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Was MMT influential?

Summary:
I often see people claim that Modern Monetary Theory is increasingly influential.  I see no evidence for that claim. One problem is that people use the term MMT is two very different ways.  In some cases, MMT refers to a theory of how the monetary system works. It’s a model. In another context, MMT refers to a bundle of policies such as combined fiscal/monetary stimulus, the belief that Congress (not the Fed) should control inflation, job guarantees, a “Green New Deal”, etc.  As an analogy, the term ‘monetarism‘ originally described the views of people like Milton Friedman on monetary policy.  But during the Thatcher years, I often saw people use that term to describe a pro-free market ideology.  Those are two very different definitions. The monetary model version

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I often see people claim that Modern Monetary Theory is increasingly influential.  I see no evidence for that claim.

One problem is that people use the term MMT is two very different ways.  In some cases, MMT refers to a theory of how the monetary system works. It’s a model. In another context, MMT refers to a bundle of policies such as combined fiscal/monetary stimulus, the belief that Congress (not the Fed) should control inflation, job guarantees, a “Green New Deal”, etc.  As an analogy, the term ‘monetarism‘ originally described the views of people like Milton Friedman on monetary policy.  But during the Thatcher years, I often saw people use that term to describe a pro-free market ideology.  Those are two very different definitions.

The monetary model version of MMT has virtually no support among influential economists, on either the right or the left.  The right is almost unanimously opposed, and on the left the supporters are primarily little known economists at smaller schools.  That doesn’t mean MMT is wrong (I’m a little known economist who taught at a smaller school), but it does suggest that MMT is not influential.  People like Larry Summers, Paul Krugman, Janet Yellen, Greg Mankiw, etc., tend to be highly skeptical of MMT.

One problem is that the MMT theoretical model is pretty incoherent.  Unlike most economists, I spent many hours reading a major MMT textbook, and I saw almost nothing in the model that would appeal to mainstream economists.  (See here and here.) Consider the following thought experiment.  In 1998 (when the economy is booming), the Fed suddenly does a big enough open market purchases to cut interest rates from 5% to 0%.  The MMT model implies that this has almost no impact on the economy, as you are just swapping one government liability (base money) for another (T-bills). Mainstream economists will never accept a model that produces that sort of implausible claim.

A slightly more plausible case can be made for MMT having boosted the case for combined fiscal/monetary stimulus.  But even here, I don’t see much support for the claim of influence.  In 1999, Ben Bernanke recommended this policy to the Japanese.  Paul Krugman has discussed this option.  Indeed, when the economy is at the zero lower bound, combined fiscal/monetary stimulus is a fairly mainstream policy recommendation.

MMT is almost universally viewed as a left-wing theory.  In that case, what should we make of the policy views of Donald Trump?  He presided over what was at the time perhaps the most recklessly expansionary fiscal policy in US history, which dramatically boosted the size of the budget deficit when the economy was already booming (in 2019).  In addition, he appointed Jay Powell to be chair of the Fed, and then complained that Powell’s policies were not expansionary enough.  And yet I hardly ever see people claim that Trump was an MMTer, instead they warn of MMT influence within the Biden administration.  But if MMT is to be defined as combined fiscal/monetary stimulus, then why wasn’t President Trump an MMTer?

In the end, the false perception of MMT influence comes from lazy reasoning.  Real interest rates on government debt have been trending downward for 40 years.  Not surprisingly, governments have responded by increasing their borrowing, and economists have raised their estimates of the maximum safe level of debt as a share of GDP.  That’s just an empirical judgment, it has nothing to do with the acceptance of a radically different model of monetary economics.

Now that inflation has become the number one problem, MMT seems to have faded away.  All of the focus is on what the Fed will do to bring inflation back to 2%, or lower.  But in the MMT model the Fed has no ability to control inflation; only Congress can do so (with tax increases or spending cuts.)  So the renewed focus on the Fed’s need to control inflation is an indication that MMT never seriously challenged mainstream economics.  It was just a fad, like the brief mania for price controls during the 1970s.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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