• J.S. Mullen

MMT: a New Case for Ending the FED and Lowering Taxes

In the last several years Modern Monetary Theory, or MMT, has been thrust forth excitedly by the more progressive ranks of the Democratic Party as a wonderous, curative economic elixir. Led by Bernie Sanders and Alexandria Ocasio-Cortez, to their credit, MMT being brought to the fore has stimulated a robust discussion that has prompted the asking of many good questions. Not yet among them to my knowledge, however, are why do we still need the FED, and does this mean we should lower taxes?

For those who may be wholly unfamiliar, MMT is perhaps best explained by metaphor. Stephanie Kelton, the chief economist for Bernie Sanders’ campaign in 2016, and a leading MMT economist, has explained it in terms of a bathtub being filled up with water. The spigot is the Federal government; the water is money; the tub is the economy; and the drain is taxes. According to MMT, when the Federal government needs money it simply “turns on the water” by contacting the Treasury, which contacts the FED, which credits the Federal government’s account at the FED for that amount. The government then spends that money into the economy; to continue the metaphor, water is filling up the tub. Now there is only so much space in the economy for additional money. This is because, as we all know, more money chasing the same amount of goods causes inflation. To manage this, according to MMT, the government taxes money out of the economy as necessary – “draining the water.”

Recognition of this last point, according to its advocates, represents a serious contribution on the part of MMT theorists – that the government isn’t collecting taxes to fund programs: it’s doing it to manage inflation – when it needs money for government programs, it just turns on the spigot and runs more water into the tub.

Two things stand out. First, in the MMT conceptual framework there is no role for the FED. Having read both Warren Mosler and Stephanie Kelton’s available books and papers, the two economists most closely associated with MMT, that was what really stood out as differentiating them from the various post-Keynesian schools, from whom they are otherwise all but indistinguishable: that MMT seems to make no distinction between monetary and fiscal policy. So, if MMT is correct, why do we still need the FED?

Though slightly outside our present purview, just to illustrate how little MMT differs from post-Keynesian thinking generally, consider that MMT’s original name “Soft Money Accounting” was much more apropos – for MMT is really nothing more than a totalized conceptual framework of how post-1971 fiscal accounting and banking were done.

As for the second thing that stands out: If, as MMT proponents claim, preventing inflation is simply a matter of ensuring that productive output rises at a fairly consonant rate with the money supply – so that the same proportion of dollars are chasing the same proportion of goods and services in the future – it would seem to me, then, that all that needs to be shown is that letting individuals, businesses, and corporations spend their money how they want is more efficient in terms of ensuring total future production than the government taxing it out of existence to make way for more of its own spending…something that should be no more difficult to evidence than trips to the local Post Office and Fed Ex store. Far from suggesting we raise taxes, the MMT framework seems to suggest the opposite: So does this mean we should lower taxes, too?

I must say, if these are the fruits of MMT, then I too am ready to begin glorifying some of the wonderous, curative properties of this “new” economic elixir.

J.S. Mullen

April 2020

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