as easily say that you could take that money and go to war and conquer another nation and add to your GDP that way, and therefore pay off the deficit, right? Which is why, in the end, MMT, at least in its modern form, is as much a political argument as it is an economic argument. Because there are acceptable uses for the money and unacceptable uses for the money, and those are dictated by politics more than by economics.

Luigi: The other point is, this concept of monetary sovereignty, it’s quite important to understand what this is. If you are the United States, we know that there is some demand for dollar assets all over the world. Now, nobody knows how much demand there really is. And so, if you try to push it to the extreme, at some point the Chinese, the Europeans, whoever, might decide to create an alternative. Or people might decide that the alternative created by the Europeans, like the euro, is a better alternative. And then the demand for dollars might immediately collapse. 

My reading is that if there is some value to MMT, this value is most for countries like United States, Japan, where there is a lot of internal demand and external demand for that currency. And people are not going to rush to exchange debt to try to hold their assets in a different currency.

Bethany: In a world where we’re all conscious of the expression of privilege, in a way, you can see MMT as the ultimate expression of privilege, right? Because it’s only countries that can print and control their own currency that get the privilege of employing MMT.

Luigi: Yes. But behind it, there is an element of coercion. In a sense, the reason why a lot of people want the dollar is because the United States has the biggest army. So, in a sense, what MMT is saying is that if you are so powerful and you can force other people to take your currency and hold it without being remunerated, you have a free pass. But it’s not exactly free, because it comes with a few atomic bombs in the arsenal.

Bethany: So, MMT is the expression of privilege backed up by military might, that makes it sound a lot less progressive. In fact, it makes it sound rather regressive.

Luigi: Yeah, I think that that’s at least my view.

Bethany: Before we move into a serious critique of this, let’s pause again on the positives. Because I think what I hear you saying is that there probably is some truth to MMT in the sense that, perhaps in a period of global deflation, we don’t have to worry as much about inflation. And perhaps there is more room for deficit spending. And perhaps we shouldn’t be as worried about this beast called the deficit as we historically have been. Is that the major argument in favor of MMT, from your perspective?

Luigi: I think it is, with one big qualifier that you don’t know what the limits are. We don’t know. And, of course, it depends very much on the contingencies. Now, we are in a world of massive deflation as a result of COVID. I can tell you for sure that the limits are much larger now than they were a year ago. For example, Germany can spend much more, as a result of having a very strong fiscal position, than most countries. How much more, and what is the limit? I think this is what is tricky. And at the end of the day, it is a risk analysis. And if you push it too much, you might lose everything. 

Today in the United States, we are enjoying this extraordinary privilege of having people hold dollars throughout the world without paying us anything. And so, that’s a big subsidy that we receive. Now, if we abuse that privilege, at some point people stop holding dollars. And then we are going to be worse off. So, how much do you want to push your luck until you actually lose out?

Bethany: That’s a really interesting point. It is an example of how everything is true until it isn’t. And by the time you realize the conditions have changed, it’s too late to go back and fix them. And you can’t say, “Oh, wait, hit pause. Stop spending, start reining in the deficit. We see the problems coming.” Because by the time the problems are upon you, it’s too late to do any of that. 

In that sense, it is no different than going to Las Vegas and gambling at the craps table, right? That you’re going to be able to keep going and keep going and keep going, and that ground isn’t going to be knocked out from underneath you, or the dealer isn’t going to call your bluff. I think I’m mixing up my gambling analogies. But anyway, that’s obviously not where I spend my time—

Luigi: I can see you are a typical Las Vegas player, right?

Bethany: Clearly. Luigi, why is it that MMT has become so popular now? Is it simply a function of where we are, that the United States has never had deficits like this before? And so, people are looking for ways to pretend it’s going to be OK. Is it because the idea of free money is just so appealing, and particularly appealing amid a pandemic?

