Modern Monetary Theory Got a Pandemic Tryout. Inflation Is Now Testing It.

The sun was sinking low over Long Island Sound as Stephanie Kelton, wearing the bright red suit jacket she had donned to give a virtual guest lecture to university students in London that morning, perched before a pillow fort she had constructed atop the heavy wooden desk in her home office.

The setup was meant to keep out noise as she recorded the podcast she co-hosts, a MarketWatch production called the “Best New Ideas in Money.” The room was hushed except for Ms. Kelton, who bantered energetically with the producers she was hearing through noise-blocking headphones, sang a Terri Gibbs song and made occasional edits to the script. At one point, she muttered, “That sounds like Stephanie.”

What Stephanie Kelton sounds like, circa early 2022, is the star architect of a movement that is on something of a victory lap. A victory lap with an asterisk.

Ms. Kelton, 52, is the most familiar public face of Modern Monetary Theory, which posits that if a government controls its own currency and needs money — to make sure its citizens have food and places to live when, say, a global pandemic pushes many out of work — it can just print it, as long as its economy has the ability to churn out the needed goods and services.

In the M.M.T. view of the world, “How will you pay for it?” is a vapid policy question. Real-world resources and political priorities determine how much lawmakers can and should spend.

It is an idea that was forged, and put to something of a test, during a low-inflation era.

When Ms. Kelton’s book, “The Deficit Myth,” was published in June 2020 and shot onto best seller lists, inflation had been weak for decades and had dropped below 1 percent as consumers retrenched in the pandemic. The government had begun to spend rapidly to try to prop up flailing households.

When Ms. Kelton appeared on a Bloomberg podcast episode, “How M.M.T. Won the Fiscal Policy Debate,” in early 2021, inflation had bounced back to around 2 percent.

But by a chilly January afternoon, as ducks flew over the frosty estuary outside Ms. Kelton’s house near Stony Brook University, where she teaches, inflation had rocketed up to 7 percent. The government’s debt pile has exploded to $30 trillion, up from about $10 trillion at the start of the 2008 downturn and $5 trillion in the mid-1990s.

The good news: The government has had no trouble selling bonds to fund its spending, contrary to the direst projections of deficit scolds.

The bad news: Some economists blame big spending in the pandemic for today’s rapid price increases. The government will release fresh Consumer Price Index data this week, and it is expected to show inflation running at its fastest pace since 1982.

And that may be why Ms. Kelton, and the movement she has come to represent, now seem anxious to control the narrative. The pandemic spending wasn’t entirely consistent with M.M.T principles, they say — it wasn’t assessed carefully for its inflationary effects as it was being drawn up, because it was crisis policy. But the situation has underlined how hard it is to know just where the economy’s constraints lay, and how difficult it is to fix things once you run into them.

Last summer, Ms. Kelton called inflation a temporary sign of “growing pains.” By the fall, she painted it as a good problem to solve, compared with a continued weak economy. As it lingers, she has argued that diagnosing what is causing it is key.

“Can we blame ‘MMT’ for the run-up in inflation?” she tweeted rhetorically last month, just hours before her podcast recording.

“Of course not.”

The economy is the limit

To understand how M.M.T. fits in with other dominant ways of thinking, it’s helpful to take a trip to the beach.

In economics, there’s a school of thought sometimes called “freshwater.” It’s the set of ideas that became popular at inland universities in the 1970s, when they began to embrace rational markets and limited government intervention to fight recessions. There’s also “saltwater” thinking, an updated version of Keynesianism that argues that the government occasionally needs to jump-start the economy. It has traditionally been championed in the Ivy League and other top-ranked schools on the coasts.

You might call the school of thought Ms. Kelton is popularizing, from a bay that feeds into the East River, brackish economics.

M.M.T. theorists argue that society should feel capable of spending to achieve its goals to the extent that there are resources available to fulfill them. Deficit spending need not be constrained to recessions, even theoretically. Want to build a road? No problem, so long as you have asphalt and construction workers. Want to feed children free lunches? Also not a problem, so long as you have the food and the cafeteria workers.

What became Modern Monetary Theory began to percolate among a small group of academics when Ms. Kelton, a former military brat and one-time furniture saleswoman, was a graduate student.

