MMs, MMTers, Larry Summers, young tweeters, and politicians



Larry Summers sees a roughly equal chance of three outcomes: high inflation, a soft landing, and the Fed slamming on the brakes so hard that the economy falls into recession. That’s a nice prediction, as whatever happens he won’t be wrong. (I’m being sarcastic. I don’t have much better to offer, other than to look at market forecasts.)

Larry now seems viewed as some sort of old fuddy duddy, to be contrasted with hip young pundits who think worry about inflation is as old fashioned as a 70s-era disco music.

Some people associate the “What, me worry?” school with MMTers, which seems kind of strange. As far as I can tell, MMTers are the most likely to believe that inflation is caused by big deficits. If inflation is rising, then the MMTers say that tight money won’t work, as open market sales merely swap one government liability for another, without changing income. That means inflation can only be stopped by tax increases, which means that if you haven’t stopped inflation then that indicates that your budget deficit is too big. Thus in the MMT model, inflation is basically caused by excessively large budget deficits. A very crude fiscal theory of the price level.

But then maybe I’m all wrong, as trying to pin down MMTers is like playing a game of whack-a-mole (as Paul Krugman once observed.) All I know for sure is that if we get a lot of inflation then MMTers will say, “See, we told you to raise taxes”, and if we don’t, they’ll say, “See, we didn’t expect inflation.”

Meanwhile, young tweeters seem to forget the Great Inflation happened, or perhaps that it was caused by some sort of oil shock. How oil shocks cause double digit NGDP growth has never been explained. Everything we learned about unreliable Phillips Curves and shifting inflation expectations seems to have been forgotten. You simply can’t have too much stimulus.

I suppose their ignorance is understandable. If parents expertly adjust the thermostat to keep the house temperature at 71 to 73 degrees for 20 years, with a 72 degree target, can you blame the kids who grew up in that house for thinking that thermostats don’t have much impact on temps? (Let’s hope Powell knows!)

My views are orthogonal to this intra-Keynesian debate. I don’t think the fiscal stimulus is a good idea, but not because I expect much inflation. The inflation rate will be determined by the Fed. Rather it’s a reckless policy because it will lead to higher tax rates in the future and won’t do much to generate growth beyond Q3. (Deficits do cause higher interest rates, but only slightly higher in a country like the US.)

For 250 years of American history, politicians have held the peacetime budget deficit in check because of fears of either inflation or higher interest rates (or perhaps a loss of confidence in the gold standard.) What would happen if they begin to sniff out that the actual risk is not inflation or much higher interest rates next year, rather the risk is higher taxes in 20 years, after they’ve safely retired? How would they respond to this information?

I fear that we are about to find out.