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Does inflation disprove Modern Monetary Theory?
Jun 1, 2022
Episode 684

Does inflation disprove Modern Monetary Theory?

Plus, we answer more of your burning questions.

Regular listeners of this podcast might recall an episode we did a few years back on Modern Monetary Theory. MMT is the economic theory that basically says a country that controls its own currency can’t go broke because it can always print more money. But with inflation at 8.3%, one listener is wondering whether rising prices disprove MMT. We call the expert on MMT to find out. Plus, we take your questions about how canceling student loan debt might affect the wealth gap, using a single world currency and the economic consequences if part of Oregon really secedes to Idaho.

Here’s everything we talked about today:

If you have a question for our hosts, email us at makemesmart@marketplace.org or leave us a voice message at (508) 827-6278 or (508) U-B-SMART.

Make Me Smart June 1, 2022 transcript


Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.


Kai Ryssdal: Hey, everybody. Welcome back to Make Me Smart, making today make sense is the thing we do.


Kimberly Adams: And I’m Kimberly Adams, recovering from my cold, which I understand was much more audible than I thought it was. Not COVID. I’ve had many tests. Thank you for joining us for Whaddya Wanna Know Wednesday, and that means it is time for us to answer your questions.


Kai Ryssdal: And if you’ve got a question you would like us to answer, or find the answer to actually, you can email them to us at makemesmart@marketplace.org or leave us a voicemail. Our number is 508-U-B-SMART.


Kimberly Adams: And we do love those voicemails and voice memos. And we have one of those now with our first question.


Peter: Hi Makes Me Smart. This is Peter. I’m calling from the Columbus area, out walking my dog by the Alum Creek Dam. And I had a question I hope you could make me smart on. With inflation that we’re seeing right now, does this call into question the modern monetary theory that used to be in vogue a year or two ago? Because this, this prove that theory? Make me smart. Thanks. Love the show. Bye.


Kai Ryssdal: Yes. MMT, not only was it in vogue a year or two ago, it’s been in vogue for a while. And obviously the proximate cause is all the government money that has been spent during this pandemic. Modern monetary theory, first of all, Molly and I did it in May of 2020. We did a whole thing. And we’ve got a link on our show page. It’s a theory that basically says if you control your currency like the United States does, right, Jay Powell can print as many dollars as he wants, it cannot go broke because it can print as much money as it needs to, to pay for any budget gaps. That’s an unbelievable oversimplification, but that’s the knowledge graph. So number one, we went to Stephanie Kelton, who is one of the really high profile advocates of modern monetary theory. She’s a professor of economics at Stony Brook University. And here’s what she said about the question.


Stephanie Kelton: All we’ve ever said is that the checks will clear. So can the government spend too much? Sure. Is the punishment for spending too much national bankruptcy? No. Could you end up with inflation? The answer is yes.


Kai Ryssdal: It’s really important here to point out what’s going on with the particular inflation that we have in this economy right now. The overwhelming majority of it is driven by post pandemic imbalances in supply and demand, right? Yes. Did the Biden stimulus and oh, by the way, the Trump stimulus before that, add some relatively small amount to the inflation we’re seeing? Yes, absolutely. But this inflation is different, and it is not a direct result, Kelton says, of the government spending that we are seeing. I will tell you that many economists disagree, number one with modern monetary theory, and with Stephanie Kelton, but it has been – it is not anymore, right? Because we’re into the inflationary period and sort of all the rules go by the wayside when you’re trying to figure out how to crack down inflation like Jay Powell was doing. But the early days of this pandemic, when we were spending so much money, right? That was a real live test of modern monetary theory. And remember that inflation didn’t come into this economy until a year plus ago, right, which was a year into all the spending. And so the short answer is, no. It’s not because of modern monetary theory. It’s not the death of modern monetary theory. But economics is hard. And there will be on the one side and on the other hand forever, about the last three years in this economy. That’s what I got.


Kimberly Adams: Well, and also like economic models and theories get proven and disproven all the time. I mean, what was it – the Laffer Curve or? No, that was a different one.


Kai Ryssdal: No. Phillips Curve.


Kimberly Adams: Phillips Curve. Thank you. That everyone was just like, well, that didn’t work. And then you know, we had Kate on a while back and she was talking about, well, in the perfect economic model, their companies would make no profits. And so all of this –


Kai Ryssdal: Blew me away. Blew me away, as I remember saying at the time.


Kimberly Adams: Yes, you did. But like these economic models and economic theories are attempts to grasp what is sometimes irrational behavior, and you can never account for anything, like all of the cargo ships in the world getting backed up at ports. You know, there’s not a theory that bakes that in. So a lot of it is still winging it.


