"Where is the money to come from?"

My boss back in my bank economics days was an ardent Keynesian. He would regularly wheel out an anecdote about Keynes discussing reconstruction of London after World War II with an anxious architect. The story was in fact told by Keynes himself, in an article in the venerable BBC magazine, The Listener.

The architect was worried about where the resources would be found for the massive rebuilding that would be needed.  Keynes, in his telling of it, asked the architect if there would be bricks and steel available.  The architect said their would.  Skilled and unskilled labour? Yes to that too.  So, said Keynes,  what is the problem?  Well, said the architect, "Where is the money to come from?"

It was a central part of Keynes's world view that capitalist economies would always have a tendency to operate at less than full capacity, with the result that living standards would be lower than they needed to be. This drove his belief that governments should be prepared to borrow and spend in order to boost demand. 

Recall that Keynes's General Theory was very much a product of the Great Depression, and that Keynes was surrounded by evidence of unutilized resources and the consequent poverty. The policy response had been inept at best and damaging at worst.  Explaining how the Depression was finally brought to an end, the post-Keynesian economist Axel Leijonhufvud once wrote "sad to say, Schicklgruber did it".

Fast forward to today and we find a newish answer to the architect's question, in the form of Modern Monetary Theory (MMT).  The central tenet of many MMT proponents is that for any country that controls its own money supply, public debt can never be considered a burden, because the monetary authority can always create the money needed to service it or pay it off. It might be likened to Keynesianism on steroids:  Keynes himself saw borrowing as a counter-cyclical tool, with the debt to be paid down when the economy overheated, but MMT, at least in some readings, sees no such constraint.

Can things really be so simple, and if so, how has it taken economists so long to figure it out?  This excellent article by George Selgin attempts to show the possible flaws in the MMT approach.  Specifically, he argues that removing the monetary constraint does little to alleviate constraints on the mobilization of real resources.  Writing in 1936, it was obvious to Keynes that there would be little risk and much reward in using government borrowing to boost the economy. In today's world of near-record low unemployment, is it really possible to say the same?

Selgin pays particular heed to the so-called Green New Deal (GND), many of whose proponents are also, unsurprisingly, big fans of MMT.  He asks, "Is it plausible that programs costing 34 percent of current US GDP can be financed without running up against those pesky real resource constraints, or by exceeding them only by a tolerable margin? I very much doubt it, which is another way of saying that I doubt that GND can be paid for without diverting substantial amounts of presently-employed real resources from their current uses."

Selgin goes on to quote another economist, Josh Barro: "If the government prints and spends money when the economy is at or near full employment, MMT counsels (correctly) that this will lead to inflation, and prescribes deficit-reducing tax increases to reduce aggregate demand and thereby control inflation."

The US economy is unarguably "at or near full employment" at this time.  What's more, the Trump administration is already spending borrowed money at a torrid pace, though I'd guess that the Orange One himself is unfamiliar with MMT.  As Selgin points out, there's plenty to like about Modern Monetary Theory: its description of how money is actually created in the modern economy is more accurate than the conventional economics version. However, in the world we live in, over-enthusiastic reliance on MMT precepts, be it for the Green New Deal or anything else, seems like a recipe for a return to the bad old days of high inflation.