How Far Can We Push Fiscal Spending in Light of MMT? Some Optimistic Reflections on the Potential For Economic Experimentation

Yves here. It’s remarkable how deeply internalized fear of generating “too much” inflation and/or “too much” in the way of Federal debt impedes rational discussion of MMT. For starters, deficit scaremongers refuse to acknowledge that operationally, there’s no need to fund Federal spending with bond issuance, which is a holdover from gold standard days. The Federal government can simply net spend. But MMT critics regularly refuse to consider that idea.

Philip Pilkington is trying to push debate into a more productive direction by estimating how much larger the US Federal deficit could be before self-reinforcing (as in accelerating) inflation kicked in. Before you balk at the idea that inflation of 4.9% is unacceptably high, consider that what makes inflation nasty is failure of wages and interest income to keep pace. If pay setting and investor expectations saw higher interest rates as sustainable, there’s no reason that workers should be net worse off than now, and they are likely to be better off with the economy running in a higher gear.

We’ve had policy interest rates set below the rate of inflation by design since the crisis, which has hurt savers and retirees and encouraged investors to walk on the wild side, encouraging speculation and over-commitment to high-risk strategies like private equity.

By Philip Pilkington, a research analyst working in investment management and focusing on macroeconomic research. Originally published at Fixing the Economists

Readers are probably aware that there is quite a lot of discussion of Modern Monetary Theory (MMT) and the potential for fiscal experimentation batting around at the moment. Others have weighed in on this already, and I have little to add.

It is striking, however, that most of the push-back — where there is push-back — is not focused on trying to discredit the idea that we should engage in fiscal experimentation. Indeed, the notion that we should engage in fiscal experimentation seems to be, if not mainstream, at the very least part of the discussion.

Yet, vulgar strawman-style arguments against MMT aside, no one seriously disputes the fact that if too much fiscal expansion is undertaken the economy will eventually hit a hard inflation barrier, past which any increase in spending will generate inflation rather than real output expansion. Interestingly, no one seems to have tried to come up with a new framework for estimating where this inflation barrier might be and whether it is too risky to overshoot it.

So, I’ve decided to fill that gap. Linked below is a paper where I use a new capacity utilisation-based framework to provide hard, yet optimistic numbers of how far we might push the economy in the spirit of fiscal experimentation.

I find that we could probably safely increase the current US fiscal deficit by around 5% of GDP structurally — that is, from the current level of around 3.8% of GDP to around 8.8%. This would give rise to annual real GDP growth of around 6% and a once-off shot of inflation that would drive the annual growth in CPI to around 4.9%. As I say in the paper, this would then lower the private debt-to-GDP ratio from around 200% of GDP to around 190%.

I argue that, based on a new framework I’ve developed for measuring the likelihood of sustained, runaway inflation that I call the Worker Bargaining Index (WBI), it is highly unlikely that a sustained inflation will result.

That said, after undertaking such an experiment, we would be wise to watch whether sustained, overly high nominal wage growth results and if so take action. Given the current institutional arrangement, tight monetary policy would probably be the best response but it would also be possible to tighten the fiscal stance. So long as nominal wage growth merely kept pace with the new 4.9% rate of inflation and did not greatly outstrip it, the economy should be safe from a wage-price spiral.

Here is a link to the paper:

How Far Can We Push This Thing?

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38 comments

  1. LyonNightroad

    It’s a simplistic model but when I think about inflation I think of it as a wealth tax. The less we tax income, relative to ‘spending’, the more we tax wealth. We hardly ever dare tax wealth in this country. I think it’s pretty exciting that we can implement a wealth tax by simply taxing less than we ‘spend’.

    Obviously there is a limit to this, but we haven’t even begun to find it.

    Reply
    1. Templar555510

      You’re spot-on here. This was pretty much the position throughout the fifties and sixties. Hence Bernie and co. in the US and Jeremy and co. in the UK are frightening the horses. The problem over the last few decades is that the super-rich have had their wealth protected at the expense of everyone else. The ruse that we should all ride on the coat-tails of these ‘ wealth creators ‘ has now evaporated and they know it, and they know that we know it. It’s all up for grabs as we used to say.

