Missing Milton – and the Magic Money Tree

A year ago I wrote about what, at that time, I called “one of the new big things” in economics and politics: Modern Monetary Theory (“MMT”).¹  I explained MMT by quoting from The Wall Street Journal:

“Ms. Kelton² argues the government doesn’t need to worry so much about how much it borrows to pay for spending programs.  Unlike a household or business, it can never run out of money.  The government can always print money to pay for debts.  The constraint, according to MMT, isn’t the deficit, but whether the borrowing and spending spurs inflation and disrupts economic activity.”

When I wrote that post, MMT wasn’t mainstream yet, though in the words of the WSJ, Sen. Bernie Sanders was giving it “approving nods.”  Now, it is definitely mainstream.  In fact, it seems to be what lots of countries are doing.  But while people see it as necessary, some still worry.  Professor Kelton, however, assures us we do not need to.

Professor Kelton explained why in the Financial Times a week ago:

“While most see big deficits as a price worth paying to combat the crisis, many worry about a debt overhang in a post-pandemic world. 

Some fear that investors will grow weary of lending to cash-strapped governments, forcing countries to borrow at higher interest rates.  Others worry governments will need to impose painful austerity in the years ahead, requiring the private sector to tighten its belt to pay down public debt. 

They should not.  … [Public debt] poses no inherent danger to currency-issuing governments like the US, Japan, or the UK. …

There are three … reasons.  First, a currency-issuing government never needs to borrow its own currency.  Second, it can always determine the interest rate on bonds it wishes to sell.  Third, government bonds help to shore up the private sector’s finances.

The first point should be obvious, but is often obscured by the way governments manage their fiscal operations.  Take Japan, a country with its own sovereign currency.  To spend more, Tokyo simply authorizes payments and the Bank of Japan uses the computer to increase the quantity of Yen in the bank account.  Being the issuer of a sovereign currency means never having to worry about how you will pay your bills.  The Japanese government can afford to buy whatever is available for sale in its own currency.  True, it can spend too much, fueling inflationary pressure, but it never needs to borrow Yen.”³

The whole thing seems a little bizarre to me.  Also, I wonder whether the UK is really in the same category as the United States.  While both the United States and the UK can issue currency to pay their bills, at some point the UK may find itself in a situation when it can’t get enough foreign currency, at a rational rate, to buy things it needs from overseas.⁴  The United States may be big enough, however, and it doesn’t import that much, so it may fit Professor Kelton’s description.⁵  Maybe Japan, too.

But it’s not just Professor Kelton pushing ideas like this anymore.  In a recent column in The Wall Street Journal, Greg Ip seemed to sign up for at least part of MMT:

“The usual fear is that high government debt leads to a crisis or excessive inflation.  But there’s little risk of the first, and nothing inevitable about the second. … 

The threat of debt crises has often been invoked to justify cutting spending or raising taxes, even when the economy is weak.  But it’s based on flimsy evidence: There’s little precedent of an advanced economy that controls its own currency being unable to borrow (eurozone members like Greece don’t control their currency).

So long as the Fed can print dollars, it can lend as many of them as it needs, ensuring the federal government can always borrow. 

This delights some on the left who think the Fed should finance all deficits this way, obviating the need for higher taxes.   It horrifies some on the right who think it eliminates any restraint on government spending and will lead to inflation.

… [But] printing money by itself doesn’t cause inflation.  That requires spending and investment to reach the point that the economy overheats, sending prices and wages up.  Or the public has to expect higher inflation, which can be self-fulfilling. … 

Right now, the Fed would love a little more inflation, which has persistently fallen short of its 2% target.  But what if it’s headed well past 2%?  The Fed knows what to do, because it’s done it before: raise rates and cool the economy.”⁶

When I read things like this, the person I miss the most is Milton Friedman.  It would be great to hear his views on the current situation and, more importantly, his ideas on what we should be doing, on what the dangers of MMT are, etc.  It would be great not only because he was a Nobel Prize-winning economist.   But also because he had the ability to explain his ideas in a clear, simple, and understandable way that even non-economists could appreciate.  Which is exactly what we need today.  And why I miss Milton so much.
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¹ Modern Monetary Theory is also sometimes viewed, mostly I suppose by its detractors, as a variation of the “Magic Money Tree.”  See here and here.
² Stephanie Kelton is a professor of economics and public policy at Stony Brook University.
³ Stephanie Kelton, “Can governments afford the debts they are piling up to stalilise economies? Yes - It poses no inherent danger to states that issue their own currency,” Financial Times, May 4, 2020.
⁴ Like food.  The UK imports a lot of its food.
⁵ Having a reserve currency helps, too – as long as it remains a reserve currency.
⁶ As for the Fed knowing what to do if inflation heads well past 2%, I lived through the late 1970s and early 1980s.  The Fed may know what to do, but it was not nice – for a lot of people.
UPDATE (5/10/20 10:15 am): Added the links in footnote 1.