Monday, February 7, 2022

MMT Has the Facts on Its Side and Is Starting to Win the Narrative

This weekend was a watershed moment for the MMT movement, as Dr. Stephanie Kelton graced the cover of NYT's business section with a title read: Time For a Victory Lap*.

This is a turning point because MMT is officially becoming mainstream (indeed, I may need to start writing about something else!).

I would encourage anyone to read it in its entirety, but the article was intentionally nuanced: author Jeanna Smialek gives credit to MMT for being correct that the US government didn't have a problem selling bonds to "fund" its large fiscal deficits, with the caveat that many mainstream economists have blamed the deficits for the elevated levels of inflation in 2021. This is obviously ridiculous considering we've been running deficits for two decades with mild inflation; the difference is this time, we had a global pandemic and supply chain disruptions to deal with, which stretched our real resources and caused inflation. Consider the below, which shows that consumer spending remains on trend with the last decade:

So if spending (i.e. demand) is the same and inflation is higher, that must mean the elevated inflation is due to supply side - bottlenecks and shortages thanks to the pandemic.

Joe Weisenthal, an editor at Bloomberg and co-host of the fantastic Odd Lots podcast, wrote it perfectly in this morning's "5 things to start your day" newsletter, which I recommend subscribing to (emphasis added):

"The story that a lot of people are telling right now is that "we tried MMT" got a lot of inflation, and so therefore it failed. But this is problematic on multiple levels. For one, it ignores the incredibly fast labor market recovery (or seems to imply that the labor market recovery was always inevitable, but that the inflation wasn't). But more importantly, a lot of the inflation we're seeing can be attributed to mediocre growth post-GFC. We're experiencing shortages for various parts of homes (garage doors, windows, lumber) in part because we let capacity for all of those things atrophy after the housing bust. A lot of lumber mills went bust after we let the economy collapse. The ideal MMT solution would be, in part, to never have had that horrible post-GFC growth in the first place, so that we didn't lose supply side capacity in those key areas. Now of course we can't go back in time to change policies. There's no time machine. But in some sense, we're now paying the price -- not for fiscal expansion in 2020 and 2021 -- but for fiscal timidity post-GFC that allowed the economy to be so languid for so long, such that we found ourselves with no capacity for a period of rapid growth."

This is incredibly well said. By deluding ourselves into creating imaginary financial deficits, we created real resource deficits that continue to create real consequences for real people.


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