It seems that modern monetary theory (MMT) doesn’t make a real distinction between monetary policy and fiscal policy. If that’s the case, then a system based on MMT has no need of a central bank.
In the last several years modern monetary theory has been thrust forth excitedly by the more progressive ranks of the Democratic Party, led by Bernie Sanders and Alexandria Ocasio-Cortez, as a wondrous, curative economic elixir. MMT being brought to the fore has stimulated a robust discussion that has prompted many good questions. Not yet among them to my knowledge, however, are: Why do we still need the Fed, and does this mean that we should lower taxes?
For those who are unfamiliar with it, MMT is perhaps best explained by metaphor. Stephanie Kelton, the chief economist for Bernie Sanders’s 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—the idea that the government isn’t collecting taxes to fund programs, but 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. Reading both Warren Mosler’s 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 which 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?
Second, if, as MMT proponents claim, preventing inflation is simply a matter of ensuring that productive output rises at a consonant rate with the increase in 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 taxing it out of existence to make way for more of its own spending. This is something that should be no more difficult to evidence than trips to the local post office and FedEx store, respectively. Far from suggesting that we raise taxes, the MMT framework seems to suggest the opposite: so does this mean we should lower taxes, too?
