A Little More on Modern Monetary Theory

Back at the end of January, I did a piece on the new economic theory sweeping the Democrat party:  Modern Monetary Theory.  The theory and name are the products of economist Bill Mitchell of the University of Newcastle in New South Wales.  When we marvel at Apoplexia Occasional Cortex saying, "just pay for it" and ask no one in particular, "she really has a masters in Economics?" - this is how you get a world full of people like AOC.

Economist and financial advisor John Mauldin writes on MMT this week and has lots to say:

Let’s get the official definition of MMT from Wikipedia. My comments inserted are in brackets.

 In MMT, "vertical" money (money created by the government and spent in the private sector) enters circulation through government spending. Taxation and its legal tender enable power to discharge debt and establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met. [And thus higher taxes create more demand for the currency and help to maintain the value thereof.]

In addition, fines, fees and licenses create demand for the currency. An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities by itself. [The more you want the government to spend, the higher the taxes have to be in order to keep from creating inflation, or so the theory goes.]

Proponents argue that unemployment is caused by lack of demand and lack of demand is caused by insufficient money entering the private sector, a problem the government can solve by creating money and spending it in the private sector. Voilà, demand is created and unemployment goes down. Inflation? That can be controlled by higher taxes. Hey, it’s their theory. Don’t ask me to explain it.

Take a look at that first sentence in the last paragraph: "Unemployment is caused by lack of demand, which is caused by insufficient money entering the private sector..."   I can see how the lack of demand for some company's products could lead to unemployment for people who work at that company, but how does money the government created and spent in the whole "private sector" matter to that specific company?  If you really don't like the products, or don't like the company (cough - Dick's Sporting Goods) how does that Gubmint Money affect you?  Are you really going to buy that product or shop at that company if the government buys their products?  If the .gov does buy their products, then what?  Do they buy their products and bury them in a landfill to create more demand?

The whole thing is this sort of borderline lunatic thinking from top to bottom.  "Fines, fees and licenses create demand for the currency" - oh, great!   Let's fine people to death, demand fees for everything, and licenses for everything because it will "create demand for the currency"?  It creates a demand for money, but that's money the government will create and then pay to itself.  You're just a hapless channel for that money.  The same goes for the first paragraph and the idea that the Taxation creates demand for currency - they're creating money to pay to themselves through you.

Be prepared for more fees, more taxes and licenses for everything in life.

The problem is that this idea is gaining traction in one of the major political parties.  Economists advising major presidential and congressional candidates on the progressive and even “moderate” left are more and more openly talking about MMT and its practical applications.

Why should this be on your radar? Let me give you just a few scenarios…

Politicians are increasingly talking about “free stuff.” Free college, guaranteed basic income, more total healthcare paid for by the public, basic housing, and more. It is almost like there will be an auction to see who can promise the most free benefits, paid for by taxes on the rich. They will cite economic advisors who say it is completely doable and even necessary for the general welfare.

“The richest country in the history of rich countries can easily afford to spend more on its citizens ensuring basic income and wealth equality.” More or less a direct quote from several interviews. Forget mere income taxes. The new political ante will be a wealth tax.

That means these ideas will be increasingly promoted in the public space. More politicians will argue for increased spending and/or at least different spending priorities. Guns and butter.

Over the next few years, this is likely to spread as a "great new theory" on the left.  Since younger voters are led by feelings rather than experience and logic, they will feel a natural affinity with the idealism. Why shouldn’t a rich nation help those who are less advantaged?

The lurking problem is that the business cycle, well, cycles.  Boom gives way to bust; expansion is followed by recession.  At some point there will be a recession. Unemployment will rise and deficits increase until we are on our way to a $30-trillion debt in just a few years. This will crowd out private investment, slowing whatever recovery there might be and making us vulnerable to a quick second recession, not unlike the recessions of 1980 and 1982.

That could also raise the potential for a true “throw the bums out” election. The frustration among voters that led to Trump will still be there, but it will also be shared by many on the left who will see the MMT promises as a way to change things.   

It is not far-fetched to imagine a White House and Congress beginning to work around the principles of MMT, if not adopt it outright with sharply higher taxes and spending.

Is this a threat?  I think so.  Is it a big threat?  That's much harder to answer.  Right now, no, but given the right combination of an inopportune recession and an election as close as the last, it could get a foothold.  There are definitely constitutional issues that have to be resolved; to wit, the Federal Reserve can buy US bonds, but it can't directly create money as this requires.  For all the pounding we all did on Quantitative Easing, it was rather subtle compared to this outright money printing.  

 

From a long (21 page) article on MMT at Seeking Alpha