Consumer prices have increased at a rapid pace over the last year. Some have argued that this inflation discredits left-wing policy ideas. But this is not true.

One common explanation for this recent spell of inflation is that consumer demand has surged beyond the capacity of producers to supply the demanded goods and services. From there, some then place the blame for the excessive demand on the three pandemic stimulus bills, especially the last one passed in March of 2021. Insofar as these stimulus bills were supported by the Left, their contribution to inflation is supposedly an indictment of leftist economic policy more generally.

This reasoning is mistaken in two separate ways.

First, macroeconomic stabilization, which focuses primarily on managing aggregate demand, is only one aspect of economic policymaking. It completely dominates reporting about the economy, perhaps because statistics about it are published every month and policymakers are constantly attending to it in one way or another. But it’s not the only thing that matters about the economy. It’s not even the most important thing in my view.

Policies related to the permanent welfare state, the organization of the labor market, corporate governance, and similar are not about pumping up aggregate demand and, as we see in many other countries, are compatible with stable and low inflation.

Second, as far as macroeconomic stabilization goes, what exactly is the left-wing idea that the current inflation debunks? Even if you believe that the stimulus in this case was excessive, this would not be an indictment of stimulus, only of excessive stimulus. No left-wing macro view that I know of says that there is no limit to how much stimulus is appropriate or good.

Furthermore, it’s not at all clear that the stimulus in this case was excessive. Consumer prices increased by 7 percent last year, which is bad, but employment increased by 6.5 million jobs, which is good. If you could have gotten the same 6.5 million jobs without 7 percent inflation, that would have been a better outcome. But this may not have been a possible outcome.

And even if it were possible to get the same employment growth with less inflation growth, e.g., by scaling the stimulus back a bit, the ideal amount of stimulus is not knowable in advance. Given this uncertainty, erring on the side of too much stimulus is perfectly defensible, especially in a truly novel situation like a pandemic.

I suspect that, for some, when they say that this inflation discredits the left, what they have in mind is what John Quiggin referred to as “Vulgar Modern Monetary Theory”:

Vulgar MMT is a movement in which the statement “taxes don’t finance public expenditure” is interpreted to mean that governments can increase spending as much as they like, with no need for an offsetting increase in tax revenue.

As Quiggin notes, you can definitely find this particular rhetoric all over MMT-inflected discourse. Indeed, it seems like this particular understanding of MMT is what made it sort of viral among certain sectors of the online left a couple of years ago.

But, as much as this interpretation seems to be encouraged at times, the top-tier MMT writers are usually careful to not to say this in their academic writing. For instance, in the 2019 MMT textbook, titled Macroeconomics, the authors discuss the possibility of stimulus-induced inflation and argue that the government should tackle it by raising taxes and reducing the deficit:

Taxes create real resource space in which the government can fulfil its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources for the government to command with its spending.

Take a situation where the national government is spending around 30 per cent of GDP, while its tax revenue is somewhat less, say 27 per cent. The net injection of spending coming from the national government is thus about 3 per cent of GDP. If we eliminated taxes (and held all else constant) the net injection rises towards 30 per cent of GDP. That is a huge increase in aggregate demand and could cause inflation.

Ideally it is best if tax revenue moves countercyclically, increasing in an expansion and declining in a recession.

If this sounds like standard Keynesianism, that’s because it is. Proponents of MMT are fond of using striking phrases and various rhetorical flourishes to promote the idea of countercyclical fiscal policy. But ultimately, that’s all it is. And the theory behind countercyclical fiscal policy is not debunked by the current inflation. It’s perfectly consistent with it.