Modern Monetary Theory and its Fictional Discipline

Michael Lebowitz

That is some crazy talk” – Bill Gates on the topic of MMT

In my article, MMT Sounds Great in Theory… But, I dove into the latest and greatest of economic thinking, Modern Monetary Theory (MMT).

This theory is crucially important for investors and citizens to understand as its popularity is spreading like wildfire. The theory promises to be a strong force in the coming election and a challenge to the popular Keynesian policies that are widely adhered to by most governments and central banks.

Free healthcare and higher education, jobs for everyone, living wages and all sorts of other promises are just a few of the benefits that Modern Monetary Theory can provide. At least, that is how the theory is being sold. Regardless of the apparent unreasonableness of such promises, it’s not hard to imagine presidential and congressional candidates running and winning on such a “free lunch” economic platform.

Bear in mind, this was done with some success in 2016 as Stephanie Kelton, Bernie Sander’s chief economic advisor, is a leading advocate of Modern Monetary Theory (MMT).

Given the importance of this new thinking, I will analyze various bits and pieces of the theory in the coming months. In this article, I discuss a crucial aspect of the theory, inflation. MMT theory essentially believes the government spending can be funded by printing money.

Currently, government spending is funded by debt and not the Fed’s printing press. MMT disciples tell us that when the shackles of debt and deficits are removed, government spending can promote economic growth, full employment and public handouts galore. Modern Monetary Theory does, however, have a discipline that regulates spending, and that is inflation.

Inflation

Inflation is impossible to calculate. Inflation is impossible to calculate. No, that is not a typo. For emphasis, let us put it another way. Inflation is impossible to calculate.

The point that inflation is impossible to calculate cannot be overstated.

Economists will say the Consumer Price Index (CPI), for instance, does a good job of telling us whether prices are rising or falling and to the precision of a tenth of a percent. As background, CPI measures how a select basket of goods changes in price from month to month.

In regards to CPI and its purported accuracy think about these questions:

  • Do the specific goods and amount of goods in the CPI basket match what you buy?
  • Are prices of goods the same in Nevada as they are in Maine?
  • Do you substitute apples for oranges when oranges rise in price?
  • Does a 75-year-old retired couple consume the same basket of goods as a single 20-year-old in college or a 50-year-old couple with three teenagers?
  • Are value hedonic adjustments fair and reflective of the value you receive from the goods?  (Hedonic adjustments attempt to change the price of goods based on perceived improvements in value. For instance, the decline in computer prices as measured within CPI is greater than what we observe at the store because they deliver more power today than in the past. We expanded on this concept in the MMT article mentioned earlier.)

We now get personal because this point is crucial. (Me) Michael Lebowitz, a partner at Real Investment Advice, is 50 years old, married, with three teenagers. He pays for his own health care and has one kid in college. He lives near Washington D.C. where real estate and many of the goods and services he consumes are more expensive than the national average. CPI, as reported by the BLS, is running annually at +1.9%. Do you think Michael’s personal CPI is only 1.9%? Based on a simple and reliable personal budget analysis, his price index has been running in the double digits for the last few years.

Washington, DC provides one good example as a city, but it is not a leap to say that major metropolitan and urban areas impose a higher cost of living than rural areas. Furthermore, according to the 2010 United States Census, over 71% of the population live in “urbanized areas”, which the Census Bureau defines as “densely developed residential, commercial and other nonresidential areas.” Does measurement of CPI or any other inflation metric properly account for such complexities? How can they?

The bottom line is that inflation varies widely by demographic, region and individual needs and desires and a host of other differences that cannot possibly be accounted for in one number.

That is problem number one with applying a “CPI-for-all” mentality and using it to make important policy decisions.

Let’s dig in deeper…

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