Tag Archive for: FailureOfMMT

Today’s Inflation Surge Should Discredit Modern Monetary Theory Forever

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Estimated Reading Time: 3 minutes

It’s been a rough year for advocates of Modern Monetary Theory (MMT). After nearly two years with all the budget deficits and money printing MMTers could have wanted, the doctrine’s popularity seems to have faded now that we’re well passed the honeymoon phase. 2022 has clearly demonstrated that creating a lot of new money and running massive government deficits does, in fact, come at a cost. We should let this theory die before it causes any more destruction.

MMT is a school of thought born and raised on the internet during a thirty-year period of low price inflation with constant debate over government budgets. Advocates argue that because the U.S. government is a currency issuer, we can drop all the talk about finding money for government programs. All that is needed is the political will to fund things with newly printed money. Suddenly in early 2020, that political will appeared overnight at a scale no one could have imagined even weeks before.

The Federal Government embraced deficit spending to prop up the economy amidst imposed lockdowns and trade restrictions. Now, 31 months later, the National Debt has increased by almost $8 trillion. At the same time, the money supply, as measured by M2, grew by $6 trillion, an increase of nearly 40%. Most critics of the free market would probably classify this historic level of money printing and debt as an unfortunate but necessary response to unprecedented circumstances. But not advocates of MMT. This is what they’ve been wanting all along.

According to MMT, having concerns about the national debt is antiquated and childish. In fact, they argue that the total national debt is nothing more than a record of how many dollars there are in the pockets of private citizens. A higher national debt is not a consequence of MMT; it’s the entire point. The pandemic was, in many ways, MMT’s moment.

Predictably, the historic level of monetary inflation paired with the government-imposed production slowdown has resulted in levels of consumer price inflation not seen in 40 years. The rate appears to have peaked in June 2022, with prices on average 9.1% higher than the year prior. Producer price inflation also peaked in June at 11.3%. Although most MMT advocates had been dismissive of inflation, that’s not something they would have said was impossible. The problem for them is what they think needs to be done about it.

Just as MMT sees the national debt as a measurement of all the dollars the government created and put into people’s pockets, taxes are the tools for the government to take money back out of the economy if inflation gets too high. Setting aside how economically flawed this characterization is, a government following the MMT playbook will run into a political problem at this point in the cycle.

It is relatively easy to convince politicians and everyday people that the government programs they dream about can be funded by creating new money. And the true cost of this method—currency devaluation—is not felt or seen immediately. That adds to the illusion that something can be had for nothing. But taxes are the opposite. Everyone can see the line on their receipt, the amount withheld on payday, and the check they have to send to the IRS each April. The economic pain is felt without any clear, immediate benefit.

During periods of high inflation, there is a general sense amongst everyday people that the same amount of money isn’t cutting it. Sure, the initial cause may be a higher money supply, but any given person will feel like possessing more money is the key to getting by. After all, prices keep going up. They’re not going to react as well to the argument that Uncle Sam should confiscate even more of their dollars. If MMTers thought it was difficult to cultivate the political will to inflate, they clearly haven’t been thinking further down the road.

Interestingly, we’re not hearing much about raising taxes from MMT advocates these days. Or at least, their claims haven’t been amplified by Democrats and progressives as much as earlier arguments to print more money were. Just as they have done with Keynesianism for decades, politicians will grab any economic theory that justifies what they want and drop it when it prescribes something they don’t. And thank goodness for that. The last thing we need is more taxes.

This year has demonstrated that printing vast quantities of money is costly. And that the political will to even stick with MMT breaks down when the going gets tough. That should be enough to completely discredit this ridiculous theory.

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This article was published by Mises Institute and is reproduced with permission.

Modern Monetary Theory Experiment Lost to Basic Economics

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Estimated Reading Time: 4 minutes

MMT may be “modern,” but it has done nothing but revive old problems.

Modern Monetary Theory (MMT) was the “Mumble Rap” of politics and economics in the late 2010s. The theory was incoherent, unsubstantial, and––before the pandemic, you could not avoid it if you wanted to.