      Reply
  2. eg

    Left out of the hysteria about inflation (despite its general absence) is any recognition of the devastating socio-economic effects of un-and-underemployment and labour wastage, not to mention the parlous state of infrastructure investment (both human and material).

    It puts me in mind of the Twain quote from “A Connecticut Yankee in King Arthur’s Court” about the horrors of the French Revolution:

    “THERE were two “Reigns of Terror,” if we would but remember it and consider it; the one wrought murder in hot passion, the other in heartless cold blood; the one lasted mere months, the other had lasted a thousand years; the one inflicted death upon ten thousand persons, the other upon a hundred millions; but our shudders are all for the “horrors” of the minor Terror, the momentary Terror, so to speak; whereas, what is the horror of swift death by the axe, compared with lifelong death from hunger, cold, insult, cruelty, and heart-break? What is swift death by lightning compared with death by slow fire at the stake? A city cemetery could contain the coffins filled by that brief Terror which we have all been so diligently taught to shiver at and mourn over; but all France could hardly contain the coffins filled by that older and real Terror—that unspeakably bitter and awful Terror which none of us has been taught to see in its vastness or pity as it deserves.”

    Reply
  3. Jef

    MMT is always careful to make the point that spending must be tied directly to physical resources which keeps it planted firmly in the real economy. IMO any and all economic activity generates a waste stream that pretty much all economic thought either underweighs or dismisses it entirely which is how we got into this mess.

    Virtually everything we produce generates a wastestream but then also becomes garbage itself. This simple fact along with resource availability should be the determinant for money creation.

    Reply
      1. Susan the other`

        this is a good point. externalized costs seem to be happening at an accelerated rate, no? and certainly it has something to do with the fact that “capitalism cannot not grow” and so externalizing costs makes it possible for capitalism to hang on when revenue dries up. So part of the overall solution must include addressing all these artful dodges.

        Reply
    1. beth

      I wonder how we estimate what we are already spending on war so that we can then calculate how much we can spend before inflation. Does anyone know how much we actually spend?

      Reply
    2. kiers

      Think of the “TV News” industry in entirety……a highly remunerated waste stream, despite being a “service” business!

      Reply
  4. Joe Chamberlin

    My first foray into understanding our monetary system was William Greider’s Secrets of the Temple, his history of the Federal Reserve and the century-long battle pre-1913 to establish a national bank. The most powerful take-away for me was that it was banks and the wealthy who were the primary victims of inflation during the stagflation 1970’s. In other words people and institutions where much of their wealth was derived from paper (creditors), where inflation ate up the fixed-rate gains they were earning. Since wages more or less kept pace with inflation workers were agnostic to rising prices (maybe except for gasoline?). And if you were a worker & a homeowner even better (debtors): if you had a 3% fixed mortgage, inflation made your debt cheaper to pay. I only read his blog post and not his paper, but it seems like this is along the lines of what Pilkington is saying.

    Freely admit I’m not an expert so I’ll appreciate any corrections the commentariat might make.

    Reply
    1. Deplorado

      IF wages rise, all is good. But why should that be the case?
      I lived through the runaway inflation and stagflation (yes that term was used) in the 90ies in Bulgaria. Ordinary people, who were savers and wage earners, were crushed. Creamed . Like wiped out to 0 and their children (me) emigrated in dire desperation. This of course coincided with privatization and restitution – so people who had ample access to business credit or hard currency, and owned real estate and means of production emerged immensely more powerful and were able to gorge up on run down state enterprises and other people’s homes, forever changing the structure of society.

      The only things that’s saved the common people as much as it did was home ownership, which was around 85-90%, and allowed people of multiple generations to survive together, and free for children and generally inexpensive healthcare, and still practically free education.