She had a gap period between graduating with a bachelor’s degree from California State University, Sacramento and attending Cambridge University on a Rotary scholarship, and her college economics professor recommended that she spend the time studying with L. Randall Wray, an early pioneer in the set of ideas.

They hit it off. She remained in Mr. Wray’s circle, and he — and Warren Mosler, a hedge fund manager who had written a book on what we get wrong about money — convinced her that the way America understood cash, revenues and budgeting was all backward.

Ms. Kelton earned her doctorate at The New School, long a booster of out-of-mainstream economic thinking, and went on to teach at the University of Missouri-Kansas City. She, Mr. Wray, who was there at the time, and their colleagues mentored doctoral students and began to write academic papers on the new way of thinking.

But academic missives reached only a small circle of readers. After the 2008 financial crisis punched a hole in the economy that would take more than a decade to fill, Ms. Kelton and her colleagues, invigorated with a new urgency, began a blog called “New Economic Perspectives.” It was a bare bones white, red and black layout, using a standard WordPress template, that served as a place for M.M.T. writers to make their case (and, in its early days, featured a #Occupy[YourCityHere] tab).

The theory picked up some fervent followers but limited popular acceptance, charitably, and outright derision, uncharitably. Mainstream economists panned it as overly simplistic. Many were confused about what it was arguing.

“I have heard pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not,” Jerome H. Powell, the Fed chair, said in 2019. “The idea that deficits don’t matter for countries that can borrow in their own currency is just wrong.”

Ms. Kelton kept the faith. She and her colleagues held conferences, including one in 2018 at The New School where she gave a lecture on “mainstreaming M.M.T.”

Rohan Grey organized the conference and a media reception afterward at an Irish pub (“‘Shades of Green,’ monetary pun intended,” he said). It was attended by organizers, academics, “lay people” and lots of journalists. At the happy hour — which lasted until 1 a.m. — Ms. Kelton was mobbed when she walked in the door. “She was already on her way to super celebrity status at that point,” said Mr. Grey, an assistant professor at Willamette Law.

When she gave presentations on her ideas, Ms. Kelton would occasionally display a quote often attributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you. Then you win.”

And her star was rising more broadly. She advised Bernie Sanders’ presidential campaigns in 2016 and 2020, getting to know the Vermont senator. He never fully publicly embraced M.M.T., but he nevertheless advanced policies — like Medicare for All — that reflected its ideals.

She amassed a following of tens of thousands, later growing to 140,000, on Twitter. Her first handle, @deficitowl, prompted ardent fans to gift her wise bird figurines, some of which are still on display in her home office. She cultivated a small coterie of prominent journalists who were interested in the idea, most notably Joe Weisenthal at Bloomberg. She signed a book deal. She was regularly talking to Democratic lawmakers, sometimes in groups.

Her idea percolated through Washington’s media and liberal policy circles. Mainstream economic predictions that huge debt loads would come back to haunt nations like Japan had not played out, the anemic rebound from 2008 had scarred society and called the size of the crisis response into question.

Ms. Kelton and her colleagues were ensuring that their theory on benign deficits was an ever-present feature of the blossoming debate.

Then the pandemic hit, and suddenly the theoretical question of just how much the government could spend before it ran into limits faced a real-world experiment.

The $1.9 Trillion Floor

Without thinking about paying for it, Donald J. Trump’s government quickly passed a $2.3 trillion relief package in late March 2020. In December, it followed that up with another $900 billion. President Biden took office in early 2021, and promptly added $1.9 trillion more.

They weren’t being driven by M.M.T. — nobody with meaningful power at the time had fully embraced the idea, given the political potency of “fiscal responsibility” — but they were effectively proving its point. The idea that a government issuing its own currency has to pay for its ambitions is misplaced.

Proponents took a victory lap.

“It took a virus to kill the deficit myth,” Ms. Kelton tweeted in March 2020, as that first relief package wound through Congress. She pushed for continued big spending in early 2021 (“$1.9T should have been a floor, not a ceiling in negotiations,” she wrote).

She trolled the Harvard economist Lawrence Summers as he warned that the big spending might be inflationary, cautioning that the stimulus overshot what the economy was prepared to produce. When the package passed, she said in a media interview that the plan “went beyond anything I would have anticipated.”