People across the country celebrated MMT. Alexandria Ocasio-Cortez, the Democrat Congresswoman from New York heralded MMT by proclaiming it “absolutely [must be] … a larger part of our conversation [on government spending].” The New York Times and other old-guard news sources authored countless articles raising the profile of MMT, while universities scrambled to hold guest lectures with prominent MMT economists like Dr. L. Randall Wray. Senator Bernie Sanders went as far as to hire MMT economists to his economic advisory team.

The most fundamental principle of MMT is that our government does not have to watch its wallet like everyday Joes. MMT contends that the government can spend as much as it wants on various projects because it can always print more money to pay for its agenda.

Soon after MMT became fashionable in the media, the once dissident economic theory leapt from being the obscure fascination of tweedy professors smoking pipes in universities to the seemingly deliberate policy of the United States government. When the Pandemic Hit, many argued that MMT was the solution to the pandemics problems. Books like The Deficit Myth by Dr. Stephanie Kelton became New York Times bestsellers, and the United States embarked on a massive spending spree without raising taxes or interest rates.

Attempting to stop the spread of Covid, state and federal governments coordinated to shut down nearly every business in the United States. Then, following the model of MMT, the federal government decided to spend, and spend, and spend, to combat the shutdown it had just imposed. Both Republican and Democrat-controlled administrations and congresses enacted trillions of dollars in Covid spending.

It is not hard to see that this spray and pray mentality of shooting bundles of cash into the economy and hoping it does not have any negative consequences was ripe for massive inflation from the beginning. Despite what MMT proponents may want you to believe, there is no way to abolish the laws of supply and demand. When there is a lot of something, it is less valuable. Massively increasing the supply of money in the economy will decrease the value of said money.

MMT economists seemed woefully unaware of this reality prior to the pandemic. Lecturing at Stoney Brook University, Kelton attempted to soothe worries about inflation by explaining that (in the modern economy) the government simply instructs banks to increase the number of dollars in someone’s bank account rather than physically printing the US Dollar and putting it into circulation. Somehow–– through means that were never entirely clear–– this fact was supposed to make people feel better

In reality, there is no difference between changing the number in someone’s bank account or printing money. In both cases, the result is the same, the supply of money has increased. Evidence of MMT’s inflationary effects is now everywhere.

Prices are skyrocketing. The most striking monuments to the failures of MMT are the price tags on every good you pick up at the grocery store. The Consumer Price Index has recorded an 11 percent increase in the price of food and a 33 percent increase in the price of energy. Housing prices are through the roof, while every economic indicator signals that the US economy is sliding into a recession. The once “transitory” inflation has become a long-term state of malaise for the economy.

Ironically, now that MMT has been implemented, no one wants to talk about it anymore. Since the first signs of inflation began to surface in late 2020 and early 2021, there has been a nosedive in the discussion of MMT. According to Nexis Uni, there were around 5,000 mentions of MMT in the news and academic articles et al. between 2019 and the end of 2021. This year, there have only been around 700 mentions. The economic fashion de jure has quickly become the emperor’s new clothes.

However, even midway into the pandemic, MMT’s architects were unrepentant. Kelton credited MMT with delivering “the shortest recession in US history,” which was true only to the degree that a Band-Aid covers a stab wound. MMT masked the symptoms of the Covid recession, while the wound festered and became gangrenous. Now, around a year after Kelton gave her lecture bragging about the “success” of MMT, the American economy is contracting.

MMT may be “modern,” but it has done nothing but revive old problems. Stagflation has returned. People have been paid not to work while businesses struggle to find employees––and, the financial markets now sit atop numerous bubbles. In many ways, MMT has proven to be nothing more than a Super-Market Sweeps style grabbing of all the worst economic phenomena of the 1970s, social welfare, and the 2008 crisis.

The only responsible choice is to discard MMT, now clearly a disproven theory, to the trash heap of history. Kelton, in her Ted Talk, quoted Margaret Thatcher in an attempt to display fault and antiquation in the Iron Lady’s thinking, but Thatcher’s quote is more relevant to MMT and economics today than ever.

“Let us never forget this fundamental truth. The state has no source of money other than the money people earn themselves,” Thatcher observed. “If the state wishes to spend more, it can do so only by borrowing your savings or by taxing you more. There is no such thing as public money, there is only taxpayers’ money.”

 

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This article was published by FEE, Foundation for Economic Education, and is reproduced with permission.