For “Ask an Economist” this week, I have a question from John O. about Modern Monetary Theory (MMT). I’ve purposefully avoided MMT in the past for a few reasons. First, because it appears to be under-theorized. In other words, often when economists try to talk with MMT advocates, the advocates argue by retreating to previously unstated assumptions.
Second (relatedly), as economist Per Bylund put it: “In scholarly research, interest in MMT is limited… One reason for this is likely that MMT focuses on policy prescriptions rather than explanations… which makes it unsuitable for research.” This makes conversation about it difficult.
Regardless, I wanted to do my best to answer John’s inquiry. He says:
MMT holds that a Federally-funded, locally-administered Job Guarantee is a way to achieve full employment (everyone willing and able to work can have a job—not 96.3%, but 100%) and would also act as a price anchor, tending to dampen inflation, just as the buffer stock of unemployed workers does today, but without all the attendant miseries (crime, addiction, suicide, etc.) of unemployment.
So can we have a free lunch of 100% employment and no inflation? No. Let’s see why.
Full Employment and MMT
One of the golden calves of MMT is the idea of full employment—or 0% unemployment. As John notes, this doesn’t mean everyone has a job in MMT World (either in theory or practice). Zero unemployment just means everyone who reports himself as looking for work finds a job (instantly in this case).
The idea that we should have full employment all the time is a revolt against the idea that there will be some natural rate of unemployment due to:
1) people’s skills not matching currently available jobs, or
2) because of short-term changes of employment due to labor market frictions.
The idea of the natural rate of unemployment is that even healthy economies have people who are looking for jobs for the above two reasons.
MMT advocates deny that this is necessary. Unlike economists, they see these unemployed workers as a wasted opportunity. In the words of MMT scholar Pavlina Tcherneva: “Unemployment holds a ‘special’ status in economic theory, compared to other social deprivations. Economists do not speak of the natural rate of hunger, or the natural rate of illiteracy, or the natural rate of homelessness.”
Except, to be clear, Tcherneva is essentially wrong about this. While it’s true we don’t measure things like the natural rate of illiteracy or homelessness, economists generally recognize that bringing the rate of crime, illiteracy, or homelessness down to zero is prohibitively costly.
Page through any introductory economics textbook and you’ll likely find a quip that “the efficient amount of anything is not zero.” That includes crime. It also includes unemployment. Unemployment is not unique in that sense like the quote above implies.
Certainly we prefer people to find jobs that suit them sooner, but sometimes the cost of finding a job immediately is higher than the benefits.
MMT advocates claim to fix this with a simple solution: a government-paid jobs program. Many iterations of such a program have been proposed, but their common feature is that the government-created jobs pay enough money that unemployed workers actually want them. Sometimes a “living wage” is proposed, but we should recognize that a living wage wouldn’t be enough to entice, say, an engineer between jobs.
How would the government pay for this? Ultimately, in MMT, the answer is that the government can print money to pay. We’ll come to issues with this later.
So MMT pursues full employment as a goal and claims the guaranteed jobs program will do so while “anchoring” inflation. Why? The idea is that if people are spending a lot (because they all have good-paying jobs) there will be lots of employment and therefore no need for the government-guaranteed jobs. As a result, spending from the government will decrease (and therefore money printing will as well).
This is the sense in which MMT advocates claim the guaranteed jobs policy is checking inflation. Spending increases by the public are offset by the spending decrease by the government, so prices stay stable.
This may sound good on the surface, but it breaks down as we look a little deeper.
Employed for What?
There are two issues with this argument. First, the full employment described by MMT is not a good goal. Second, it cannot reliably temper inflation. These problems are related.
To see the issues with this system, consider what it would mean if we implemented it today. The government creates a new jobs program. Anyone who wants a good-paying job can get one and be paid in freshly printed US dollars. The new jobs created must exceed to jobs eliminated by higher taxes, otherwise we wouldn't achieve full employment.
What happens? New money enters the pockets of these workers, and they go and spend it. As they spend it, you have more money chasing the same amount of goods, meaning that you are going to have higher inflation.