Luigi: I think it’s a combination of two things. There is a huge political demand for new forms of spending, from doing more intervention for people in need, to the New Green Deal, to infrastructure investment. The list of potential investments is infinite. Politically, you know that the moment you mention how you’re going to pay for it, you lose the election, or you lose the nomination. Elizabeth Warren started to drop in the polls the moment she tried to explain how she’s going to fund her Medicare for All program. Bernie Sanders punted on the question, never mentioned it, and almost got nominated for the Democratic Party.

If you are very progressive, I think what you want to do is pretend that nobody pays, and then that solves all the problems. Economically, we are in a situation of major deflation worldwide. And so, there is honestly room to spend more. Certainly, in Germany, but even in United States in this moment, with a freefall in GDP and interest rates at zero, why does the government not do, for example, infrastructure investments? Maybe there is a little bit of truth in what MMT is saying, or at least there is truth in saying that everybody else is way too timid.

Bethany: Well, I think we should try to take that apart with somebody who’s a big critic of MMT, so that we can get both points of view. We thought it would make sense to talk to one of MMT’s harshest critics, just so we can push as hard as we can on the drawbacks of this philosophy, as well as the pros of it. And I’ll let Luigi introduce our guest.

Luigi: Our next guest is my former colleague, John Cochrane, who is one of the clearest thinkers in economics. And also, somebody who, while very critical of MMT, is not a fan of the current monetary consensus, if you want. But a critic from a different viewpoint. So, I thought that was a good balance to all this discussion about MMT.

Bethany: Can we talk a little bit about what it does mean for our country to be fiscally solvent, given that that’s part of the argument at the heart of MMT as well, which is that it means something different than we all thought it does? What does it mean to you?

John H. CochraneWell, does a country have the ability to pay its bills? Does it have the tax revenue to pay for the stuff it’s spending money on? Or does it have the ability to borrow money and to promise future tax revenues to pay back the borrowed money in order to spend money on things? And governments that can’t do that basically end up printing money. And when they do that, that’s when inflation comes. 

Modern Monetary Theory says you can print all the money you want to spend, and that won’t lead to inflation. And they’re not talking just about a little bit of money either. The whole Green New Deal, free college for everybody, a government job program for anybody who wants a job, all of it coming out of printed money. And, in their view, that won’t cause inflation. There are about three links in the chain, two of which are reasonable. And then the one is where they lost track, and the inflation comes out.

Luigi: Let’s separate the politics from the economics, because Modern Monetary Theory, even if it is advocated now mostly by the left, is not intrinsically a left-wing theory. We can argue that Hitler and Schacht, his central banker, followed Modern Monetary Theory in rearming Germany. So, it’s not necessarily a left-wing theory. Speaking of Germany, in Germany, 1933, 1939, seem to have worked pretty well to rebuild Germany. So, why is this necessarily wrong?

John H. CochraneWell, Modern Monetary Theory, if you read the book, they kind of wander around the larder of economics and pick up a bunch of ingredients, not all of which are wrong. And one of those ingredients is that, in fact, money is not deeply different from government debt. Printing money and using that to buy things is the same, in many deep ways, as borrowing money and using that to buy things. In both cases, it’s fine so long as people think that money is backed, so long as people think you’re doing something useful with the money that will generate future tax revenues. And building an autobahn is an example.

Very classical economics says that if you’re a government and you have good public infrastructure projects that you’re going to build at efficient cost, and that won’t be bridges to nowhere, that will increase economic activity and generate tax revenue, that you ought to do it. And borrowed money is a great way to do it. Our governments have been borrowing money to build bridges and roads and schools and canals for hundreds of years. Most of the time it works out pretty well.

Bethany: You’ve mentioned a couple of times that MMT is incoherent. Will you highlight your favorite areas of incoherence? You’ve said a couple of links make sense, and then here’s one that doesn’t. I think it’d be helpful to back up and say, where is the incoherence?

