Keith —

OK, this is better.

You now say, “ The trick to avoiding inflation is to know what is possible and what is available and working toward narrowing any gap.” That is different that what you said before, which was “ The monopoly issuer of the currency can afford anything that is available and priced in dollars without incurring inflation.” Now you have added a critical condition, namely, that in order to avoid inflation, you need not only to be a monopoly issuer of currency, but you also have to “know what is possible,” that is, pay attention to real resource constraints. A big problem with MMT — the part that makes people think MMT promises a “free lunch” — is that MMTers often leave out the part about those pesky real resource constraints.

Here is another thing that is better now, but still not quite right. Now you say, “ the currency-issuing government is in a much better position to maximize the benefits of programs than is the private sector due to the irrelevance of what things cost.” That is almost right — except that “cost” is irrelevant only if you mean “cost in nominal money” rather than “opportunity cost.” Opportunity cost is still relevant because of real resource constraints. So this is a second thing that makes people think MMT promises a “free lunch” — using words like “cost” in careless ways that slide between two different meanings, and are thus easily misunderstood by the reader.

Here is what you should have said: “ the currency-issuing government is in a much better position to maximize the benefits of programs than is the private sector because it is easier for it to finance the necessary purchases.”

Let me give an health-care related example: Suppose I want to buy a therapeutic massage from you. Consider two cases:

  1. I am a sovereign government. I finance the purchase this way: I offer you $10 worth of “money” in exchange for the massage. You accept the “money” because you know that later I am going to come after you and ask you to pay “taxes,” and you know I will accept the “money” in payment of the “taxes.” You also know that if you don’t give me back the “money” when I demand the “taxes,” I will mobilize some real resources in the form of a police officer who will put handcuffs on you and lead you to jail. So it is very easy for me to “finance” the massage.
  2. I am an ordinary guy. I finance the purchase this way: I go to a “bank” and get a “loan,” which is a promise by me that I will give the bank $10 in “money” later if it gives me $10 in “money” now. (It is more convenient if I use a credit card to get the “loan” but the T-accounts are just the same.) I then use the “money” (or an equivalent electronic transfer initiated by use of the credit card) to buy the massage from you. You accept the “money” from me because you know you can use it later to pay “taxes,” etc. But why will the “bank” give me the “loan”? That is the hard part. The bank either has to know me (“trust”) or I have to offer some real resources as “collateral”. If I don’t pay, the “bank” can now get a “court” to send a policeman to seize the “collateral.”

So you are right if you say that “the government is in a better position to finance the transaction”. It is in a better position in the sense that it doesn’t have to worry about pesky things like “trust” and “collateral.”

But notice one thing: Once you say things correctly, there is no difference between what MMTers say and what ordinary economists say. Both agree that you can avoid inflation if you keep a close eye on both financial constraints and real resource constraints. And both agree that the power of taxation “puts the government in a better position” to manage the financial part of the transaction.

Written by

Economist, Senior Fellow at Niskanen Center, Yale Ph.D. Interests include environment, health care policy, social safety net, economic freedom.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store