Inflation Pressures Through The Lens Of Modern Monetary Theory-- A Guest Post By Andrés Bernal

Andrés Bernal is a Research Fellow at the Global Institute for Sustainable Prosperity, a Lecturer with City University of New York, and he's a Doctoral Student at The New School for Public Engagement. Andrés was a Senior Policy Advisor to AOC on her historic first congressional race where he had a major influence on the policy platform, particularly in developing the Green New Deal and the Federal Job Guarantee. Andrés has advised many federal candidates including South Texas progressive Jessica Cisneros vs. the right wing Blue Dog Henry Cuellar in TX-28 and he's currently helping grassroots progressive Neal Walia in a primary battle in Colorado's 1st Congressional District.

Pandemic Inflation: A Guide for Progressives

-by Andrés Bernal

A few weeks ago, I published a Working Paper to develop an alternative understanding and analysis of recent inflation pressures through the lens of Modern Monetary Theory. In it, I argue that conventional explanations of inflation remain ideologically compromised and constricted to an outdated social theory and framing. Consequently, public policy responses to recent price increases such as interest rate hikes and deficit reduction are antiquated, blunt-force tools that cause immense societal harm and simply don’t work. TL;DR the paper shows why Larry Summers and the gang are all wrong.

What is Modern Monetary Theory? MMT represents a movement of economists, historians, legal scholars, social and critical theorists, activists and organizers that has radically changed and improved the way we understand a macro economy and money. If you need a basic MMT 101 refresher, check out Stephanie Kelton’s new 14-minute Ted Talk (below) or pick up a copy of The Deficit Myth.

The Working Paper argues that the current inflation we’re seeing is coming from a variety of sources. Mainly, a mix of having to reopen the economy after abrupt closures, the shift in consumer demand toward household goods unanticipated by companies that slowed down production, pandemic-related supply chain bottlenecks, and good old corporate greed (there’s mounting evidence that major corporations are hiking prices arbitrarily of costs while using inflation as a pretext). The paper cites a recent study from the San Francisco Fed which shows that inflation from the Biden Administration’s $1.9T American Recovery Plan Act, which passed in March of 2021, is only expected to contribute to a 0.3% increase in inflation in 2022. The main point is, spending money into the economy does not mechanistically increase inflation or “devalue the dollar” as is commonly believed. In fact, Covid-related fiscal stimulus contributed to the fastest economic recovery in US history in addition to decreasing childhood poverty by 40%.

The standard or orthodox inflation management approach encourages interest rate hikes to “cool down the economy,” which few mention means throwing people into unemployment, as well as balancing or reducing the Federal budget deficit. I argue that hiking rates doesn’t actually solve any of the main causes of inflation we’re seeing or ever really see, and that raising rates can actually have the unintended consequence of increasing inflation by increasing the cost of credit and the size of the interest income channel by sending more money to creditors. The same goes with deficit reduction. It doesn’t solve anything (does nothing about economic structural issues), and instead undercuts much-needed spending on a range of other crises. It also traps progressives inside of a right wing PAYGO nightmare. The final, and structurally-historically racist, part of the orthodox framework is the idea of the Phillips Curve: that there’s a mathematical tradeoff between inflation and unemployment, and for this reason, we need to keep millions involuntarily unemployed to keep inflation at bay.

In order to move past this, and truly grapple with inflation as a serious political and economic constraint, the paper argues for an alternative framing and set of tools to go after increasing prices at their various sources. Throughout the paper, I explain the many ways that inflation comes down to a matter of coordinating resource availability and productive capacity politically expressed as real costs. It also emphasizes how prices that are set by firms as well as the state of an economy’s productive capacity and use of resources do not obey strict laws of supply and demand akin to the laws of physics. Much empirical research has demonstrated that these are all the results of social and political processes meant to keep enterprises and the economy reproducing themselves while always everywhere embedded in normative and political decisions that reflect what we value, what we invest in, what we define as resources, and how we solve problems.

Firstly, instead of a nonsensical deficit or debt constraint every time the Federal government spends, we should implement an inflation constraint to look at the impacts of any particular bill on real resource use and availability as well as the economy’s capacity to absorb the consequences of that spending. Secondly, we should pay close attention to the context and state of specific industries including potential disruptions from environmental or political circumstances. This further involves looking at monopolized market power and bank lending from private actors that can lead to price gouging and an overuse of resources for socially predatory or destructive ends.

Instead of interest rate hikes, stop forking money over to creditors by setting a zero or near-zero permanent rate, and then implement a range of financial, credit, and antitrust regulations to go after greedy profiteering and monopolization. Instead of the barbaric Phillips Curve, the paper argues for the creation of a Federal Job Guarantee that would create a low-carbon care economy, guarantee a living wage job with benefits to everyone, and would actually keep inflation in check much better with tight full employment and counter-cyclical fiscal policy (when the private sector contracts, the Job Guarantee expands, and vice versa). And instead of austerity, let’s invest in resilient and sustainable public infrastructure and administrative capacity.

The last thing the paper touches on is how all of this ties back to the climate crisis and the delicate balance of managing productive capacity with critical biophysical resources. The paper shows how if you care about inflation, you should support and advocate for a Green New Deal. Progressives need a coherent theory of inflation, a set of tools to tackle it at the sources, and the messaging capacity to clearly explain how this works to voters and media so crucial bills like Build Back Better don’t get shredded in the name of “fiscal responsibility” and inflation hysteria. The paper is a reminder that “anything we can resource, we can afford” and we’re not dependent on taxes from elites to fund our agenda or start taking action: we have the world-building power of public money.

PS: If you happen to feel a churning in your stomach about hyper-inflation as it relates to cases like Zimbabwe, Venezuela, or Weimar Germany, I’ve got you covered. Check out page 11 paragraph 3 of the paper. It’s pretty straight forward: losing a major war, getting stuck with the brutal legacy of colonization, a major crash in productive capacity, deep political instability, or tying your currency issuing capacity to another country or a commodity can lead to spiraling price instability.