MMT Explains Our 2 Tiered Economy and Inflation

MMT Explains Our 2 Tiered Economy and Inflation

A novice take on the way Modern Monetary Theory (MMT) explains inflation from a permanent K shaped economy.

Basically, MMT says we get inflation when money policy juices demand and we are at full employment, or we juice just one sector which is at full employment, while the others are constrained. This all follows from the basic rules of supply and demand.

We have a 2 tiered worker economy?—?wealthy professionals, and everyone else. The wealthy professionals can still afford Nike sneakers, houses, and new cars, but everyone else can’t. It’s telling that Nike stopped even trying to sell sneakers to poor people around a decade ago. That’s the K as measured by either income or ability to spend?—?one group’s trend is going up, and the other is going down. Some call this a “K shaped recovery”?—?but it’s permanent, if policy doesn’t change.

So what happens when Nike and car companies choose to produce fewer, much more “premium” (expensive) products, and sell to fewer people with increasing expectations? Inflation! Supply and demand. Pretty simple.

Wealthy professionals, the top of the K, have produced more demand than there is supply. The bottom of the K?—?their demand is irrelevant, because they can’t afford anything, having negative disposable income.

Democrats make this worse by emphasizing education as the only possible way out, while we are pretty much at the peak of the ability of our education system to churn out more professionals. That had been raising the top of the K, but we are now at full employment in those ranks. Those who can professionalize, become the only ones who can afford a house, a car, or Nike sneakers, and we are just about at saturation. Republicans make this problem worse when they cut social support, and suppress wages, and therefor reduce the ability of blue collar and service workers to spend in the economy. That deepens the bottom of the K. Both exacerbate the problem by encouraging over seas production?—?another trend we are passed capacity on.

The way to fix this is exactly what most on the left have been advocating for centuries?—?it’s always the way to balance the equation, whatever the economic theory. Bring the bottom of the K up (through various means —which ones is the whole political ball game), and suppress the top of the K’s ability to spend through taxes. These two groups aren’t really separate. They make up our entire socioeconomic system, and a K shaped economy is not sustainable?—?for either side, for so many economic and political reasons. But the top has the most to lose the system fails.

We are currently doing exactly the opposite. Even though we can’t produce more professionals, we are deepening the permanent K. The wealthy are literally subsidized by government through “tax relief” gimmicks?—?yes, even for the upper income middle, the professional class. They get a lot of tax carve outs on their houses, for example, and education, and 401ks and other financial instruments, personal llc, and all sorts of other tax dodge scams, to offset all that mildly progressive income tax they pay. For big businesses, states and municipalities will even throw large sums of cash to entice them to show up and open an office, or a factory in their town. These tax policies increase the professional class’s ability to spend, while the working poor are taxed, to suppress their consumption.

What’s interesting about MMT, is the way they go through the history of money?—?and feudal lords understood this pretty clearly. They used to simply burn tax revenue (in the form of tally sticks), and paper money was invented because you can burn it (and tally sticks were a real pain).

The devil is in the details. MMT is not quite as well tested as other models, but it’s pretty friggin’ convincing if you ask me, partly because of how easy it is to apply, but also because of the story it tells compared to other apologetic economics, which I and many others?—?especially business people?—?have rejected for its obvious flaws. Orthodox economics might as well be talking about money on Mars. It seems to have nothing to do with reality, despite all its fawning over questionable mathematics and sociological assertions. MMT explains that money is a feature of the human experience that predates writing, and is neither good nor bad?—?it just is, and this is how it work (explained through history).

I suspect this is going to be just as annoying to know about as moral cognition in politics, because it completely changes the necessary narrative around taxing and spending, and why we should do each of them. And just like with moral cognition in politics, I’ll have to fight against embedded myths to make any headway…