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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.

19 thoughts on "Really Bad Ideas, Part 1: Modern Monetary Theory"

  1. The article above just shows the unknown author is out to lunch on MMT. Calling it the “ultimate free lunch” is telling how profound is his ignorance. He fails to see [Ctiticalthinker is on the money here] that it is the existing monetary system in force already today. It’s not used so much because the mainstream is lost in a haze of theories that have a 100% failure rate and it suits the powerful people that we don’t understand.
    Regarding the free lunch it it seems so but the state can only create money in response to a debt. It can’t store “unused” money. Money is only a token it has no existence outside debt. It’s not called fiat because it is substantial but because it is only a token and depends on the state to support it, basically.

  2. To sumarize; MMT is used in countries with sovereign currencies, it
    needs not to be implemented. Only constraint on USA debt is an old law
    that says: there is a debt limit and it needs to be extended by
    congress. But as everyone sees they extend it as soon as it gets close
    to it. WIthout that law, economies would never notice “the debt limit”
    which is extended all the time. But that is politicians who make it a
    problem, not markets.

    MMT is used in countries with no debts in
    foreign currencies; USA, UK, Canada, Australia, Swizzerland, Japan.
    ABout a dozen countries in total.

    And now a caveat: Rest of the
    world is using MMT monetary system but they have an additional
    constraint that is preventing them to have a monetary policy
    independent-as their economy requiers at the time. They have to trade in
    foreign currencies. This is a political enforcement by “former” empires
    on “former” colonies. There is no free trade since trade can be done
    only in those “former” empires currencies. This requiers them to have
    debts in foreign currencies and in time of crisis they have to import
    more which forces them to offer higher interest rates, while in
    sovereign countries with Independent CB they lower the inerest rate to
    help their economy.

    Independent CBs lower interest rates in time
    of economic crisis, while dependent CBs raise it in times of crisis in
    order to get more foreign currencies just to refinance old debts. That
    is how Greek played out; because of their foreign debts (they do not
    print Euros) their interest rate went to 27% in crisis, while Japan’s
    went negative interest rates. Greek debt was 125% of gdp while Japan’s
    was 250%.
    Difference is sovereign currency and independent CB. Japan owns only to Japan’s banks; Greece owned to many foreign banks.

  3. HA HA HA
    MMT is description of present economic systems, It is NOT
    something that needs to be implemented, it is allready here, but only
    in particular countries, not all of them.
    Countries with sovereign currencies ARE using MMT.
    That is what most people completely miss.
    what is a sovereign currency?
    It is a currency that is not pegged to any other one or to gold,
    AND that it’s country trades only in it, not in foreign currencies so that there is no considerable debt in foreign currencies.
    There
    is only about a dozen of sovereign currencies (which most people
    understand of as reserve currency, but there is not only one reserve
    currency) and countries using them and MMT as monetary system are USA,
    UK, AUstralia, Canada, Japan, Swizzerland and partly EZ but not
    individual countries but EZ as a whole. (Individual countries use Euro,
    only ECB can print it but not individual countries)

    This means
    that those sovereign countries will trade only in their own currency and
    hence, have no foreign currency debts. These “former” empires have
    forced the rest of the world to accept their currencies only, they can
    not trade in their own. This means that USA, UK… can buy anthing in
    the world with money that only they can print. And rest of the world is
    willing to go into debt in foreign money to buy anything from them.

    Central
    banks of those countries that have no foreign money debts are
    INDEPENDENT to pursue monetary policy as it fits it’s economies. This is
    the original meaning of Independent Central Bank: to be able to pursue
    needed monetary policy and not to care about foreign debts. This is how
    Japan can have 260% debt to GDP yet negative interest rates for their
    debt; Japan’s CB is independent of foreign debts so they can control
    interest rates as their economy needs. There is no bond vigilantees for
    these countries. Ever, not ever, because only CB control interest rates
    for their debts. No foreign banks hold their debts and can NOT blackmail
    them as they do to Greece. So Japan’s CB is Independent.
    This is what is considered a reserve currency.