Kai Ryssdal: Absolutely, totally true. All right, we’ve got another voicemail. Here we go.


Hudson: Hi there Marketplace. I’m Hudson, and I’m calling from Queens, New York. I just wanted to know if your program could or would address the aspects of potential student debt cancellation, and why that would be good for the racial wealth gap, and what that would mean for potentially making more black and brown folks participate in our investment system and increasing their wealth.


Kimberly Adams: Right, so. I don’t have to tell anybody who holds one of these loans this is a major drag on our economy. And then something that so many people deal with every day, especially because a lot of people end up spending more paying off their student loans – significantly more – than they did on their education. And not even like, you know, you pay more for your mortgage than you do for your house. But like in many values greater. So we have about 45 million people holding about $1.7 trillion in student loan debt. And if you listen back to our colleague David Brancaccio’s interview last week, you’ll know that a lot of the debt – about 40% is owned by people who didn’t even finish college, for a big variety of reasons. So they’re paying on this debt, without even the benefit of the degree to increase their earning potential to help them pay off that debt easier. And so the part of it that factors into the racial wealth gap is that student debt is disproportionately held by black borrowers. If you look at how a lot of people pay for college, you know, a lot of time it comes from families. And so, if you come from families that typically and historically have not had that wealth to tap into, which is a lot of black families, you know, you end up taking out a loan. And almost 70% of Latino students have student loan debt. And people of color typically borrow more money for college expenses than their white counterparts. And then they have more difficulty paying it back. That’s for two reasons. You might have to take out more loans for expenses, because maybe you were able to get a scholarship for school, but you couldn’t afford to live in the place where you’re going to school, and your parents and your family can’t help you out. So you’re taking out loans to cover, you know, your cost of living and other things. And in the same route, black people in this country typically make less than white people, and so you’re gonna have a harder time paying back those loans. And so, on the racial wealth gap, you know, lots of people argue that canceling student loan debt would definitely, definitely help the racial wealth gap, it’s not going to eliminate it. Amy Scott spoke with a UCLA Professor Hannah Appel, who said that canceling student loan debt is one of the quickest ways to at least narrow that gap. And at the Roosevelt Institute, they said that canceling up to $50,000 in student loan debt – well, the Biden administration, I should say, is talking more like $10,000. But if it were $50,000, it would increase the wealth of black Americans by about 40%. And, you know, there’s a lot of economists that disagree on exactly what effect that would have on the overall economy. Some people think it would be a stimulus for the economy, because that money that people aren’t spending paying on the student loan debt, they could spend on other things in the economy. Other people are worried about what we were talking about in the last question, that it’s effectively a government stimulus that could make inflation worse. I mean, I have to say, I look at my friends my age, who are still paying on their student loan debts. And my parents told me growing up, they’re like, if you get a scholarship that covers it, you can go to school anywhere you want in the world. If not, we will pay for you to go to any community college in St. Louis, but you’re not taking out student loans. And, you know, that changed my life. Because, you know, I would be in a very different place.


Kai Ryssdal: That’s good advice. That’s good advice.


Kimberly Adams: I would be in a very different place if I had taken out student loans to cover the education that I have. And you know, you don’t always want to be grateful to your parents telling you you can’t go to the school that you want to, but they shut down quite a few schools I was accepted to because they were like, nope, you are going to school in state, with that great in state tuition that you have a scholarship for.


Kai Ryssdal: Good for your parents. Good for your parents.


Kimberly Adams: Yeah. All right. Let’s go to our next question. It comes from Liz in Virginia.


Liz: So my question to you is, what would happen if the world decided to use one single currency? Let’s call it the worldo, a bit like the euro. What will the advantages and disadvantages be? Thanks for making me smart.


Kai Ryssdal: Yes, that’s a good question. Where’s worldo, right? So look. So this has been talked about over the decades and the years and years and years. So there are goods and bads, right. So here are some goods. Number one, currency risk kind of goes away, right? If you’re doing global trade and global commerce, and you have to figure out how to change, you know, dollars for euros or euros for Yens or whatever, there is currency risk. And that would go away if we all use a worldo, right? Also, it can be expensive to convert currencies, that goes away. And also, you’d have a globally stable currency, because one of the reasons that currencies can be challenging is that they fluctuate and trade – most of them – trade on the market, and they can become unstable in a hurry. See also the Russian ruble, right? So, you can have many, many costs that go away. But look, there are some advantages that come with each country having its own currency. And the most salient example is the European and Greek debt crisis of the 2000s. Because Greece was part of the euro, and they were in some really big economic challenges. They could not do anything without the European Central Bank, which is to say, mostly Germany and France and Northern Europe, giving the OK, and they really wouldn’t. And that was real suffering for the Greek people, right, because they had to go under onerous International Monetary Fund conditions, they canceled pensions. I mean, we covered it extensively on Marketplace, I actually went to Greece for a week and a half and did some stories there. It can be a real, real mess. And also, as inflation pops up, right? That becomes – not having control of your own currency, which is to say, your interest rates, right, because that’s what currency is founded upon, or the manipulation of currency, right? Not having your own can be a challenge. Imagine if inflation hit the United States for whatever reason, but we were part of the worldo, and Jay Powell had to go to whoever is the worldo central banker and say, Hey, listen, we need to fix interest rates. But then the finance minister or the central banker, from, you know, China comes and says, no, no, no, we’re good, don’t touch anything. How could that possibly work, right? So it can be frustrating, and in some ways, costly to have a bunch of individual free floating currencies. But the idea of a worldo, even though promoted by no less a figure than John Maynard Keynes, probably would be a challenge and would bring with it, I believe, more negatives than positives.