John H. CochraneWell, an example, it is true that a government that prints its own money does not have to default on its debts. Treasury bonds say the US government will give the bearer a $1 bill, and they can just print up the dollar bill and give it, they don’t have to explicitly default. We could borrow a ton of money, and then, if we want to, we could pay it off by printing dollars. 

Second true statement, it’s also true that in the end you can stop any inflation if you’re willing to soak up the extra dollars with taxes. Conclusion by the modern monetary theorists, great. We can borrow all we want to finance $30 trillion, a Green New Deal, and we won’t have any trouble.

Well, you can just add up A and B. Suppose we borrow $30 trillion. Suppose we then pay off the $30 trillion of debt with $30 trillion of freshly printed cash. And then inflation breaks out. Well, now we’ve got to raise taxes $30 trillion. This is just like borrowing money, borrowing $30 trillion and paying it back with taxes. You have not avoided the fact that borrowed debt has to be paid back with taxes if you want to avoid inflation. So, there’s a classic example of true statements that lead to a false conclusion.

Luigi: I like to think about Stephanie Kelton as an Arthur Laffer of the left. Arthur Laffer is the so-called inventor of the Laffer curve, saying that if you cut taxes, you increase revenues. He’s saying something that is in between obvious and wrong, but very politically appealing. I think that the same is true of Stephanie Kelton, because it is in between something that is obvious, governments can print their own money to support their expenditures, and something that is wrong, there are no constraints on this. In the ’70s, people were overtaxed. And so, politicians wanted an intellectual framework to justify why they were cutting taxes, and they married the Arthur Laffer framework, even if was never true and, actually, never proven to be right.

In the same way, people are embracing Stephanie Kelton because maybe the US government has been too limited in pushing more expenditures, in maybe valuable projects. There have been too many, if you want, deficit hawks in a time where interest rates are so low. Honestly, there are valuable projects that can be done. There was so much resistance in Washington that now we went into magical thinking to push it down.

John H. CochraneI disagree from the first to the last word. Arthur Laffer’s analysis was logically correct. There was nothing wrong with the statement that if a tax rate is too high, lowering the tax rate raises tax revenue.

Luigi: No, no, that’s a part that is obvious. What is empirically incorrect is that we were at that point.

John H. CochraneThat is not obvious to the legislators of the state of California. So, Art Laffer is not disagreeing as a matter of logic and theory with standard economics. Art Laffer actually published papers in academic journals. By contrast, I’ve read Stephanie Kelton’s book, there’s no equations in it. There’s no reference to anything with equations in it. There’s no reference to anything published in any scientific journal since the 1940s. There’s no reference to any economics. 

We have thought a little bit about money and inflation since the 1940s, but other than insults, Milton Friedman, Bob Lucas, Mike Woodford, Larry Summers, Olivier Blanchard, there is no reference to anything anybody’s thought about in monetary and inflation economics. No reference to the experience. The 1970s are absent in Stephanie Kelton’s book. So, it is truly a fairy tale. 

Now, on your political, do you think it’s important for people to tell a false fairytale in order to surmount the difficulties and make wise policy? Boy, I hope that’s not how democracy works, because we had a lot of false fairytales out there. And perhaps you get one wise policy out of them, but if you believe in fairytales, you’re going to get a lot of completely unwise policies out of it, too.

Bethany: Full confession, John, I’m a journalist, which means that I like fairytales, and I don’t like charts and graphs. And one of the points that Stephanie made in her book is that the concept of inflation itself is actually not very scientific. It is not well understood when it happens. And so, her argument was essentially that classical economics doesn’t really understand inflation, either. So, the fact that MMT can’t predict inflation doesn’t make it so different.

John H. CochraneIt is important to tell stories, to tell narratives, to explain things to a popular audience, but it’s also important that there be science underneath it. So, it is important to write to both audiences. I’m writing a whole book on fiscal theory of the price level, because I think that the standard treatments of inflation don’t really capture where it comes from, that the models of the Fed are not very good. And it’s right. Now, just because everybody else is wrong doesn’t make you right.

