Introduction
I just finished reading Stephanie Kelton’s The Deficit Myth that was, to her own admission, meant to be an accessible reading to the general public on how fiat money works in the modern economy and what that entails regarding public finance. Dr.Kelton seems to specialize in the broader public communication of Modern Monetary Theory (MMT), appearing on Radio Lab, Planet Money, and nearly every time it’s brought up, people seem to consult her. Unfortunately, her equipping the general public seems to be rebutted as MMT is reduced to “Supply-Side Economics” by Austrian school economists and repeated in ways that make almost all economists scoff at the foolishness and “un-originalness” of the idea. Dr.Kelton seems awfully aware of the misconstrued nature of MMT as it has been read by the Economics field and qualifies concerns throughout her book regarding the limitations of “money printing” and reconstructing MMT as a framework for how governments can spend money.
What is Money Printing?
“Money Printing” is in essence the expansion of the money supply. New unique money that is not replacing old money, but adding to it. What causes this? For the most part, banks making loans. Traditional banking economics courses teach that fractional reserve banking leads to the “money multiplier effect” so that for every $100 dollars deposited in a system with a 10% reserve requirement, a bank will be able to lend 90 dollars, then 81 dollars and so on. So what its the current reserve requirement ratio? 0%, making the money multiplier approximately infinity. Obviously, fractional reserve banking is not something that is constraining the money supply, so what does? For the most part, banks remaining profitable. A bank with zero deposits, will still make loans, it’ll borrow money at the federal funds rate from other banks, or it will borrow money straight from the federal reserve. As long as a bank can say that they’ll be able to pay back the loan they take and make profit, a bank will always make a loan to a customer. This is an extremely important qualifier, a bank will only make loans it expects to be profitable and therefore, “money printing” requires banks to believe the people taking their loans will pay them back. This is what constrains the money supply. The federal reserve can raise or lower the rate banks do borrow money at and right now that rate is near 0 percent, if a bank thinks someone will pay back the principal of a loan minus the banks variable costs to make the loan, they’ll make it.
The other form of money printing that Dr.Kelton talks about is a bit different given the rights of the US government to bring authenticity to any money they want. She points to how the treasury simply marks up banks account when the government spends money rather than use taxes. Functionally, this is undeniably true. Taxes are simply wiped from existence on payment and the government uses new money to pay for things simply by typing it into existence. Dr.Kelton uses this to argue that taxes don’t pay for things, but are rather an anti-inflationary tool to soak up the effects of government money printing, and that theoretically, governments can will any amount of cash into existence that they like. The second argument here is most definitely true, the U.S. government can make as much money as it wants by nature of it being fiat, the first is more contentious. I’d argue that the first point doesn’t exactly matter. To consider taxes in a fiat system as they were when feudal lords collected shares of wheat from peasants fields is most definitely false. Fiat money has no intrinsic value, and the government most definitely doesn’t need any to pay for things when it simply wills money into existence, however, if the purposes of taxes is to redistribute capital to the public good, as its focus is meant to be in the U.S., then its function as a sponge to prevent inflation by government spending fulfills an equivalent focus. Given Dr.Kelton’s explanation, taxes most certainly aren’t necessary for things to work, but their omission would lower the spending capacity of the federal government to provide for the public good without causing inflation, both make taxes true end purpose the same, with the only difference being arguing over something that should be empirically verifiable, how much money can the government spend in excess of “tax revenue” without creating inflation.
What Causes Inflation?
Inflation most definitely is not created by expansion of the money supply (Sorry Milton Friedman) as obviously seen over the past 15 years of massive money supply expansion and low inflation rates. It’s also arguably not caused by “more dollars chasing fewer real goods”. Will Starbucks raise prices if they suddenly can’t provide enough coffee when the Nueva rich public tries to spend their Stimulus checks or will they just build another location. The capacity for real goods in the economy doesn’t seem to have a limit (ignoring the extraneous toll on the planet). Technology will improve, efficiency will improve, and resources will becoming easier to create and use as time goes on, the idea that the economy will reach full capacity where peoples wants will eclipse what a profit seeking capitalist will provide is almost incomprehensible. Before any prices are raised, someone somewhere will find a way to cut costs back to where their intrinsic costs are, preventing the lack of real goods that would cause inflation. If neither of these are main drivers of inflation, and given the consistent evidence on persistence of inflation rates, inflation not caused by actual shortages of goods in MMT’s bottlenecks, housing policy for example, it’s *probably* a phenomena of economic hysteria. Just like how market pundits try to explain random stock price moves as completely rational given some new expectation or cascading effect of a current event, economists have been explaining away inflation with plausible explanations such as aggregate demand outstripping supply, or increases in the money supply. Prices don’t need to increase year after year, but they do because we expect them too. Every business calculation, valuation, and spending metric accounts for inflation and so it becomes willed into existence. So what does constrain government financing? Peoples perceptions of how it might impact inflation?
A Measure of Preventing the Creation of Real Resources
First let’s get basics out of the way, there is absolutely utterly zero reason that anyone in America should not have food. There is a complete abundance of it, and absolutely nobody should be hungry. SNAP should be expanded to cover a healthy margin above a reasonable household food budget and expanded considerably in terms of eligibility. The same is true for education, housing, healthcare, and basic needs. This shouldn’t be political, in an effort to expand the capacity of the US economy, all of these basic human rights are most definitely drags on the productive capacity of individuals and destroy value in a country. With that out of the way, the real question becomes, what are limits on non-positive NPV government spending? I would argue that their limits are at what point they would start constraining real resources. A mining company that struggles to find workers because a government jobs program has raised the costs of the company such that mining is no longer profitable at the required wages to get workers? Most definitely value destroying and decreases the real productivity of an economy. Will that happen? Probably. Does it matter? Now that’s probably the important question here. If the economic goal is to create the most real resources and productivity, then yes it does matter. Should that be the economic goal? Absolutely not. What should it be? Probably something along the lines of maximizing happiness, fulfillment, and satisfaction among the population. How do you align those goals with a system that doers not require centralization? That’s quite difficult. People are very unaware of what will make them happy and in a non-cooperative system, aligning interests is nearly impossible. In that sense, this is the real limitation on money printing, beyond positive NPV projects, how do you decide what trade-offs are worth it in a system without a measurable quantitative goal.
