On My Mind: Modern Magical Thinking

In economic (and political) circles, “Modern Monetary Theory” has gotten some buzz of late. What does it mean—and does it have any merit? Franklin Templeton Fixed Income Chief Investment Officer Sonal Desai thinks it’s not only potentially dangerous, but offers intellectual fuel for populism

Last week at Stanford University, I watched Professor Mark Duggan reluctantly ask US Federal Reserve (Fed) Chairman Jay Powell his view on Modern Monetary Theory (MMT). MMT has attracted scathing criticism from an array of heavy hitters, including former US Treasury Secretary Larry Summers, former International Monetary Fund (IMF) Chief Economist Ken Rogoff, Nobel Laureate Paul Krugman and Stanford’s John Cochrane. It’s become an unavoidable topic of discussion. Plus, anything that unites economists as far apart on the spectrum as Cochrane, Summers and Krugman deserves attention. So here we go.

If you are tempted to learn more about MMT, be warned: there’s a deep rabbit hole of books and articles, and even Powell admitted that it’s hard to pin down exactly what MMT says. The New Economic Perspectives website offers a primer, but it runs 52 blogs long. Stephanie Kelton, a leading proponent, provides a clearer and concise summary in a recent CNBC video. (She is a professor of economics at Stony Brook University and was an advisor to Bernie Sanders’ 2016 presidential campaign.)

I think of MMT as a shape-shifter; it presents itself as a set of sensible principles, then morphs into dangerous policy ideas—which is why so many prominent economists now sound alarmed, rather than dismissive.

The basic tenets of MMT are that (1) the government has a monopoly over the issuance of national currency; (2) unlike households or companies, the government does not have a budget constraint; it can never run out of money to spend because it can print money; and (3) the only limit to the government’s spending power kicks in when it generates excessive inflation.