Inflation: Did the government spend too much?
Economist Stephanie Kelton has been on “a victory lap with an asterisk,” said Jeanna Smialek in The New York Times. Kelton is the public face of Modern Monetary Theory, which posits that “as long as its economy has the ability to churn out the needed goods and services,” the government can fearlessly print what it needs whenever it needs it without worrying about the fiscal hazards, such as inflation and interest rates. In March 2020, this theoretical question of how much spending a government could essentially get away with “faced a real-world experiment.” Since the pandemic hit, Congress has passed nearly $6 trillion in relief spending—and “the economy rebounded faster than anyone had hoped.” The results “seemed to be confirmation” that Kelton was right—until inflation started soaring. Kelton says the government ignores the part of the theory that considers the effects of supply-chain disruptions, such as those brought about by Covid. Anyway, she argues, “what is worse than inflation? A crawling recovery.”
In some ways, the pandemic has vindicated MMT, said Eric Levitz in New York magazine. The investment world’s “bond vigilantes” long warned that outsize spending would make federal borrowing costs skyrocket. But “even as multitrillion-dollar Covid-relief bills pushed the national debt past $30 trillion, America’s borrowing costs have remained historically low,” and the U.S. was the only G-7 country to fully recover its prepandemic GDP by the third quarter of 2021. In a sense, the recovery “may have been too successful,” yielding higher inflation. MMT theorists have proposed a solution to this: “progressive income-tax rates that increase automatically when incomes rise faster than the target inflation rate.” But that has never been tried.
That’s because it’s impractical, said Karl Smith in Bloomberg. MMT’ers “admit that, in theory, too much government spending could lead to inflation,” but if that happened, the government “could just stop spending.” That’s nonsense. Politically, it would be nearly impossible for “any administration to tell supporters that their most wished-for programs are wrecking the economy.” Second, raising taxes as a means of combating inflation would only “exacerbate the difficulties facing families and businesses.” Modern Monetary Theory is “a meme whose star is already falling,” said economist Noah Smith in his Substack newsletter. Interest in the theory “surged in 2019 when the writers of the Green New Deal used MMT as their justification for not finding ways to pay for all the new spending.” Critiques were dismissed while inflation was low. But its rise in recent months is a clear reminder “that you can only boost the economy with fiscal and monetary policy so much before costs start to appear.” Still, MMT will always find “new starry-eyed advocates to dazzle with words that sort of sound like economic theory.”