Kimberly Adams: I mean, there’s a reason that the US has one currency, it didn’t always. We used to have lots of foreign currencies, and there were fights at the time about how we had so many different economies within the United States, that there’s no way we could be on one single currency. And yet, you know, here we are.


Kai Ryssdal: It’s a great point. It’s a great point. And here we are, for sure. One more? All right. So there’s one hypothetical, which we will leave for you, Ms Adams. Here we go.


Sarah: Hey, Kai and Kimberly, this is Sarah in Eureka, California. What are the economic implications of some counties in Oregon becoming part of Idaho? Don’t state boundaries have to be ratified by Congress? Will this change the number of House Representatives for each state? And can they really do this?


Kimberly Adams: I have to admit, Sarah, I was not paying attention to the story until I saw this question. But this is so interesting. This is so interesting. So in case you like me hadn’t really heard, nine counties in the state of Oregon recently voted in favor of moving their borders and joining the neighboring state of Idaho. And the people who support this say they want to leave Oregon because their rural values and economies are more aligned with those in Idaho. And these just so happened to be counties that also voted overwhelmingly for President Trump, and Idaho has more Republican control than Oregon, which has a Democrat controlled state legislature. And it’s a bit of a long shot. It’s a bit of a long shot because said democratic Oregon Legislature would have to sign off on it along with the Idaho legislature, and Congress, which as we so eloquently say on here, often does bupkis on many, many things. And so it’s a long shot. But what would it mean economically? So not a lot of hard data, but the supporters say that Idaho would see a boost in tax revenue from all the new residents. They also say Idaho has a lower tax burden than Oregon, which would be nice for the people to pay less in taxes. But some of these counties have also benefited from Oregon’s larger tax burdens, including things like legal cannabis industry, which generates a lot of tax revenue. That’s illegal in Idaho. So you wouldn’t get the benefits of that tax revenue, and also, if you’d like to smoke weed, you’d have a lot harder of a time. Minimum wage… people need to, people do what they do. Minimum wage is lower in Idaho, it’s $725 there compared to Oregon. So in Oregon, it’s $1,350. So if you’re a lower wage worker, you know, that would matter a lot to you. In terms of congressional representation, you know, you’d have to wait for the next census to roll around. But yeah, if the population shifted pretty drastically, then those representatives would go over to Idaho and Oregon would have fewer. And I wonder if we’re going to be seeing more of this. Isn’t there often like an effort in California to do something similar to this?


Kai Ryssdal: There is. Yeah, way up north in California. They want to call it like – in fact, I think they want to join Oregon. Like Jefferson land or something. But look, I mean, I think the point you made about both state legislatures and the Congress would have to approve, which means functionally nothing’s gonna happen, right?


Kimberly Adams: Yeah. I mean, could be surprised. People get passionate about things, and make it happen.


Kai Ryssdal: That’s true.


Kimberly Adams: All right. What we’re gonna make happen is ending. Because that’s it for today. Thank you for all of your questions. Those were great. Thank you for listening. And we’ll be back tomorrow with more news and hopefully some smiles.


Kai Ryssdal: In the meanwhile, questions and comments and thoughts and anything else you want to tell us? Email us makemesmart@marketplace.org or leave us a voicemail, 508-U-B-SMART.


Kimberly Adams: Make Me Smart is produced by Marissa Cabrera. Our newsletter is written by Ellen Rolfes.


Kai Ryssdal: Jayk Cherry engineered today. Ben Tolliday and Daniel Ramirez wrote our theme music. Our Senior Producer is Bridget Bodnar.


Kimberly Adams: So you know that Drambuie that made my eyes water last week turns out to be great in a hot toddy.


Kai Ryssdal: Almost the worst hangover I’ve ever had was from Drambuie. Yeah.

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