Bethany: One other thing that Stephanie argues in her book that’s appealing to the noneconomist is this idea that the natural rate of unemployment is cruel and heartless, and we don’t need any such thing to be true. Is this a case in which MMT has it right? Or is this another point on which MMT isn’t coherent?

John H. CochraneI would say it’s a point at which they take a little bit of a half-truth off to an insane extreme. Unlike what Stephanie says, there always should be some unemployment. People who quit their jobs or lose their jobs don’t immediately the next day take the first job offer that’s coming. They look around a little bit. Now, the Fed has thought of inflation as happening when unemployment is too low, there’s a natural rate of people looking for jobs. And if the job market’s too tight, that’ll be inflation. And if the job market’s too loose, there won’t be.

And the Fed has had a hard time measuring where is the natural rate and forecasting employment. That’s true. But, you know, Kelton goes on to basically say, there is no limit to how much the government can spend, and people will work more if the government does that. And that’s just . . . There is a supply out there, and it takes investment. It takes factories. It takes people starting new companies, getting the supply to move out. It takes productivity. That’s really the heart of long-run growth, not just, there’s endless amounts we could produce if only there weren’t people sitting around who don’t work.

Luigi: But the way I take Stephanie Kelton’s point is that maybe you can manage inflation through the labor market rather than from the Fed funds market. So, imagine that now what we have is a way to park our money at zero interest rates, which is called money. And then the Fed maneuvers the alternative, stimulating investment, and so on and so forth. Imagine that you have a fiscal committee that has a lot of proposals to invest, and then it keeps going through these proposals with an alternative that people have, as a job, a crappy government job paying very little. Every time there’s a new proposal, they are going to move on to the better proposal. And then, if you see inflation going too high, you stop passing through more proposals. And that sounds very appealing to a lot of people, saying that you actually clear the market through employing everybody rather than through the money market. What is your response to that?

John H. CochraneI’ve actually played with similar ideas. If you’re trying to find what defines a dollar, if the federal government said, “We’ll hire anyone at $15 an hour”—and it’s always $15 an hour—well, that’s like a gold standard. We’ll have the jobs standard. I think the problem with Kelton’s proposal is, there’s a problem conceptually and a problem in how it works. 

Modern labor economics understands unemployment. Unemployment is not people sitting around at home waiting for the plant to call and bring them back to work. It is people searching for jobs. Most unemployed people are only unemployed for a couple of weeks until they find the job that they’re looking for. So, this 1930s model of, you’re just sitting in there because there are no jobs is simply not true. Unemployment is like marriage. People date a lot. The problem with the federal jobs thing is, Luigi, you told me you worked in the Italian army. Now that’s a classic—

Luigi: I served in the Italian army. I didn’t work.

John H. CochraneI think you were paid about 1,500 lira a day, if I remember correctly.

Luigi: Actually, less than that. Probably 500 lira a day, which is a quarter these days.

John H. CochraneYeah. I think we have a lot of experience with, especially, federally run jobs programs. Actually, if money’s free, as Kelton says, why bother making people work? Why not just send them the check? What’s the point of having them show up and then learn how to do a government job? I’ve seen lots of reports of what you learn on government jobs, you learn how to do a government job. Which is, you learn how to just show up barely the minimum, and then take the truck, and don’t work too hard, you’re making us look bad. And how to cheat and steal. When you read her proposals of what these people are going to do, it doesn’t sound particularly attractive. I think there’s a lot of practicalities of running . . . There’s a difference between how a government runs a job and how a private sector runs a job. And it’s not the same as buying number two red winter wheat and sitting it in the warehouse. A job is a very personal activity.

