Why Do MMT Advocates Think Inflation Can't Get Out of Control in the US?

Introduction to Modern Money Theory and Inflation Control

Modern Money Theory (MMT) advocates a unique perspective on economic policy, particularly in relation to inflation. One of the core claims of MMT is that managed government spending and taxation policies can effectively control inflation, unlike what is often perceived in traditional economic theory. This piece explores why MMT advocates hold this view and how it applies to the context of the United States.

Historical Context and Inflation Control

In the 1970s, the United States experienced high inflation, and the US Federal Reserve responded by raising interest rates, a move that led to a significant economic downturn. Following this period, the Fed has placed controlling inflation at the forefront of its objectives. 1

Despite the Fed's success in maintaining low inflation over the past four decades, the approach and methods used by the Federal Reserve are increasingly scrutinized.

MMT and the Fed’s Track Record

One of the key arguments MMT proponents make is that the Federal Reserve, with its long history of controlling inflation, will continue to do so. The past 40 years have seen the Fed navigating various economic challenges, including the 2008 financial crisis, without leading to hyperinflation. During this crisis, the Fed injected 700 billion dollars to bail out the banking sector. This move was met by widespread predictions of hyperinflation from mainstream economic experts, but MMT advocates were more measured in their response, as they had a clearer understanding of the Fed's ability to manage inflation.

MMT and Policies that Could Impact Inflation

MMT advocates recognize that certain government policies could exacerbate inflation. For instance, universal basic income (UBI) has been proposed as a policy to alleviate poverty, but MMT advocates predict that it could lead to inflation. This is because UBI would inject substantial additional money into the economy without the corresponding increase in productive capacity, potentially driving up prices.

Key Factors that Differentiate MMT from Mainstream Economics

Despite the Fed's consistent track record of controlling inflation, MMT advocates propose a different framework. They believe that governments, through policy decisions, can manage inflation more effectively by ensuring that the money supply aligns with economic demand and productive capacity. MMT argues that the government can create and destroy money as needed, provided that the economy operates at a certain level of capacity utilization. Any excess money would simply drive up prices, but this process can be managed with appropriate fiscal and monetary policies.

Conclusion

In conclusion, MMT advocates maintain that the Federal Reserve's ability to control inflation is based on its historical competence and ongoing success. When evaluated against this track record, the fear of hyperinflation in the US is misplaced. However, MMT also acknowledges that certain policies, such as UBI, could inadvertently cause inflation if not managed carefully.

Understanding the nuances of MMT and how it differs from mainstream economic theory is crucial for comprehending the complexities of modern monetary policy and inflation control in the United States.

1Note: The Federal Reserve's commitment to controlling inflation has been a consistent policy objective since the 1970s, based on the historical need to prevent economic instability and ensure price stability.