At first, the results seemed to be the confirmation that she and her colleagues had been right. The economy rebounded faster than anyone had hoped. Many of deficit hawks’ worst nightmares did not come to pass: Rates on government debt remain extremely low, and the dreaded bond vigilantes never came knocking.

Still, as inflation surges, the headlines declaring that the theory had “won” need some caveats.

Ms. Kelton and her colleagues make clear that the pandemic relief packages did not follow one of M.M.T.’s key tenets — they did not try to account for resource constraints ahead of time. In an M.M.T. world, the Congressional Budget Office would have carefully analyzed possible inflation ahead of time, and lawmakers would have tried to offset any strain on available workers and widgets with stabilizing measures and tax increases.

The theory’s basic idea on inflation — as Ms. Kelton tells it — is that the best defense is a good offense.

As 2021 demonstrated, however, the economy is a big, complex entity, and it can be hard to predict. Many economists, both mainstream and M.M.T. ones, did not think that the March 2021 package would be inflationary.

But homebound consumers, flush with cash, spent their money far more heavily on goods than they typically do, and it took them longer to shift back to services than just about anyone expected. That roiled supply chains, pushing up prices for cars and furniture and precipitating the heady inflation that now has America in its grip.

Ms. Kelton supported the $1.9 trillion package that passed last March, and she stands by that. She just questions how much of the inflation now is really coming from the demand it drove. Plus, she argues, you know what is worse than inflation? A crawling recovery.

One of M.M.T.’s big ideas is that the Federal Reserve, which in the United States is in charge of trying to keep prices under control by raising interest rates to lower demand, should not be the one-stop shop for economic management. Raising rates now would cool off investment, the logic goes, and how is that helpful at a moment when we don’t have enough factories or cargo ships?

The problem is that the alternative to a Fed response is, at the moment, not obvious. The Biden administration’s attempts at tamping down price increases — longer port hours, release of strategic petroleum reserves, calling out corporate price gouging — have mostly tinkered around the edges of the issue.

Those kinds of precise moves to counter inflation are what M.M.T. economists would recommend, though. Ms. Kelton laid out other suggestions M.M.T. economists have made in a recent blog post. Among them: Medicare for All, cutting the Pentagon budget, repealing some tariffs and unclogging the ports.

Not exactly “easy peasy,” to borrow a phrase of hers.

“M.M.T. was already pretty marginal,” said Jason Furman, a Harvard economist, noting that, in his view, most policymakers and prominent academics ignored it already. Even if policy in the pandemic effectively embraced the idea that you do not have to pay for your spending, that idea, he said, was also Keynesian.

And the M.M.T crowd, while dismissing the Fed’s role, has not come up with a clear and obviously workable idea for how to stem inflation, he argued, adding, “If you were open-minded, this would discredit it still further.”

In Washington, the suite of ideas has clearly been dealt a setback. Deficit concerns have returned. Mr. Biden’s sweeping policy agenda has not passed because Senator Joseph Manchin, a West Virginia Democrat and member of his own party, has opposed it on concerns about government debt and inflation.

Despite that, some of M.M.T.’s proponents are still sounding celebratory.

“We’ve won the debate on the intellectual level — there are no flaws,” Mr. Wray said.

Flaws or not, there are questions.

Questions like: “Did Congress ‘experiment’ with MMT, and does the run-up in inflation mean that MMT has ‘failed’?”

That is how Ms. Kelton put it in a Substack post — she upgraded from WordPress last year — that she called “How Do You Solve a Problem Like Inflation,” complete with “Sound of Music” art. (The Von Trapps, who famously fled Nazi-occupied Austria in 1938, would have known a thing or two about inflation.)

She published the 3,715-word riff hours before I was scheduled to visit her at her home in Stony Brook. The question she notes that “some people” have been asking is the main one I posed to her in an initial conversation.

During our first talk, she never broke her cool when questioned about the inflationary moment and what it says about her theory. She laid out her response methodically. Times are weird, supply chains are constrained, decades of corporate consolidation make it all worse. True M.M.T. policy would have thought about inflation in the first place, with tax increases or other stabilizers built in.

She was also emphatic. And that tone carries over to the post, if type style expresses tone. Has the M.M.T. experiment failed? “The answer,” it declares, in bold face, “is an unequivocal no.”

Why let someone else shape your narrative, when you could shape your own?