Bethany: Do you think, more broadly, when you talk about other well-respected economists who are joining the just-print-money brigade—and I’m speaking a little bit loosely—but do you worry that economics itself is influenced by the time in which we’re living by our desires to make it so? In other words, in a time of great exigency, like we’re in now, where it would be so convenient to believe we could just print money to get our way out of it, is that, in and of itself, shaping people’s beliefs away from what might be a more rational way of looking at numbers and budgets and deficits?

John H. CochraneAbsolutely. A lot of economics consists of providing Rolodex cards and charts and graphs to suit political preconceptions, both on the left and on the right. Gee, we found out that minimum wages don’t cost jobs. We recently found out that paying people $600 to stay home doesn’t actually make them stay home, that they’ll take their jobs anyway. These are just two tiny examples. Keynesian economics, in my view, was a similar thing. And useful in many ways, it saved us from Soviet central planning. But it’s a bunch of mumbo jumbo that served a political purpose. And that’s true on the right and the left.

I’ll give in to some of Luigi’s . . . Some of the use of Art Laffer’s napkin was convenient to a tax-cutting project that saw there would be economic growth, but maybe not enough to pay one for one. So, economists have been doing this, left and right, forever. And, in some sense, why not? At least you have to run through some hoops to make it look vaguely plausible that the politically predetermined outcome makes sense.

Luigi: So, Bethany, I should take you more often to the academic seminars, because you got John to concede that Keynesian economics was at least in part useful. And that Arthur Laffer was at least in part wrong. So, this is more than I succeeded in doing in 20 years of being colleagues. You’re a magician.

John H. CochraneNo, come on, Luigi, I learned a lot from you.

Bethany: I was just going to say, Luigi, see, economists and journalists aren’t so different after all.

John H. CochraneEconomists actually do listen to each other.

Bethany: We’re all complicit in storytelling.

So, Luigi, what surprised you the most that John said? What surprised me the most, what I found really interesting, is the idea that these elements of MMT have crept into mainstream economic thinking. For example, in the arguments that Larry Summers makes, and that John sees a danger in the acceptance of that. And, of course, he’s a conservative economist, so perhaps that’s not so surprising. But it is interesting, if you try to see the world through his lens, what a frightening place we’re in.

Luigi: But, honestly, I think he’s trying to put everything together. People like Blanchard and Summers are making, in my view, a very reasonable argument that because real interest rates are so low, you can probably support a much larger level of debt. When real interest rates were 3 percent, the burden of debt for an economy is much larger. When real interest rates are close to zero, or even willing to say they’re negative, there is clearly a political concern. And I am sympathetic to some of the issues that John raises, but there is a political concern that once you start spending, you never stop. And once you start spending, you might waste the money you spend. 

There are all of those things that are certainly important. But there is no doubt, at least in my mind, that as real interest rates go down, you should be able to spend more and afford more in terms of existing debt, and so, current deficit, than if real interest rates are very high. And so, the argument of Blanchard, that real interest rates are negative, we should actually spend more, I don’t think he’s so outrageous. And you don’t need to equate it to MMT. And you don’t need to believe in MMT to support a Blanchard argument.

Bethany: But doesn’t this come back to that point that it’s a gamble? Because when interest rates change, they change suddenly. The human ability to foretell the changes in interest rates has thus far, over the course of history, been extraordinarily limited. People have been wrong time and time again. And by the time interest rates aren’t zero, and in fact are climbing rapidly, it will be too late. And suddenly we would have unsustainable interest payments, and thereby the spiral that John is afraid of begins before you can halt it. Doesn’t the risk come back to this idea that you’re gambling that we’re in a period of low to negative interest rates for the foreseeable future? And that that’s not a situation that’s going to change rapidly?

Luigi: I think you’re right, but there are ways around it. For example, the United States could issue 100-year bonds. If you lock in the interest rate for 100 years, that’s a pretty cool deal. At some point in England, in the 19th century, they had consols that were perpetual bonds, where you never repay the principal, you just pay interest. If you issue a perpetual bond at a very low rate, then the risk you are describing doesn’t exist.