      So, given this anecdote, what makes anyone think that inflation is likely to be good for the common person and less so for the ownership class?

      One good example of mmt + inflation is Turkey, which appears to have had both high growth and inflation in recent years. Ive heard from a Turk who owns a small thriving business in Istanbul that he loves inflation, because he was able to pay off his mortgage in a few years. So that’s good. But the regular workers – I don’t know. Recently Erdogan authorized fiscal stimulus as direct payments to people’s credit card account balances. That probably tells you how well the population was really doing on the whole under an inflation regime.

      I haven’t read the paper (will try) so this is more a comment on the reader comments.
      But, while I’m not an economist, I think asking where the inflation boundary is a super important question. But again, answering it only through the tunnel vision of economic models instead of looking at empirical evidence from other counties and considering the capacity or labor and capital to deal with inflation is may easily lead to policy recommendations that will bring ruin to the economically vulnerable population.

      Reply
          1. deplorado

            In the 90ies in Bulgaria, most retirement benefits for people retiring in 1998-2001 were reduced to the equivalent for minimum wage earners – because there was a minimum wage floor to which all salaries ended up being reduced after a while, as employers definitely did not want to keep up with inflation on their labor cost. This would be like, if you expected a social security monthly payment of say, $2000, you only got like $600. And basically all service level jobs and many professional jobs – like teachers, nurses, technicians working for shops, accountants, like my mother – tended and got stuck to the minimum wage and and people started getting nothing after decades on the job, and got even less in retirement.

            Don’t get me wrong, I am all for MMT-supported fiscal policies and love the idea that discourse and practice may be finally liberated from the chains of gold standard legacy, but without a strategic systemic approach — and probably deep reaching systemic (trade, labor, business, education, culture if you will) changes and ajustments – to strengthen the job profile for the whole economy over time, setting a minimum wage while inflation is raging does little to assuage my fears that the usual winners will be rewarded even more, should high inflation start flaming across all sectors in the economy.

            And without the familial connections and high home ownership, and universal healthcare, and free education, the US population is even more vulnerable. But their debts may be wiped… OK.

            So beware – this is playing with fire.

            Reply
        1. deplorado

          Karen – started reading your article, thank you so much.
          Very well said, I think it sums up the problem perfectly.

          “For MMT advocates, the question is this: can monetary policy deliver only “good inflation” that raises wages but not prices? Or raises wages and not asset prices? My economics training started with a focus on poor countries, where inflation was viewed as extremely bad, because wages tended NOT to rise as fast as prices–and rising inflation typically led to political instability.
          [. . .]
          What makes anyone think that our inegalitarian economy would produce a better result simply by printing money? Without structural changes to address the declining labor share of GDP, MMT is likely to boost prices faster than wages. That might help with debt resolution, but could aggravate the widening social divide.”

          Reply
            1. rob

              oh really,
              so “printing money” which is generally meant that with our fiat currency we have now is a term used to denote the actual small percentage of the money supply that is “on paper”, ALONG with the DIGITAL EQUIVALENT of the “money” created out of nothing, by an accounting function; is not a major aspect of MMT?
              If that were true, what would MMT do to pay the debts created by even more reckless spending taken on by the congress? If the interest rates were higher and even more debt obligations were created to balance out the MMT fantasy of ” debt being paid by encouraging more debt.”.
              What would be the MMT prescription for that eventuality?
              Are you suggesting that just by making balance sheet adjustments , no money need be created?… And how does that really square with the reality that most money is created by banks when they make loans, in the digital and paper realm?

              Reply
              1. skippy

                If you take the time to read more in depth MMT you would understand the issues with the printing meme and results are political in nature and not intrinsic.

                Printing is a term used to forward a vision of – reckless government – furiously printing money in some basement. Its not hard to pin the tail on the group that creates such memes to fill the unwasheds heads with and why.

