The Most Powerful Woman On Earth?

John Maynard Keynes once quipped, “Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.”

If that’s true then there is no more powerful woman on earth right now than Stephanie Kelton and her cohort of Modern Monetary Theory economists that are destroying the ideas of classical economics that have been with for centuries.

MMT replaces fake constraint of deficit with real constraint of inflation

The foundational principle of MMT is that government budgets are not like individual or private entity budgets because the sovereign enjoys the privilege of seigniorage or printing money. The government can therefore spend money first and then raise revenue later either though monetization by the central bank or through taxation.  As Kelton  succinctly puts it, “MMT replaces the fake constraint of deficit with the real constraint of inflation.”     

Furthermore, the risk of inflation from pure monetization of debt is often grossly overestimated by neo-classical economists as has been amply demonstrated over the past decade when several major world economies such as US and Japan have engaged in gargantuan monetization schemes without any discernible uptick in inflation despite the Cassandra warning of all the mainstream economists.

The abject failure of neo-classical economics

Indeed, the abject failure of neo-classical economics has been so massive that one can make a perfectly legitimate argument that policymakers would have been better off listening to palm readers on the street than to all the vaunted adherents of utopian economics and the rationalist school of thought. As John Cassidy’s seminal work on the Global Financial Crisis entitled How Markets Fail, showed the neoclassical economists  were first woefully wrong in defending the laissez-faire practices of the financial markets that created two massive investment manias and the worst economic recessions since the Great Depression and then were  even more glaringly wrong in their insistence on austerity which only unnecessarily prolonged the economic slump.

This is where Ms. Kelton and the MMT school of economic thought  have really won the debate on economics. By destroying the incorrect economic model of “sound money and sound budget management” – which again seems utterly intuitive  on the individual level, but is false at the sovereign level- they have opened up the possibility for greater stimulus on the part of the fiscal authorities 

MMT is descriptive not prescriptive

Ms. Kelton is careful to note that MMT is a descriptive rather than prescriptive model of the economy. It does not necessarily favor one type of stimulus over the other (government spending vs. tax cuts) but rather simply notes that stimulus in and of itself will not be inflationary if there is ample slack in the economy.  She wryly points out that many mainstream economists warned of a never ending future of privation after the Trump tax cuts were enacted that would not allow policymakers to enact any additional stimulus as a result, and yet less than two years later the US government engaged in two massive multi-trillion dollar stimulus packages utterly unhampered by any financial restraints.

MMT’s primary value in economics has been to open the debate for more fiscal action. The false deficit spending constraint of neo-classical economics resulted in the overreliance of central bank intervention in the economy. The monetary stimulus has been weak at best simply because the central bank by its very essence can only lend and not spend – thus limiting the multiplier effect in the economy while grossly skewing most of the stimulus benefits towards the asset holders. MMT believes that a proper balance between central bank monetization and fiscal expansion would offer the best policy prescription for full employment and stable prices.

MMT success will depend on economic growth

As Ms. Kelton is first to note the key constraint of the MMT model is runaway inflation which diminishes the sovereign’s ability to monetize  debt via central bank balances and MMT’s success going forward will depend on just how much growth MMT policies will generate relative to inflation. If the fiscal spend pushes real growth above 3% – something that has occurred just three times this century then higher nominal inflation will be a small price to pay for much better economic performance but if the economy fails to lift off, there will be no doubt that all the disgraced neo-classical economists will come after MMT with a vengeance.