Over the last several months, Modern Monetary Theory—MMT—has become the progressive left’s latest policy darling, notwithstanding withering criticism from the center (Larry Summers) and the right (from figures too numerous to count). The basic idea of MMT is that the government should finance big, bold spending plans by supplying itself with currency, of which it is the monopoly producer. If inflation gets out of hand as a consequence, the solution is to raise tax rates to mop up the excess dollars that are causing the inflation.
Professor Paul A. Samuelson, as he geared up to proffer MMT. (AP Photo/Reportagebild) photocredit: ASSOCIATED PRESS
Per MMT, economic growth comes through major government spending—as much of it as possible directed toward forward-thinking projects such as those addressing climate change and inequality. The classic side-effect of freewheeling money creation—price inflation—has no purchase, since it gets canceled on the implementation of the standby tax-increase authority. A Gordian Knot is cut: the government arranges for an inflation-free boom, of an enlightened variety, by greatly expanding its reach in both monetary and fiscal policy.
Nathan Lewis has asked the question of why the term “modern,” given that there are plenty of examples since ancient times of authorities practicing and rationalizing policies along these lines. This is a pointer to a further issue that has not been made clear in the recent discussions. This is that MMT has existed per se for quite some time, about seventy-five years, since the 1940s. Necessarily, over that span, it was subject to the heat of debate across economics. It did poorly in the court of peer review and policy judgment and therefore went moribund. A major reason MMT is arising now again is that its experience of acute argumentative and practical failure, which dates from some forty to sixty years ago, has been forgotten.
In the 1950s, the two primer inter pares of Keynesian economics, Paul Samuelson and James Tobin, outlined what they chose to call the “neo-classical synthesis,” which recommended among the four possibilities of the loose/tight fiscal-monetary policy matrix, loose money and high tax rates. As Tobin and a colleague reflected in the 1980s, “we saw the desirability of policy mixes that emphasized private and public investment in the future, relative to current consumption. These mixes would usually entail low interest rates and tight government budgets.” Those budgets were to be tight by virtue of their tax receipts, in that the spending side had to be large in order to accommodate “public investment in the future.”
Such was MMT in bloom, intellectually, in the 1950s. In 1960, Tobin spelled it out beyond any question in a New Republic column called “Growth Through Taxation.” Tobin wrote with admirable, if appalling candor in the following extended passage:
“Here are some major constituents of a program for growth:
“Increased expenditure by federal, state, and local governments for education, basic and applied research, urban redevelopment, resource conservation and development [cf. today’s Green New Deal]….Federal Reserve and Treasury Policy to create and maintain ‘easy money’….If these measures [inclusive of an investment tax credit] were adopted, a reduction in the basic corporate income tax rate [then at 52%], advocated by many as essential to growth, would be neither necessary or equitable. Indeed the strength of these measures might be greater if the rate were increased….