                Reply
                1. rob

                  sorry to break it to you, but I have seen the depths of MMT. It isn’t from a lack of understanding of the message, that I do not agree with the story.
                  The simple fact is, Creating money, as a sovereign nation has the right to do, IS “printing money”… in all of its forms and associations…..
                  And this country SHould be “printing money”…
                  my problem isn’t with the fact that a country like the US, can “print money”.if it were to enact new legislation to do so, and repeal the federal reserve act, which allows a private contractor to carry out this function for an otherwise sovereign nation like ours. It is the falsehood being espoused by MMT that we already do print our own money….. And this arrangement for the bankers, is the reason why MMT is so subversive.

                  and as far as who you may mean as to who equates what with a reckless government, I do not know, or care…. fools are foolish.. so what has that to do with the actual points of fact?

                  Reply
          1. David Swan

            Failure to factor in the impact of FULL EMPLOYMENT naturally leaves one wondering where the wage increases will come from.

            Reply
      1. Wukchumni

        A taxi ride from the airport to Istanbul was around 50 million Lira in 2002. It sounds impressive, but was only around $30 U.S.

        They chopped off 6 zeroes from the currency in 2005, 1 million Lira now equaling 1 New Lira.

        Turkey was just another country with hyperinflation that few know about today.

        Reply
  5. Susan the other`

    This was written for those of us who barely understand slope and regression. And toward the end I got confused about the implications for unemployment. So I failed to follow this beyond understanding that inflation does not take off as long as there is capacity to grow. NAIRU doesn’t make much sense anymore. Nice to know somebody has done the statistics to prove that there is room for a 5% increase in our current fiscal deficit and the GDP will grow faster than the CPI by 1% and the private debt to GDP ratio will decrease by 5%. That sounds like 6s. Everything in balance. So at a minimum it is safe to do some MMT experimenting using these estimates. No excuse to put it off really. One thing about labor and MMT: (Mosler) looks at it as if it were a resource that could become “scarce” like lumber or some raw material. When it is more like a counterbalance. In that full employment should actually keep the economy going (Kelton). And in the actual implementation of MMT and fiscal spending the difference between these two views can be gradually determined. Nice. (I wish I had more tolerance for statistics – but I can see this is very useful information.)

    Reply
  6. PlutoniumKun

    Good to see Philip Pilkington back writing here again.

    I suspect that a similar analysis of the Eurozone would show even more spare capacity for an MMT approach, although I suspect that politically the EU is far behind the curve in adapting a more MMT (or even just an old fashioned Keynesian) approach. We can just hope that with a more left wing oriented government strengthened in Spain then maybe we’ll see some changes.

    A point about inflation – its often forgotten that inflation has one very important positive feature – it flushes out debt, especially mortgage debt. I can remember after my parents death going through their accounts and marvelling at how tiny their mortgage was for the large nice house I grew up in – bought in the 1960’s, with the mortgage value pretty much wiped out by 1970’s inflation, which had at least that one benefit. The contrast with people I know (including myself), still trying to get 2 decade old mortgages paid off was very enlightening.

    Reply
    1. Susan the other`

      Inflation amortizing a mortgage is a classic example of how excess private debt is intolerable to an unbalanced economy. The move to financialize everything over the last 30 years, while imposing totally ineffective fiscal austerity, is something that manages to avoid blame in all these statistics. Someone should point out that in balancing the economy going forward, private debt should not still be required to pick up any slack. It’ll screw everything up all over again if there is too much financialization going on. Too much nickel & dime crapification.

      Reply
      1. skippy

        I thought the divergence of wages and productivity followed by the -2% credit underwriting solution w/ fee padding and cottage tax haven industry, all whilst the unwashed get the MSM Red Dwarf “Psirens” treatment – a boon to the billionaire multiplier.

        Whats not to like ?????

        I mean historically the trades were called the mysteries, why not the machinations of orthodox economics ….

        Reply
  7. Odysseus

    So there are several different critiques that immediately present themselves, at different levels of economic thought.

