Skip to comments.Democrat-touted modern monetary theory is a joke that's not funny
Posted on 01/18/2019 5:41:57 AM PST by gattaca
Yes, a government that issues its own currency can pay its bills. But piling up debt for no urgent reason is lunacy.
If you follow the debates over U.S. economic policy, you had probably heard of modern monetary theory well before freshman Democratic Representative Alexandria Ocasio-Cortez spoke favorably about it earlier this month.
If you thought from the start that the whole idea sounded like lunacy, you were right, even if its possible to admit some sliver of sympathy for it. So why is MMT, as it is known for short, generating such intense interest now?
First, lets start with the confusion over what it is. The answer seems to depend on which advocate of MMT is being asked. It is sometimes a theory of money. MMT is also being discussed in the context of a political program to justify huge increases in social spending. Finally, there is its role as a prescription for macroeconomic policy.
Even as just an economic theory, it is not settled or fully developed. This makes engaging with it challenging even, at times, frustrating.
The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills. This observation allows policy makers to show less concern about the budget deficit than is typically the case.
In fact, MMT is growing in prominence precisely because of its relative lack of concern about the size of the deficit. In the years immediately after the Great Recession, which started in December 2007, this aspect of MMT stood in favorable contrast to the position of fiscal-policy centrists and many Republican politicians who called for significant reductions in the deficit at a time of very high unemployment.
Today, when some are continuing to question commonly held views about fiscal policy, the thrust of MMT the deficits matter a lot less than its critics would have you believe is attractive to many solid economists. (Though I am not yet sold on their arguments.)
In my reading, this is about all that can be said favorably regarding modern monetary theory. As a political program, the observation that a government issuing its own fiat currency cant involuntarily default an observation with which mainstream economists largely agree has been used to advocate for extremely expensive spending policies, including a universal jobs guarantee and single-payer health care. Theres no need, some MMT advocates argue, to let paying for these proposals through tax increases get in the way of enacting them; government can just increase the deficit.
In a short review of MMT, the economist Stan Veuger (my colleague at the American Enterprise Institute) notes that on its face this is not all that different from current policies that deliver benefits today and costs tomorrow, including the deficit-financed 2017 tax cuts. But thats more of a criticism of this approach to legislating than a justification for MMT.
Political progressives like Ocasio-Cortez who are showing sympathy for MMT are also being short-sighted. If we further loosen the shackles tax revenue has placed on federal spending, then Democrats may get Medicare for All the next time they control the government. But, in turn, when the GOP is next in the White House, what might it do with its newfound fiscal freedom?
Both parties claim to care about the deficit, but once in power they often act as if they care more about putting their preferred policies in place, whether these are tax cuts in the case of conservatives or new spending programs in the case of liberals. Further loosening political constraints on deficits is reckless, no matter which party is doing it.
But it is in its ideas about macroeconomic policy that MMT fully earns its place on the fringe.
The theory understands that the economy is constrained by real limits on its inputs to production. If you push its advocates hard enough they will admit that at some point all that spending could send the economy into a bout of damaging inflation.
But they quickly dismiss that risk, in part by pointing to the lack of inflation in advanced economies in the recent past and by appeals to vague thought experiments.
So what does MMT have to say about inflation when it does materialize? Since under MMT the central bank is responsible for financing government programs through printing money, it falls to the institution with authority over tax and budget policy the U.S. Congress to make sure prices are stable by raising taxes and moving the budget deficit into surplus. As part of a series of columns last year for Bloomberg Opinion, leading MMT exponent Stephanie Kelton called on fiscal policy, not the Federal Reserve, to manage the business cycle.
But it is extremely difficult to imagine Congress responding to an overheating economy by legislating tax increases. If anything, the opposite is easier to imagine: When households are being hit with price increases, the natural inclination of an elected representative might be to increase their disposable income by lowering taxes, not raising them.
It is precisely this dynamic the occasional need for the institution in charge of price stability to inflict short-term pain for long-term benefit that justifies in large part the political independence of central banks.
Veuger, who is largely critical of MMT, points out that its advocates may envision an independent fiscal authority, though even on this their views are hard to decipher.
But tax policy changes the way income is distributed across households the after-tax income of high-earning households is reduced, and households to which income is redistributed see increases and Veuger argues that for this reason it should not be conducted by an agency that is independent of politics.
Monetary policy also has distributional implications. For example, low interest rates are good for borrowers but bad for savers. But given that the U.S. already heavily redistributes income through the tax code, Veuger is right that we should avoid the turmoil that would be created by handing tax policy over to a new, independent agency.
