If you think Greece should serve as an economic model for the United States, you’ll love modern monetary theory (MMT).
MMT advocates like Congresswoman Alexandria Ocasio-Cortez (AOC) (need I say more) believe the federal government can spend unlimited amounts of money and just keep creating more money to pay off any debt without increasing taxes. At least initially, of course.
Stephanie Kelton warping the minds of our children.
Stephanie Kelton, who was a senior economic advisor to Bernie Sanders′ 2016 presidential campaign and chief economist for the Democrats on the U.S. Senate Budget Committee, is MMT’s most visible advocate. She has become a media darling by spouting nonsense, such as the following from an interview with CNBC:
“If you think of the government deficit as the difference between what the government spends into the economy and what it taxes back out, then imagine a government that spends $100 into the U.S. economy but it only taxes $90 back out. We label that a government deficit and we record that on the government’s books. But what we forget to do, is pay attention to the fact that there’s now $10 somewhere in the economy that wouldn’t have been there otherwise, that is put there by the government’s deficit. In other words, their deficits become our surpluses. So when we talk about the government having all this red ink, we have to remind ourselves that their red ink becomes our black ink, and their deficits are our surpluses.”
Thanks for dumbing it down for us, Ms. Kelton, but I’m still not sure I understand this. So you’re saying that government spending creates a surplus, not a deficit. You’re saying that $90 – $100 = +$10, which is new math to me.
Wow! Imagine how much greater America will be when we quadruple our federal debt and leave it to our kids to determine whether or not MMT is anything more than a theory. We have nothing to lose by putting our spending on their tab, right?
Ms. Kelton sees deficits as an opportunity, not as a problem. Deficits make the government weaker, but they make the rest of us relatively stronger, because for every $10 by which the government overspends, “there’s now $10 somewhere in the economy that wouldn’t have been there otherwise.”
I guess we don’t need to pay any taxes, then. Just ratchet up the spending. The more, the better.
Interviewer Jordan Malter let Ms. Kelton’s explanation of budget deficits go, presumably because it made no more sense to him than it did to me. And, if you’re wondering why your kids have no understanding of capitalism, note that Ms. Kelton is now a professor of public policy and economics at Stony Brook University.
Spending to Full Employment
In a separate interview, Ms. Kelton wrote that, “MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.”
But please define “full employment.” The Fed thought we reached that level when the E-3 unemployment rate fell to 6%, but it continued falling. And how will Congress/the Congressional Budget Office/the U.S. Treasury/the Federal Reserve Board determine the level of public spending necessary to achieve full employment, especially given the gap in time between when spending is approved and full employment is projected to be achieved?
In true Keynesian fashion, it apparently matters not where the public money is spent. Expect a lot more spending on bridges to nowhere, California-style trains to nowhere, useless studies and abuse of your tax dollars from MMT true believers. But keep in mind that government spending is a public service, as it contributes to our deficit. When your Congressman arranges a fact-finding mission to the Maldives, it may look like an unwarranted expense, but it’s taking place to enhance our financial standing by adding to the deficit.
And since we’re just going to print more money to cover our bills, it should have no impact on our bond rating, right?
Making the Federal Debt an Asset
It must be tempting for all of Congress to adopt MMT as a way to make the federal debt look like a valuable asset. Of course, it doesn’t matter much, as Congress has never treated the debt as a problem, anyway. Just last month, Congress agreed to a budget deal in which the federal deficit will exceed $1 trillion each year starting in 2022.
“The Congressional Budget Office predicts that federal debt held by the public will increase to 92% of the economy in 2029 on present course from 78% in 2019,” according to The Wall Street Journal. “Interest on the debt as a share of the economy is on track to exceed defense spending, and by a lot if interest rates rise even modestly.”
This deal was approved by both parties, as they work hard to improve our economy.
Maybe members of Congress will campaign on the principle that they helped our economy by increasing the federal debt, but I doubt it. Fortunately, every constituent with a third-grade education or higher is likely to understand that MMT is true voodoo economics.
Controlling Inflation
One big catch in MMT is that the government’s role is supposed to be to control inflation – something that the professional economists that make up the Federal Reserve Board tried unsuccessfully to do for years.
And how is the U.S. Treasury supposed to control inflation? By spending less? How much less? Over what period of time? How long before it has an impact? How do we keep from over-adjusting?
Unless the Treasury has the super powers that the Fed lacks, creating trillions of new dollars will, of course, devalue the dollar and eventually create hyperinflation.
According to Kelton, though, inflation won’t kick in until we achieve full employment, which no one seems able to define anymore. This relationship between inflation and employment is a Fed staple, and follows the reasoning of the Keynesians and the Philips curve, even though history has proven them to be wrong.
MMT isn’t all that modern, though, as it is mostly an excuse for the behavior that Keynesianism created – unbridled government spending.
Wikipedia does a better job than most in explaining MMT, as it notes that, “The theory suggests government spending can grow the economy to its full capacity, enrich the private sector, eliminate unemployment, and finance major programs such as universal healthcare, free college tuition, and green energy.”
In other words, it will now be virtuous to spend $32.6 trillion over the next decade for universal healthcare, provide everyone with a universal basic income (UBI) at a cost of $3.8 trillion a year, and adopt a Green New Deal that would be so expensive no one can even calculate its costs.
Wikipedia adds that we won’t have to worry about hyperinflation (see Venezuela, et al to see what really happens): “Increased government spending will not generate inflation as long as there is unused economic capacity or unemployed labor, MMT proposes. It is only when an economy hits physical or natural constraints on its productivity — such as full employment — that inflation happens because that is when supply fails to meet demand, jacking up prices.”
So MMT treats employees as a product for which there is a limited supply, but it ignores all other products and services, as if their supply will have no bearing on the economy. Oil, for example, does not figure to have an impact on inflation, but the supply of employees does.
When we hit full employment is the solution to start laying people off to slow the economy and reduce inflation? How will we know when we’ve laid off enough people?
If MMT’s true believers are wrong and creating trillions of new dollars causes inflation after all, there’s a fall back. Higher taxes.
Higher taxes. Now MMT is starting to make sense.
To paraphrase Geraldine Ferraro, we’d call MMT voodoo economics, but doing so would give witch doctors a bad name.