    1) The World Is Not Flat. Wages are not the same globally. International trade has been focused for decades on lowering wages in first world economies and moving those jobs to nations where the wages are lower. Any consideration of MMT must confront this kind of global leveling dynamic and motivation. You can’t just hand wave and say “people will create jobs”.

    2) People don’t necessarily know what they want or need. Plenty of ink has been spilled over coal miners losing their jobs, but when retraining funds are made available, they go unused. People pine for “the good old days” when they had a job that paid X rather than doing the work needed today which pays Y. The flip side of this is that corporations are changing rapidly. Facebook didn’t even exist 20 years ago. Who got trained to create that platform? Even MMT can’t make people do something that they don’t want to do.

    https://www.reuters.com/article/us-trump-effect-coal-retraining-insight/awaiting-trumps-coal-comeback-miners-reject-retraining-idUSKBN1D14G0

    3) MMT shows us that certain goals are cheap and easily achievable. All hunger in the world today is political, not technical. We produce enough food to feed everyone, we don’t distribute it to everyone for a number of reasons. Any nation that has a food surplus could absolutely eliminate hunger within their borders. However, even those goals will meet political opposition regardless of the economics.
    As Jef says above, “MMT is always careful to make the point that spending must be tied directly to physical resources which keeps it planted firmly in the real economy.” That’s not enough. 5% of GDP would be plenty of spending to eliminate hunger in the United States. We need to have an honest discussion about why we’re not doing that.
    The same statement occurs on a larger scale for healthcare. We can ensure that all US citizens get some minimum standard of health care. We choose not to do that. Any MMT program suggestion needs to understand why. What would it take to make the Colorado LARC program go nationwide? Hint: It’s not just money.
    https://www.newsweek.com/remote-area-medical-shows-what-americas-uninsured-go-through-health-care-287507

    https://www.colorado.gov/pacific/cdphe/cfpi-report

    4) There will need to be serious controls on Waste, Fraud and Abuse. I firmly believe that economically valuable programs can be identified and funded, but it’s not hard at all to find examples of programs that any objective observer would say are complete nonsense.

    https://arstechnica.com/tech-policy/2013/02/why-a-one-room-west-virginia-library-runs-a-20000-cisco-router/

    https://arstechnica.com/tech-policy/2018/08/isps-want-to-be-utilities-but-only-to-get-more-money-from-the-government/

    Despite subsidies, rural broadband is still poor

    Of course, private Internet service providers already receive various subsidies from states and the federal government, including $1.5 billion a year for rural networks from the Federal Communications Commission’s Connect America Fund. Despite this, telcos like AT&T have mostly avoided upgrading their copper networks to fiber, except in areas where they face competition from cable companies, we noted in a recent article.

    Nearly 31 percent of the 43.6 million Americans in rural areas do not have access to home Internet service with speeds of at least 25Mbps down and 3Mbps up, according to the FCC.

    Reply
  8. Synoia

    On second thoughts, it can be pushed much further with policies for import substitution and tariffs protecting local manufacture and worker protection.

    The issue is trade defect. With resources an no trade defect there is only resource limits. The most scarce resources are probably rare earths.

    It’s a pity we cannot create batteries from hot air, BS and real S… /s

    Reply
  9. RBHoughton

    I think advanced economics sites like NC will have to push MMT every few weeks until the great immoveable mass of the profession begins to forget what it learned in school and trundles across to the truth.

    Reply
  10. Sound of the Suburbs

    WW2 allowed economists to see how flexible the monetary system was and how full employment could be created.

    There was enormous Government spending and deficits but they didn’t cause any problems at all.

    The following gives a good summary of the lessons that had been learned by the early 1940s

    http://delong.typepad.com/kalecki43.pdf

    He even saw in the 1940s. how full employment would lead to problems of its own, which came to pass in the 1970s.

    Somehow, everything that had been learned was then lost.

    Kalecki gives an insight into how the US can always find money for the military and new wars, but not for entitlements.