One of the classic lines of MMT is that printing money does not cause inflation unless there is full employment. Our little thought experiment here shows that moving from some unemployment to full employment does indeed involve inflation. Historical precedent of events like stagflation (where the economy experienced increasing monetarily driven inflation and high unemployment) also shows that the MMT line isn’t true.
Why do MMTers say this then? Well, the logic is that as you hire people to these new government jobs, they start producing more as well. Inflation is caused by more money chasing the same number of goods. But what if we have more money chasing more goods produced by the new government jobs?
In other words, MMTers claim that while this program does increase the supply of money, that increase is offset by an increase in the supply of goods. These two cancel out, leading to no inflation. Our problem is solved. There’s no inflation because the new production of goods and services makes up for the new money-printing, and everybody has a good-paying job. With this policy everyone will get rich—and quick!
Sounds nice—doesn’t work. Here’s the problem. The government can create jobs, but jobs are not in and of themselves a good thing.
Here’s an example. Imagine the new guaranteed jobs program pays government workers to dig a hole and fill it in all day every day.
Did employment increase? Sure. Did the supply of goods and services increase? I guess if you consider a newly dug and filled-in hole a good, then yes. The problem is that this isn’t really a product that consumers want. It doesn’t make anyone better off.
If you included this good in your inflation quantification, its price would certainly fall. But since no one wants to buy the unfilled and refilled holes, it really shouldn’t be included in the inflation quantification. Since the new production was wasteful, it doesn’t lower the prices of the goods relevant to consumers. As such, inflation does not actually fall, even if some quantifications which included newly dug and refilled holes indicate that it did fall.
In other words, this new production isn’t enough to curb the inflation that matters to real people. You need the right production. This oversight is a microcosm of a larger issue with MMTers where they ignore the territory of a healthy economy in favor of the map of its quantifications.
At this point it would be fair to point out that MMTers likely have slightly better proposals for what sort of jobs to create than a program that digs holes and fills them back in. Maybe we could have the new workers make hamburgers, cars, solar panels, or some tangible goods. Would that fix the issue?
No. The whole problem is that creating jobs is an engineering problem, as the government can get more output (jobs) by simply putting in more inputs (money); creating jobs which aren't wasteful, however, is an economic problem.
Of course, if the government spends more money, it can make more jobs. But which jobs are best?
Private, for-profit business has a mechanism to solve the economic problem of which jobs are best. If a private business hires a worker whose work output is not valued sufficiently by consumers, the business will make a loss on that worker. This loss signals to the business that the job does not create sufficient value to consumers to merit the costs associated with the job (such as wages and the worker’s use of other inputs).
A government-guaranteed job, no matter how it is facilitated, does not have access to the profit and loss mechanism.
As such, there is no way to tell if the output from the job is valued sufficiently by consumers to justify the loss of that worker in another line of production. Producing hamburgers will probably create a good that consumers like more than dug and refilled holes, but the point is that insofar as consumers were not willing to pay the worker to produce the hamburgers before the government stepped in, they do not sufficiently value the hamburger to warrant its production.
In the words of Murray Rothbard, "Private enterprise can get funds only from satisfied, valuing customers and from investors guided by present and expected future profits and losses. Government gets more funds at its own whim...."
So the price of hamburgers will fall (at least in the short run) if government pays thousands of workers an unreasonable amount of money to produce an excess of hamburgers, but since consumers did not really want to pay for those hamburgers in the first place, the lower price is relatively less important.
Inflation quantifications may pick up on this increase in productivity of hamburgers and show lower inflation numbers as a statistical result, but the thing driving the “lower” inflation is a product that consumers weren’t asking for more of. Just like cheaper dug and filled-in holes don’t really improve our well-being, a glut of cheaper hamburgers doesn’t help much either.
So which jobs should be created? There is no way for the government to tell because they don’t have the profit and loss mechanism! As the economist Ludwig von Mises pointed out with respect to government central planning:
The paradox of “planning” is that [the government] cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.