    Again,
    MMT is allready here since the end of the Bretton-Woods but only for
    those countries with sovereign currencies and independent CB.

  4. Your critique misses some important points:
    [1] MMT is not based on a theory of value or money or even society. It is based on a factual, empirical description of what banks and treasuries actually do, how they act. It is largely based on accounting identities which no one can dispute.
    [2] There are prominent MMT proponents who are not at all socialist or about to give away the store for free. In fact, one of the criticisms is that MMT could equally be used to enforce slave-level wages.
    [3] Historically, the King’s taxes were levied only on the wealthy. The less wealthy were taxed by having to perform services in kind, labour for public works. The wealthy could often buy off such labour conscription, if not by money, then by hiring a substitute. The system worked well at a time that many people had little money and many goods/supplies came about without exchange of money. If you can put people to work with MMT, there would be disinflation because of competition with the private sector — this topic is fully problematic, by the way. However, the government can equally force pricing down as up if there is slack in the economy.
    [4] MMT does not at all deny that spending money on one thing excludes spending it on another. War spending illustrates that the government can borrow/spend huge amounts in an emergency, although it does happen at the cost of available consumer goods. By calling spending a political decision, MMT simply points out that you need not call off the football game because you have run out of points. It is not money which limits the possibilities (money is just keeping score), but other variables. That is why there is always enough money when war-spending is required.
    [5] Unemployment means you are wasting valuable resource which you may as well put to work. It is not lack of money but lack of the proper social organization (or virtuous economic flows) that sidelines people. Sidelining people is not truly saving (like giving them pink slips) because unless you are prepared to actually get rid of them, there will still be costs but with no attendant productivity. In all European social democratic societies, there is an obligation to work, and this is enforced in Northern European countries — where this obligation weakens the entire system is at risk. I know lots of stories of people who tried to lounge around in the welfare system, only to be called in the morning by irritating civil servants who have found odd jobs for you to go to.
    [6] MMT points out that unemployment is a political decision, not an economic “fact of life”. If you are spending $100 dollars to employ 80 people while 20 do nothing, you can just as well spend those $100 to employ 100 people, and the added productivity will generate growth. Treasury bonds are simply savings accounts for people who would rather park their money with the government than investing it elsewhere. They would be very upset if the government stopped “borrowing” from them.

    The idea that human nature will turn politics into giving free stuff is just as true of the current economy: there is plenty of free money going to certain groups, both rich and poor.

  5. Your criticisms are shallow. You don’t even reach the Federal Reserve system or the banking cartel having the ability to issue unlimited amounts of money for the corporate agenda. The money power is given to Congress in the Constitution, but it was usurped by the bankers through the Federal Reserve system. So MMT, with a new take on Keynes, is a rock star with an arrangement of a Bach cantata ( https://www.youtube.com/watch?v=aGDZc9bdUZM ). The whole substance here is that socialist policies could be enacted by a socialist government, which hopefully, we already knew. In reality, MMT is a new gloss on the existing system in which the money power is appropriated for the benefit of a tiny elite. We are so ignorant of money that new insights are a revelation. Perhaps you will include continuing the present Federal Reserve money system as another “really bad idea.” I also would appreciate it if you would discuss the AMI ( http://www.monetary.org/ ) reform proposal found in the NEED Act. I don’t see anything wrong with it, except taking excessive power from the banking cartel and potentially freeing us from federal debt.

      1. I don’t think it is about trusting politicians. If Congress is clearly responsible for the money supply they will find an acceptable level and then avoid the issue. It is not about wild spending ideas, but about how the ruling class(es) maintain their positions, which usually has a lot to do with access to money. I would expect Congress to issue too little money rather than too much.

        1. I correctly predicted that you as an MMT adherent couldn’t name a single politician that you trusted to determine the nation’s money supply. Case closed.

  6. Ask any MMT adherent which specific politician(s) they trust with the money supply and you’ll hear the sound of crickets.

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