Doug Henwood has a problem with MMT: He just doesn’t know what it is

Doug Henwood has problems with modern money theory (MMT):

“The major problems at the fiscal level are what we spend money on and what we don’t. If anything, we’re closer to terminal now than we were fifty years ago, when Martin Luther King Jr said, “a nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.”

More broadly, we have a private economy driven by exploitation, overwork, asset stripping, and ecological destruction. MMT has little or nothing on offer to fight any of this. The job guarantee is a contribution, though a flawed one, and it’s not at the core of the theory, which proceeds from the keystroke fantasy. That fantasy looks like a weak response to decades of anti-tax mania coming from the Right, which has left many liberals looking for an easy way out. It would be sad to see the socialist left, which looks stronger than it has in decades, fall for this snake oil. It’s a phantasm, a late-imperial fever dream, not a serious economic policy.”

That is the conclusion to Henwood’s recent essay for Jacobin, Modern Monetary Theory Isn’t Helping, but it isn’t his real problem.

Doug Henwood’s real problem with MMT is that he doesn’t even know what his real problem with MMT is.

MMT as a policy tool

As a policy tool, Henwood doesn’t seem to be very satisfied with modern money theory. In fact, to be honest, Henwood calls economic policy itself into question. As he argues, policy has the defect that it is not always clear what, exactly, the state should be doing to manage capitalism. Sometimes, it’s not even obvious what policy should do, when, for instance, both unemployment and inflation are raging — as it was in the 1970s — or you have what looks like historically low unemployment with borderline deflation — as has been happening at least since 2002.

The problem with state economic policy is that it often takes time to understand what’s going on in the economy, and it takes even more time to change policy. Add to this the fact that the primary tools of economic policy are fairly blunt instruments: fiscal policy can’t easily be fine-tuned and central banks are not as completely in control of interest rates as they would like us all to believe.

Beyond the problem of identifying the correct policy and implementing it, MMT requires a nation be a monetary sovereign. As bizarre as this sounds, there are not a lot of countries who are actually in control of their monetary policy. It is likely that the only true monetary sovereign — able to issue bonds solely in its own currency — in the world market today is the United States. By and large, MMT has little to say to countries that are not monetary sovereigns and who, therefore, have to borrow in the currency of another country. This peculiarity of the theory is not address by its proponents.

Finally, MMT has little or nothing to say about the relation between state economic policy and the so-called real economy. In some cases this is because the advocates of MMT just choose to be vague about certain things — like whether the government need worry about deficits at all and whether debt-holders pose a threat. In other cases there seems to be legal or other obstacles to MMT suggestions — like the Fed directly purchasing bonds issued by the Treasury.

The biggest problem, however, is hyperinflation, always lurking in the shadows of economic policy like the ultimate zombie apocalypse.

Does dollar printing cause inflation?

Henwood argues that printing money runs the risk of spiraling prices. Since wages typically lag behind price changes, inflation can lead to real declines in living standards of the working class. Moreover, inflation is politically destabilizing and has historically fed into the rise of Right-wing nationalist governments. At a minimum, once set loose in the economy, inflation can only be halted with severe austerity.

To make his case on the link between MMT and inflation, Henwood seems to rely on some variant of the long discredited quantity theory of money (QTM). In this, he is not alone: this view is held by no less an authority than Ben Bernanke, former head of the Federal Reserve Bank, who, in 2002, wrote that the Fed could cure deflation by printing dollars:

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. (Bernanke, Deflation: Making Sure “It” Doesn’t Happen Here)

In case you missed the import of the statement above by the former head of the Federal Reserve Bank, pretty much as MMT argues, Ben Bernanke admitted that the US government has the ability to create unlimited quantities of dollars. It can use this capacity to reduce the value represented by those dollars and thus drive up prices of goods and service — i.e., to stoke inflation. In Bernanke’s view, this was not a defect of state issued debased (value-less) fiat tokens, but a weapon in the hands of a “determined government.”

Thus, for almost two decades, Washington has been working under the assumption it can create inflation by printing dollars. This assumption is based on complete acceptance of the core argument of MMT that it is a monetary sovereign who can, as a result, create its currency in any quantity it finds necessary to get the job done. (In this case, to fight deflation.)

Such inflation, Henwood tells us, can lead to the real decline in the living standards of the working class, because ‘wages typically lag behind price changes.’ Moreover, printing dollars this way is politically reinforcing in that it has historically fed into the rise of Right-wing nationalist governments.

Like that of Donald Trump.