    “The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments”

    This would have been well understood at that time, it’s the route by which capitalism degenerates into fascism.

    Reply
  11. Sound of the Suburbs

    The mainstream don’t understand the monetary system and their arguments should be taken with a pinch of salt.

    Money comes out of nothing and is just numbers typed in at a keyboard.

    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

    Bank loans create money and bank repayments destroy money and this is where 97% of the money supply comes from.

    Money and debt are like matter and anti-matter they come out of nothing and go back into nothing.

    The haphazard way that nations create their money supply means bank credit has to be managed well to ensure a stable money supply.

    Policymakers had no idea and embarked on financial liberalisation, leading to frequent financial crises.

    Finance got more and more complex, but almost no one understood the basics.

    The ideal economy has steadily rising, supply, demand and money supply; the new money covering the new goods and services in the economy.

    Achieving the ideal money supply for the economy, bearing in mind the way it is created, is not an easy task.

    https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png

    Before 1980 we (UK) were doing it right.

    Debt rises with the money supply and you need to ensure the economy can stand the debt repayments. If GDP grows with the debt you won’t have a problem. Banks were lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy).

    After 1980 we were doing it wrong.

    Financial liberalisation; where bankers could earn more money from lending into all the wrong places that don’t grow GDP with the debt (real estate and financial speculation).

    Asset prices have boomed everywhere as bankers have been lending to inflate asset prices rather than creating real wealth as measured by GDP.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

    https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6

    Japan, the Euro-zone, the UK, the US and China.

    The world has been loaded up with debt, but it cannot handle the debt load as GDP didn’t grow with the debt.

    Bank repayments destroy money and this is now dragging the global economy down.

    Japan has been like this for nearly thirty years and they know all about it.

    Richard Koo explains:
    https://www.youtube.com/watch?v=8YTyJzmiHGk

    It is the near, global balance sheet recession that has created the need for Government created money.

    All those debt repayments are destroying money and the Government needs to maintain the money supply with freshly created money.

    If you take the Japanese route, a private debt problem just becomes a public debt problem.

    The money supply ≈ public debt + private debt

    Reply
  12. rob

    So , when stephanie kelton was an advisor to the bernie sanders campaign, did she ever tell them, or anyone in congress this fiction of MMT, that debts don’t matter?
    I understand that when journalists and professors have an idea they want to espouse, they can say anything….. but having to tell the people in congress, who are subject to the rules of the monetary system, that debts don’t really have to be repaid with anything other than more debts; could be a serious blow to her credibility.

    The national debt has been ballooning for the last 15 years, with nothing more than government incompetence. between the fake war on terror, and the real war on freedom, and wall streets assault against the 99%….. do we really want the powers that be to have another justification to give themselves more icing on the cake they are eating?

    so, for the camera’s. people might make hay over the MMT promise, but behind closed doors, how do they square the facts, that debts are a burden to this country which is making multiple hundreds of billions of dollars in interest payments in servicing that debt (that supposedly doesn’t matter) every year…

    To think the powers that be, that screw the 99% with every action they take, will allow a raise of wages, while they make more on the debts they create when they make loans, in the banking system… is fanciful at best. The burden will fall on those who don’t have room to breathe.
    even the notion that inflation is low, is really just a cruel joke on the working class who pay bills every month, who know better. despite what indexes are manipulated to prove to them that they just don’t understand economic principles and practices.

    Reply
    1. Oh

      I agree that we don’t need to hand another justification to act more on behalf of the 1%. We have to clean out Congress first, especially those that talk “balancing of the budget” from one side of their mouths while continuing the runaway spending under the guise of the defense of our country, homeland security and the war on terror. What hypocrites they are!

      After all, it was Murderer Cheney said “Deficits don’t matter”.

      Reply
  13. Red

    Reduction of JUST 10% in private debt?! Is it just me or that’s not enough? I was under the impression that getting private debt down was one of the priorities of fiscal policies.

    Reply

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