Was MMT Wrong About Inflation? | Stephanie Kelton (The Deficit Myth)
Feb 13, 2024
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Stephanie Kelton, Professor discussing the relevance of Modern Monetary Theory (MMT) and the role of government in controlling inflation. They cover topics such as the impact of government spending on inflation, the role of central banks, the Deficit Myth in the COVID era, involvement in political administrations, understanding inflation and fiscal policy, government budgeting during COVID, and the role of government and central banks in fighting inflation.
Inflation spike caused by supply chain disruptions and global factors, not solely government spending.
Interest rate hikes have complex effects on inflation, interacting with various economic factors.
Governments should prioritize building productive capacity and investing in infrastructure to support increased spending, rather than relying solely on central banks to manage inflation.
Deep dives
Is Modern Monetary Theory Still Relevant?
Modern monetary theory (MMT), which gained popularity in 2020, suggested that the deficit should not be a concern as long as government spending does not cause inflation. However, the rapid rise in inflation following Joe Biden's COVID stimulus package led to questions about the relevance of MMT. In an interview with Professor Stephanie Kelton, the author of 'The Deficit Myth,' the discussion centered on the relevance of her book and whether MMT still applies outside the United States. It was concluded that inflation occurred due to supply chain disruptions, global factors, and pent-up demand from the pandemic, rather than solely government spending. The debate also addressed the impact of interest rate hikes and the possibility that they may have contributed to inflation. Overall, the interview shed light on the complex factors influencing inflation and the ongoing relevance of MMT.
The Role of Supply Shocks in Inflation
The inflation spike experienced in the United States and other countries was primarily driven by supply chain disruptions and the shift in consumer demand during the pandemic. As people stayed home and relied on online shopping, the demand for goods surged, putting pressure on supply chains already strained due to the pandemic. Furthermore, factors like global supply chain disruptions, the war in Ukraine, and inflation in food and energy prices contributed to inflationary pressures. While government spending played a role in increasing demand, studies suggest that the supply side factors were more significant. As supply chains stabilize and the global economy recovers, inflation has started to decrease.
The Impact of Interest Rate Hikes on Inflation
The debate surrounding interest rate hikes and their impact on inflation is complex. While higher interest rates can discourage borrowing and spending, they also lead to increased interest income for bondholders and savers. This additional income has the potential to stimulate consumer spending, offsetting the decrease in borrowing. The effects of interest rate hikes on inflation are not straightforward, as they interact with various economic factors. It is important to consider other channels, such as supply shocks, fiscal policy, and different segments of the economy. The consensus is that the recent decline in inflation can mainly be attributed to the normalization of supply chains and the abatement of supply side pressures, rather than interest rate hikes.
Government budgeting during and post-COVID
During the COVID pandemic, many countries broke away from traditional thinking about government budgeting and ran massive deficits. However, as the crisis subsides, there is still a push for fiscal rules and balanced budgets. The author argues that governments need to recognize the importance of building productive capacity and investing in infrastructure to support increased spending, rather than solely relying on central banks to manage inflation.
Inflation targeting and supply constraints
The book explores the relationship between deficits and inflation, challenging the focus on deficit levels as a measure of fiscal responsibility. Instead, the author emphasizes the need to assess inflationary pressures and supply constraints. They argue for a more sophisticated approach to inflation targeting, involving input from agencies such as the Congressional Budget Office, to assess the impact of large-scale spending programs on productive capacity and to make responsible decisions. This approach aligns with the notion of 'modern supply-side economics,' recognizing the importance of building resilience and managing capacity to address inflation and supply shocks.
I talked to professor Stephanie Kelton about whether or not Modern Monetary Theory (MMT) is still relevant today; how well her book the Deficit Myth is holding up, what caused the inflation spike, whether central banks are the ones driving inflation down, what the role of the government should be in controlling inflation, and how MMT applies to non-reserve currency countries like the UK.
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