We typically think of inflation as being generated from an overheating economy with excess demand. But prices can also rise because it has become more expensive for businesses to produce goods and services. For example, this situation could occur if the price of oil were to increase rapidly the economy could experience stagnation and inflation at the same time.
In this scenario, MMT seems to call for tax increases in order to restrain inflation. But the economy is already slowing. Raising taxes would only make a downturn worse, increasing unemployment and further slowing the economy.
Modern monetary theory is seductive in its promises and, occasionally, in its observations. But if enacted it could cause great harm to the U.S. economy. Like Medusa, it may seem beautiful. But if you look it in the eye you will turn to stone.
Author is implicitly agreeing with this democrat tripe: "...deficit-financed 2017 tax cuts." It's not the government's money, it's the taxpayers'. If a tax cut actually resulting in less government revenue, then the government spending should be decreased, to balance the congressional budget. But tax cuts increase government revenue! Wasn't the latest report that 2018 was a record US government tax collection year? I'm sure the congressional budget will reflect that in decreased spending and taxes, right???? Hah! Let alone is there no balanced budget, there is no budget period. And this government partial shut-down is over a continuing resolution to increase the US borrowing limit, so that the deficit spending can continue. Right?
I know that all governments fear being controlled by others, so none wants to have its currency printed by someone else. But being able simply to print more money, when more spending is wanted, is just taking on more government debt, and deflating the value of the money already in circulation. So easy to understand. And I'm not even an economist. Don't even play one on TV. And didn't stay in a Holiday Inn last night.
The author is acknowledging what... there is somelogic or truth to unlimited spending and printing money to pay the bills? Or is he suggesting he understands why nincompoops like it (or even understand it's ramifications)?
Then there is some veiled and complicated explanation about the downside of this monetary policy.... Really?
Good Lord. The monetary policy espoused by these folks where spending is funded through printed money has been tried. But the article never mentions the root cause and effect of it. It adds currency into the economy without any production. It devalues the money. It creates inflation and makes saved dollars worth less.
Magabee? Zimbabwe? The article missed the basics.
(My first paragraph above is a quote from the posted article. I still can’t figure out how to make the forum automatically identify a quote. Guess I’ll have to use italics or the words “quote” in front of it, etc. Sorry if anyone was confused, or didn’t read the full except of the posted article.)
Hey, it worked so well in Venezuela!!!
I agree. I hear AOC pushing this and calling anyone who disagrees essentially too stupid to understand.
I just like to read what other FReepers have to say.
At least until somebody decides they have no confidence in your currency . . . spent any Confederate currency lately, anyone??
So, a national economic policy premised on the notion of the Free Lunch. They really think we can continue to spend a trillion dollars a year (and rising) of imaginary money indefinitely with no adverse consequences. As we look through the history of civilization can we find a single instance where that’s worked? “Money for nothing and your chicks for free”
People who retired a generation ago retired with savings worth x. Time moved on, government printed money. Now that generational savings is worth MUCH less. Thank you for making the elderly dirt poor, government.
Time and time again it is shown that lowering tax rates increases tax revenue when the tax rates are too high. The problem isn't the income side of the equation - it's the outgo. Until the orgy of spending in congress (BOTH parties) ends, the deficit will continue to soar.
You mean like continentals during the Revolutionary war and greenbacks during the civil war? They either ended up nearly worthless or had to be redeemed by gold.The Constitution prohibited the Federal government from issuing paper currency.
You can look up html codes on the internet. Whenever you use one, you have to format your whole post using html codes. So I use < p > at the ends of paragraphs.
Note that I placed spaces into the html examples so that they would display. The actual functional codes dont show in the final post.
Judging from how they behave at budget time most Republicans apparently believe in MMT too.
“...deliver benefits today and costs tomorrow, including the deficit-financed 2017 tax cuts...”
Except that the 2017 tax cuts produced increased tax-based income to the government, not an increased deficit, proof that the problem is spending.
You are 100% correct when you say that the problem is out go not income. Which is also the truth for much of the population in this country.
I know people who’s spending will always outstrip their income no matter how much money comes in.
With the government, printing its own money simply ensures that the gap between income and outgo will indefinitely increase.
MMT = UNICORNS
AOC is floating the trillion-dollar platinum coin thing again too.
Sadly Keynsian theory is still all the rage today. We have this obsession with consumption over production. Sadly even a GOP Congress, as we have seen, has no desire to cut spending.
I gotta an idea. Make spending equal revenue for a few years. Like maybe a hundred years.
Sometimes it sort of works in some extremely stable nations, for a short time, so therefore we should make it long term policy! Brilliant!
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