Democracy & Profligacy: Will MMT Destroy the World? Part I of III on the Government Spending→Inflation Myth

Prologue

The worry about a “danger” from understanding how government actually functions/spends was already famously stated by Paul Samuelson decades ago:

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times…Once it is debunked, [it] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths

Paul Samuelson (from minute 1.27 here)

This was echoed by the “right” who either genuinely believe an understanding of public-spending capacity will lead to inflation or want to “drown the baby” simply because they hate the idea of public-goods for some bizarre reason:

“I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”

Grover Norquist 

(this is one of the most disgusting quotes by any political figure I know of, and not even because of the drowning analogy (!) but because his dogma, in effect, actually kills babies, kills rural people, kills the elderly and the sick and the poor. We (society) organize as a group (polity) to help the poor, the disabled, the elderly, the rural (e.g. post offices or rural train lines or Farm to Market (FM) roads that in theory are not “profitable”).

Anyway, it is even heard on the “left” by those who believe an understanding of the “spending” (properly: organizing) power of the government will lead to activity they don’t want (military, or increased economic activity that is harmful to the environment.) [If anyone has any links to those types of articles, could you add to the comment section? I have seen them but don’t have the time to go back and find them at the moment).

A Samuelson-type view can be seen in this 1997 discussion of Israeli inflation in the 1980s. Can democracies control their spending so as to maintain the long-term public-good of the value of their currency (their tax-credit)? Or will the short-term aspect inherent in democracies lead to ruin (especially, as Samuelson and MMT-detractors worry) if the public and politicians know they can always afford to buy anything for sale in their currency that they will destroy their currency?

Rafael Reuveny Democracy, Credibility, and Sound Economics: The Israeli Hyperinflation Source: Policy Sciences , 1997, Vol. 30, No. 2 (1997), pp. 91-111 https://www.jstor.org/stable/pdf/4532401.pdf

Whenever mainstream economists mention their “spending-leads-to-inflation” worries (basically always if they are discussing MMT) I realized: They have such an ingrained belief that there even EXISTS a spending : inflation connection that they do not even question it.

So I always ask them a question: Name examples where peacetime, politically stable countries (with no foreign-currency denominated debt) have ever spent themselves into inflation?

And I am not talking about hyperinflation (also not caused by spending, and a completely different phenomenon than inflation; i.e., “hyperinflation “big” inflation.)

Just normal inflation.

Generally I think the question is dismissed because the assumption that there exists a relationship is “so obvious” to a mainstream economist that it bears no further thought. They are stuck in their simplistic supply/demand mentality.

Anyway, I have had a total of seven replies. 7. One from an early commenter (I don’t remember who) and 3 from someone I will mention, and then they added three more when I suggested a world-view based on three cases was hardly convincing.

I will discuss those seven cases, and why they fail to show what their proponents believe them to show, over the next two posts, Parts II & III.

And to be clear – yes, although it may be theoretically possible for stable democracies to “spend themselves into” problematic inflation, I do not think there are actually any examples of it happening in a non-fantasy world.

An understanding of government finance (i.e., MMT or reality-based Macro) is not dangerous. Democracies actually guide themselves overly conservatively on the spending front.

Part II

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