To reiterate simply: MMTers say that money printing to create jobs will not create inflation because the production of new goods and services means that the larger amount of money is matched by a larger amount of goods. The problem is that the goods produced by these government-guaranteed jobs have no rational tie to the desires of consumers, and therefore any lower prices caused by increase in their supply are not meaningfully connected to inflation as it relates to the values of those consumers.
Some inflation quantifications may appear to fall with the production of these guaranteed jobs, but insofar as they do fall, this is the result of the quantification 1) not properly capturing inflation as it relates to the prices people care about and 2) random chance that even irrational planning occasionally creates a valuable job.
This failure on the part of MMT advocates to notice the difference between economic quantifications and economic health is not unique to MMT. It’s a constant mistake of central planners. Economists were convinced for decades that the Soviet Union would overtake the United States in terms of economic well-being because the macroeconomic data indicated that the Soviet Union’s production outputs were growing faster than those of the US.
Production, like job creation, is an engineering problem. More inputs mean more outputs, all else equal. The problem, though, is that not all production is production that benefits consumers (just like not all jobs are jobs that benefit consumers). In other words, the USSR was producing stuff, but it wasn’t stuff that helped benefit consumers. It was wasteful production—just like MMTers argue for wasteful jobs.
During the decades where the Soviet Union was rising in the opinion of experts, one economist boldly bucked the trend and pointed out that big production numbers were not the same as big economic well-being. The economist Murray Rothbard noted in his 1962 edition of Man, Economy, and State (well before the USSR’s collapse):
We may illustrate our analysis by noting the hullabaloo that has been raised in recent years over the supposedly enormous rate of Soviet growth. Curiously, one finds that the “growth” seems to be taking place almost exclusively in capital goods, such as iron and steel, hydroelectric dams, etc., whereas little or none of this growth ever seems to filter down to the standard of living of the average Soviet consumer. The consumer’s standard of living, however, is the be-all and end-all of the entire production process. Production makes no sense whatever except as a means to consumption. Investment in capital goods means nothing except as a necessary way station to increased consumption… There is every indication that the “pie-in-the-sky” day when living standards finally rise almost never arrives. In short, government “investment,” as we have noted above, turns out to be a peculiar form of wasteful “consumption” by government officials.
As these wasteful guaranteed jobs are created, not only do they create inflation via money creation; they actually destroy valuable inputs along the way. Most jobs do not use labor alone. A myriad of other machines and natural resources are combined with labor in production.
Government-guaranteed jobs would need these inputs as well in order for the jobs to function. These artificial jobs would then compete with productive employers for inputs necessary to create the jobs. Government burger-flipping jobs mean already-existing companies will have to compete more heavily for ovens. Oven producers wanting to create more ovens to satisfy the higher oven demand will have to compete for raw materials like metal, diverting these raw materials away from more useful lines of production. Input scarcity increases.
MMTers like to argue this isn’t an issue because we have lots of “idle” (or unemployed) inputs already. We can utilize those inputs for a free lunch. But wait a minute. If we have idle inputs all around the place, why are people constantly buying and creating new inputs?
It’s because companies “employ” the least costly unemployed inputs first. Some ovens need to be modified, cleaned, or fixed up before they are put in use. Some ovens aren’t as efficient as others. The point is that if a resource is idle, it is because it is expensive to employ. Employing idle resources is not a free lunch.
As government-guaranteed jobs that weren’t productive enough to earn a profit begin to enter the market, they compete for inputs against jobs which were productive enough to enter the market. This drives up input costs, causing private producers to lower their production. This decrease in supply is reflected in higher prices for consumers. This means more inflation in the goods consumers care about.
Labor is not the only input, so you cannot create full employment of inputs by having more jobs without regard to their productivity.
So, it might not surprise many FEE readers, but it turns out merely printing money and handing it out to people to do otherwise unprofitable jobs will not act as a bulwark against inflation.
Any government can increase the number of jobs, but creating jobs which improve the standard of living is the real issue. Many will promise they can do this, but, as Rothbard noted, the pie-in-the-sky day never seems to come.
https://fee.org/articles/breaking-down-mmt-s-guaranteed-jobs-scheme-for-fighting-inflation/