Bethany: You are overall more positive about MMT than I would have expected you to be. Am I reading that correctly?

Luigi: I don’t know what your expectations were. I’m certainly more positive than John, but it’s hard not to be. The thing I liked the least about John’s interview, but this might be personal, is the dismissal of the analogy with Laffer. Because I think that this is exactly what I think of MMT, in the same positive-negative way in which I saw Laffer. And it says, Laffer’s ideas were not new economically, but they were very appealing politically. It was the right message at the right time. 

And I think that MMT is a little bit like that. I think, economically, it is nothing new, and whatever is new is most likely wrong. But the political message it has fits the moment. You can exaggerate with Laffer by cutting rates too low, you can exaggerate with MMT. But I think there is a reason why Laffer exploded in the ’70s, and Stephanie Kelton has exploded in 2020. We went too much in the opposite direction. Stephanie Kelton is the nemesis of Arthur Laffer.

Bethany: That, to me, is a really good summary. What I like the most about MMT is that it is something that shows the flaws of conventional economic thinking. It’s a way in which you can hold up conventional economic thinking and say, “What’s wrong here?” Or, “What hasn’t this gotten right either?” And so, I think MMT doesn’t have to be an answer in and of itself to be incredibly valuable as a challenge to the existing predominant point of view.

Luigi: It is trying to say, we can spend a little bit more. And the reason they give might be completely wrong. But to the extent you don’t overdo it, actually the message, or the recipe, can be right in the short term.

Bethany: I think the key flaw in MMT comes down to the practicalities of it rather than the theory of it. You tell politicians that there’s such a thing as free money, and there is no way that money is going to get invested in productive activities. It’s going to get wasted. And that they can pay a lot less by issuing short-term debt and make it really appear costless. There’s no way they’re going to lock in that 100-year debt that you’re talking about. To me, where MMT breaks down is just against the political, practical realities. The theory of it is fine, but in practice, it would get very ugly very quickly.

Luigi: I agree with these dangers. But I think, first of all, I’m not saying the theory is right. Let me be clear. I’m not saying the theory is right. I think that the message in small doses may be the right message at this time. While I understand your concern, which is also John’s concern, I don’t think that economic theories should distort reality in order to factor in the political distortion, in the sense that we end up basically playing politics and not economics.

Bethany: Well, I don’t know. I think part of John’s point is that economics is always politics, and that economic thinking is biased most of the time by a preexisting political point of view. And if the core of MMT being useful, or Keynesian theory working, is that the money has to be invested in something that’s going to generate a rate of return, something that’s going to be productive, and you can look at the political system and say, that’s not going to work, then you’ve got a problem right off the bat, right?

Luigi: Yeah. But there are some countries that do better on this front than others. If you think about the United States, if you were to force this investment to be in infrastructure, for example, I think it would be difficult, not impossible, difficult to waste money on infrastructure today. Because the infrastructure in the United States is so poor that almost any investment will be a good investment. 

The same is true for a lot of countries, in the sense that German infrastructure is crumbling as well. We went through a 20- or 30-year period in which the goal was to minimize expenditures and particularly minimize capital expenditures. And I think that we underinvested in a lot of this stuff, fixing mountains that are collapsing, fixing the bridges that are falling apart. There’s a lot of fixing that needs to be done, which is not a lot of fun in terms of investment, but it’s very needed and very crucial to the smooth working of our society.

Bethany: OK. So, broad strokes, here’s where I come out. That’s convincing. If we employ MMT and we invest all the proceeds in both fixing our infrastructure and fixing our education system, and we finance it with 100-year debt instead of with short-term debt, then I’m all in favor. Then I think it works.

Luigi: Wow. OK. We need to go back to John and see whether he will sign on to that.

Bethany: I have a feeling that wouldn’t be enough for him.