A Free Lunch for Me, but Not for Thee

An ill-reasoned take on MMT

Last week, I stumbled across an episode of a podcast that was advertised as the “Voice of Reason on MMT.” The show’s host turned to David Kelly—the Chief Global Strategist and Head of the Global Market Insights Strategy Team for J.P. Morgan Asset Management—for insight into Modern Monetary Theory. Apparently, the conversation was inspired by something Kelly had written on MMT. I searched around for something recent but was only able to find this short note from September 2020.

In the note, Kelly says things like, “MMT exploits the trust that people have in fiat currency.” The problem, he says, is that “trust in money is like trust in marital fidelity.” You know, once you lose it, it’s probably gone forever.

Kelly argues that the GOP tax cuts (December 2017) and the $2.2 trillion CARES Act (March 2020) showed that the U.S. had “already embarked on the MMT experiment.” He rightly notes that “MMT promotes the idea that budget deficits can be used to treat the problem of an insufficiency of aggregate demand.” And he acknowledges that lawmakers failed to do enough to restore aggregate demand after the 2007/08 financial crisis, slowing the recovery and “inflicting hardship on millions of workers and small business owners.”

“So long as inflation is very low,” Kelly concedes, we “shouldn’t be too scared of using expansionary fiscal or monetary policy.” Thus, inflation is the thing to watch out for, not the deficit per se. Precisely as MMT—though not J.P. Morgan—has always insisted.

As Kelly put it, “MMT starts from an empirical observation that we have had persistent government deficits for decades without any inflation.”¹ He points to the 2017 tax cuts, which added nearly $2 trillion to the deficit without sparking an inflation problem. Sending a huge windfall to those at the top of the income distribution didn’t trigger inflation because “the richest 10 percent spent just 64 percent of their after-tax income and saved the rest.” His message is that you can get away with increasing the deficit when the extra money goes to people who don’t really need it.

In contrast, when the pandemic hit, the government put money into the hands of tens of millions of people who actually did need it. The CARES Act, and the two major COVID bills that followed, provided substantial support to those in the bottom 90 percent of the income distributions.

And here’s where it gets weird. Kelly says:

There’s a sort of irony to MMT, which is that you want to achieve all this social good and presumably that means giving money to lower- and middle-income households who aren’t doing so well in the economy. The problem is that rich people, if you give them money, they will save it and it doesn’t add to inflation. Poor people, if you give them money, they will spend it and it does add to inflation. And again we’ve really seen the flaw in MMT just in the last two years. Because I know we’ve had a pandemic, which is the cause of it, but we’ve reacted by doing massively expansionary fiscal policy, giving people a lot of one-time checks. And guess what? Spending on food went up by 10 percent in real terms. Now that is a dramatic increase in food spending for a population that isn’t growing at all. But it went up by 10 percent because a lot of lower-middle income households, who were always living paycheck-to-paycheck, suddenly had and extra paycheck. The problem is that if you increase demand when you don’t have supply, you end up with higher inflation. So in some ways MMT only works if it doesn’t work—if it doesn’t achieve any of the social goals you’re trying to achieve in terms of lifting up the poorest people in the economy. It only works if it doesn’t help them. Because if it does help them, you end up with excess demand for goods and services and you end up with inflation anyway. I mean it’s a nice idea. It’s a nice aspiration.

So let’s break this down.