Modern Monetary Theory (MMT) basically says most fears about budget deficits are wrong and dangerous. The federal deficit is projected to swell to $4 trillion this year. Republicans are nervous. Democrats are eager to spend trillions more.
The result is likely to be a political standoff. How it is resolved will matter at the polls. MMT arguments could have a real impact on the country’s fiscal future.
MMTers follow a book called “The Deficit Myth”, an introduction to MMT’s main ideas for the lay reader. The logic goes like this. The federal government spends a lot. When it spends more than it taxes, it runs a deficit. It pays for the deficit with more borrowing, adding to the national debt. Under MMT that’s no problem.
These big numbers are a popular political point of contention. Both the R’s and the D’s trot them out to argue. R’s argue for cutting spending and D’s ague for raising taxes. The conventional logic has been; If Congress doesn’t “pay for” the deficits, financial ruin will eventually catch up. The analogy is normal people cannot rack up debt without eventually going broke… government is no different.
The idea that the federal government has the same financial constraints as a household is what MMTers term the “deficit myth.” MMT argues: Unlike the people, the U.S. government can spend and borrow as much as it wants. It never runs the risk of going bankrupt. It can just print more money.
The Weimar Republic tells us unlimited money printing is not the answer
That assertion is absolutely true. All the government has to do is print money. The problem with doing so is the problem fiat money has always intrinsically had. The value of the money goes down as the government which is printing it prints more. What you can buy with the same number of dollars diminishes. Most famously, this did play out in Germany after WWI in the Weimar Republic.
MMTers argue people are currency “users.” The U.S. government is a currency “maker.” The government has a monopoly on production of dollars. The dollar is not pegged to another currency or to a commodity. Federal debt is only denominated in its own currency. The question we should be asking is: Do we want our money to mean something, to have value?
This grants the government the special status of “monetary sovereignty.” Government can spend your savings without your permission. Government does so also without taxing you. It happens by simply reducing the value of money, by printing more money. This is exactly why Modern Monetary Theory is both extremely dangerous and politically attractive.
Monetary sovereignty means it is technically impossible for the government to “run out” of money. This is true because it can always borrow or print more. MMTers assert it is also impossible for government to default. They argue government can always print money to service debt. But what happens when nobody buys your debt or nobody will accept your money? Exactly what is your full faith and credit worth?
When this happens the only constraint on deficit spending is inflation. The government cannot spend more into the economy than its real capacity permits. If it does hyper-inflation sets in.
Just asking questions…
Okay, so who determines the real capacity of the economy? What does that mean? Do politicians actually believe this deficit myth? Politicians talk a lot about fiscal responsibility on the campaign trail. The Modern Monetary Theory handbook focuses more on deficit rhetoric than on actual policy or economic reality.
The argument is: Actions speak louder than words. The federal budget has been in deficit for 76 of the last 89 years. Deficit-constraining measures like the PAYGO rule are routinely waived. Are policymakers really that worried about deficits? The argument says two wrongs make a right. Well, they don’t.
The relevant question is not the existence of deficits, but their size. Modern Monetary Theory argues the budget’s size should not be dictated by debt sustainability. Rather, it should be determined by the amount of “slack” productive resources labor, land, factories, etc. available to meet that spending. Got that? Don’t worry almost nobody understands how to calculate this either.
What they are saying is: When the economy is at capacity, deficits send more money after the same goods. That raises prices. But if the economy is below capacity, then added government spending can mobilize otherwise slack resources without inducing inflation. This assumes the governmental spending actually affects slack resources at all.
What MMTers want is a reorientation of the government’s whole approach to spending. They want to decouple spending and revenue generation. They do not care about the size of the deficit. From their perspective the question policymakers should always ask is: Will the added spending will induce undesirable inflation? That begs the whole question of how much inflation is too much?
Political reality… does that exist anymore?
