Really Bad Ideas, Part 1: Modern Monetary Theory

The past century has been an orgy of experimentation. We tried fascism, which initially looked good to some before (literally) crashing and burning. We tried communism, which looked great to many before killing millions and withering away. Fiat currency and fractional reserve banking, meanwhile, still make sense to most economists and politicians but seem to be heading for their own fiery end.

And we’re not done. Lots of new ways of organizing society are competing to be the next big thing. This series will consider some of the really bad ones, starting with Modern Monetary Theory (MMT).

MMT’s basic premise is that governments don’t really need to finance themselves through taxing and borrowing when they can just create money and spend it, thus simplifying their operations and satisfying everyone’s needs. Here’s an excerpt from a long panegyric from the Nation magazine:

The Rock-Star Appeal of Modern Monetary Theory

In early 2013, Congress entered a death struggle—or a debt struggle, if you will—over the future of the US economy. A spate of old tax cuts and spending programs were due to expire almost simultaneously, and Congress couldn’t agree on a budget, nor on how much the government could borrow to keep its engines running. Cue the predictable partisan chaos: House Republicans were staunchly opposed to raising the debt ceiling without corresponding cuts to spending, and Democrats, while plenty weary of running up debt, too, wouldn’t sign on to the Republicans’ proposed austerity.

In the absence of political consensus, and with time running out, a curious solution bubbled up from the depths of the economic blogosphere. What if the Treasury minted a $1 trillion coin, deposited it in the government’s account at the Federal Reserve, and continued on with business as usual? The workaround was technically authorized by an obscure law that applies to commemorative platinum coins, and it didn’t require congressional approval, so the GOP couldn’t get in the way. What’s more, the cash would not be circulated, so it wouldn’t cause inflation.

The thought experiment was catnip for wonks and bloggers, who described it as “ludicrous but perfectly legal” (Slate); “a monetary parlor trick” (Wired); “really thrilling” (Business Insider); “a large-scale trolling project” (The Guardian). The idea made its way onto late-night TV, political talk shows, White House press conferences, and lived on as a hashtag: #mintthecoin. At the heart of the attention was an acknowledgment that money wasn’t the problem here—politics was.

For a small but committed group of economists, academics, and activists who adhere to a doctrine called Modern Monetary Theory (MMT), though, #mintthecoin was the tip of the economic iceberg. The possibility of a $1 trillion coin represented more than mere monetary sophistry: It drove home their foundational point that fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend.

According to this small but increasingly vocal cohort of economists, including Bernie Sanders’s former chief economic adviser, once we change the way we think about money, we can provide for everyone: We don’t have to “find” the money to “pay” for universal health care by “cutting” the budget elsewhere. In fact, our government already works that way: Spending must precede taxation, or there would be no dollars in the economy to tax. It’s the political will to spend on certain things, not the money to afford it, that’s lacking.

“The idea that you can’t feed hungry kids and build a bridge is a huge problem,” says Stephanie Kelton, an economist at the University of Missouri, Kansas City. “It’s cruel to say we want more money for education and food but have to wait for legislation.”

Kelton, who spoke about the coin on MSNBC, is MMT’s most mediagenic expert. She’s 48 years old, whip-smart, impeccably coiffed, and brims with enthusiasm—important for someone who spends half her time telling Wall Street types to rethink their basic approach to economics. When Sanders ran for the Democratic nomination, Kelton became his chief economic adviser at the recommendation of several prominent left-wing economists, including Dean Baker and Jamie Galbraith. Before that, she served as chief economist on the Senate Budget Committee and moonlighted as the editor of a blog called New Economic Perspectives.

Kelton sees the fundamentals of her work as “a descriptive analysis that could be exploited by either side: Democrats and Republicans can use the insight to push tax cuts or increase spending.” Indeed, the idea of a big-spending economic stimulus to fix the country’s infrastructure served as a common ground for Trump and Sanders voters who liked the idea of jobs perhaps more than they disliked the idea of national indebtedness. If that’s what voters want, then MMT is a rare bird: an economic theory that not only validates their hunches, but contends that they’re the key to a healthy, stable, prosperous economy for all.

To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. The decisions about how to issue, lend, and spend money come down to politics, values, and convention, whether the goal is reducing inequality or boosting entrepreneurship. Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we’re a long way off from that, particularly if we include people who have given up looking for jobs or aren’t working as much as they’d like to among the officially “unemployed.” The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.

Some thoughts
Let’s start by pulling some quotes from the Nation article and looking for fatal flaws:

“Fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend…The idea that you can’t feed hungry kids and build a bridge is a huge problem”

Agreed, hungry kids and dangerous bridges are bad things. But the above variation on “The richest nation in the world should be able to [fill in your top pressing need]” ignores the actual physical limits on the amount of stuff that exists at any one time. Life is always and everywhere a series of trade-offs. To get something you have to give up something, a limitation which Utopian philosophies have always assumed away.

“…economists Tyler Cowen and Paul Krugman, though not particularly sympathetic to MMT (in part because of their concerns about inflation)…”

When Paul Krugman calls your plan inflationary, you’ve achieved something unique.

“Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we’re a long way off from that.”

Inflation is only “not a problem” if you exclude real estate (soaring), fine art (soaring) and financial asset prices (record highs worldwide). If you do include them it’s clear that the excessive currency created in the past few decades is simply flowing into the assets most prized by the rich recipients of government largess. The fact that official inflation numbers exclude asset prices is another really bad idea that should be considered in this series.

“The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.”

Now we’ve fallen back into mid-20th century European socialism where the state is the dominant employer and owner of most productive assets while private enterprise is just a vestigial structure, like male nipples, forlornly hanging around long after it no longer serves a useful purpose other than as an ATM to be tapped as needed. That this view is still widely held is one reason that the message of Atlas Shrugged (if not the behavior of its main characters) still resonates: When the public sector takes over the economy capital goes on strike and the system collapses.

“…Democrats and Republicans can use the insight to push tax cuts or increase spending.”

Here’s why MMT will be tried by one or more major governments in the next few years: It’s the ultimate free lunch. We’ll eliminate your taxes, give you a good-paying job with a public pension and/or invade whatever country upsets you, with zero argument over the deficit. Everything will be free!

This has universal appeal and (once the current system really starts to implode) will generate lots of enthusiasm. It’s possible that if the recent Democrat primary had been run honestly Bernie Sanders would be president today and MMT would already be in the US legislative pipeline.

But Europe, the system closest to the abyss, is a more likely early adopter. All it will take is a few elections in which the populist left wins or finishes a close second.

How will MMT fail? Not because of complexity. Financing a government this way would be technically very simple. The flaw is human nature. If the same officials who contest upcoming elections get to decide what government “needs,” its needs — and the required increase in the money supply — will be endless.

Eventually MMT will bump up against the one thing it can’t control: The market’s assessment of the currency’s value. As the money supply soars, the exchange rate will eventually plunge. The price of everything will skyrocket and the Austrian Economics crack-up boom will swamp the tax increases or price controls or whatever the MMT governments throw at it.

It’s possible that MMT is the final stage of the fiat currency meta-experiment in which we hand governments control of the money supply and discover (surprise!) that you can’t trust humans with absolute power. Which is, when you think about it, the fatal flaw of most really bad ideas.