Crowding Out

Kelton begins chapter four with a discussion of crowding out, which she basically dismisses as a myth in the context of MMT.  The idea of crowding out is pretty standard in elementary textbooks in economics.  Since it is so basic and since she also describes it, I will not further describe it here.  Anyone unfamiliar with the idea can look it up on Wikipedia.  Now the problem of crowding out is probably not the Achilles heel of MMT, but it still deserves far more serious attention than she seems willing to give it.

Even though our monetary authorities are potentially the source of unlimited cash and spending, the way things actually work is much more constrained.  The Fed does not simply print the money, or create it on some ledger, and then turn it over to the Treasury to fund whatever the fiscal authorities might like.  Instead, the bond market acts as an intermediary.  This means that fiscal spending relies upon bond investors.  Now unlike a government with fiat money, the bond market relies upon investors with finite supplies of cash.  Even though the banks originally floating the bonds to investors don’t need money to perform their function, the investors buying the bonds require money that already exists.  Kelton seems to gloss over this reality.  Yet this is exactly where crowding out comes into effect.  Since investors have finite resources, not all investments can be made.  So governments are forced to offer terms that will be attractive to investors in the context of other possible investments, which adds to the cost of government borrowing.  And insofar as the government makes terms attractive to draw investment funds, other possible investments will not be made.  That is, government spending crowds out other investing that would have taken place in an environment with more moderate needs for cash to fund debts.  MMT’s fiat money must not be regarded simply as free money for socially desirable spending until inflation becomes a problem.  Too much government spending necessarily becomes a problem for the financing of private industry.  Crowding out in the context of high debt creates a real constraint upon private enterprise.