Exercising “monetary sovereignty” means: First, Congress sets a list of spending priorities. Then it prints money to meet them. What happens to the balance sheet does not matter. Doing so is important. The “deficit myth” stands in the way of the other “deficits” in our country. There’s the “education” deficit, the “climate” deficit, the “democracy” deficit, etc.…
When inflation becomes an issue, Congress simply raises taxes or borrows more. This results in sucking money back out of the private economy. The government grows limitlessly. The size of the private economy shrinks until you cannot feed yourself a meal with a wheelbarrow full of money.
MMT is framed as revolutionary. It is actually completely irresponsible. In its own opinion it amounts to a kind of word game. MMT is substituting “use taxes and borrowing to pay for spending” with “use taxes and borrowing to offset the inflation that pays for spending.” The net effect is the same, just with Congress bound by the price level instead of the debt level.
We have actually tried governmental price controls in America. They did not work worth a crap. We did it under FDR. The black market was huge. Products were less safe and more scarce.
There is no room for deficit spending now. Coronavirus response excepted, inflation has been persistently below 2% since 2008. Private domestic investment has flagged. “Government can worry less about deficits right now” is not the same as “Congress can be trusted to spend freely and then manage inflation when it strikes.” The biggest problems with MMT are its assumptions about politics. They are utopian assumptions. Unfortunately the world we live in is a very harsh cold realm one.
Controlling the Genie once it is out of the bottle
MMTers assert we have already entrusted the government with “monetary sovereignty.” Therefore the best way to bind its unbridled spending power is through “automatic stabilizers.” Chief among them is a jobs guarantee. This ties spending levels to real economic variables rather than political whims…
This views the government through rose-colored glasses. Do you believe our government would act responsibly if fully unconstrained by debt concerns? Necessarily, Modern Monetary Theory means asking elected representatives to make judgments about measuring inflation. You trust the government to ask itself if it should spend more money and respond responsibly… don’t you?
Do you have concerns about integrity in governmental spending? How about their competence to make such judgments? But both judgments and measurements are subject to political incentive. An MMT world is one where price measures fall prey to Goodhart’s law. “When a measure becomes a target, it ceases to be a good measure.” They are determined not objectively but by what Congress wants it to be.
There is no reason for Congress to bind itself to “automatic stabilizers.” They have never allowed themselves to be constrained in the past. When unbridled spending can flow to Congress’ preferred interest groups; it will spend.
Subjecting price level to the political process sets stability concerns against the demands of entrenched constituencies. This is state of affairs central bank independence was originally designed to combat. So much for the Fed… Do you think it is a good idea to dump the Fed and centralize more power in Congress? How’s that working?
Is Congress acting responsibly now?
Congress already does a poor job following a standard, balancing the budget. They have not even bothered to pass a budget in almost a quarter of a century. MMTers think that does not matter. In an MMT world, horse-trading drives us inexorably towards hyperinflation. That is a political reality no wonky stabilizers can address.
It is also worth noting, if MMT allows the government to spend freely, it need not do so in line with any specific political program. MMTers argue taxes are needed to balance the distribution of wealth in society. To you is left the logic and reasonableness of those positions.
Unconstrained by “fiscal responsibility” it is hard to imagine politicians justifying any taxes at all. Why would anyone vote for taxes if they could vote for someone who wouldn’t tax them? Further the “we need to reduce inflation” argument can only convince 30% of the populace who understand how inflation is reduced. Think about that… “we the people.”
MMT already has quiet political support among progressives, both Rs and Ds. Politicians see its usefulness for their own goals. MMT is used to argue for a national industrial policy. Abandoning the economic “neutrality” informing present deficit debates does not guarantee the prioritization of any specific set of values. MMT will induce a policy arms race. In everyday words there will be unlimited and unrestrained governmental spending.
Myths serve a political function. The “myth” of balanced budgeting constraints crowding out private investment and control of inflation. It also imposes a potent check on the government’s fiscal reach. The full exercise of “monetary sovereignty” is not merely a threat to long-run macroeconomic stability. It is also a profound expansion of government power with a result we the people are unlikely to enjoy.
