MMT: assume a can opener

Abstract

The key assumptions in the debate between MMTers and CMEers are about the relationship between monetary and fiscal institutions. CMEers assume the Treasury and the Fed are independent.MMTersassume either that the Fed is consolidated into the Treasury, or that, whenever the Treasury wants to spend money, the Fed adds reserves to the Treasury’s account at the Fed. MMT is also wrong at the very start in its assumption that the money supply is the instrument of monetary policy; the federal funds rates is. The fact that MMT’s assumptions are wrong means that all the conclusions that follow from them must also be wrong. For example, with respect to crowding out, not only don’t interest rates rise with an increase in government spending in MMT, they actually fall, indeed, all the way to zero! This analysis of the effect of government spending on rates is wildly off the mark. It is also not comforting that the MMT framework would have Congress accept responsibility for the current Fed mandates Nonetheless, MMT has highlighted a central policy question: whether the large spending programs called for to meet unmet social needs can be financed without adverse consequences.