If you asked people what they were most interested in reading about, economic issues would end up way down on the list. That is understandable: a discussion about government spending, taxes, money supply, and unemployment often becomes as dull and gray as a concrete wall.
Conversations about the economy also tend to morph into a numerical repartee where winners and losers are separated by fractions of percent of inflation and economic growth.
Should we leave the economy to the economists? As an economist myself, I firmly say no to that idea, especially when it comes to a theory known by its MMT acronym. Its full name is Modern Monetary Theory and it was formulated by a group of economists centered around the University of Missouri, Kansas City, some 25 years ago.
In a nutshell, MMT says that we have no reason to worry about government debt. If government debt gets too big, we will just let people use their Treasury securities to pay their taxes.
Sounds weird? That is because it is a weird theory. Among its many unpleasant consequences is a green light for the government to print unending amounts of money. When someone objects that this will cause inflation, the MMT proponents merrily respond that ‘we can just raise taxes and inflation will be gone.’
If you feel by now that MMT makes no sense at all, that is because you are correct: it is a strange economic theory. I would not bother writing about it, but the problem is that MMT is becoming increasingly important in American politics. We have already had at least one presidential candidate—Senator Bernie Sanders—endorse MMT, and economists who like the theory are becoming increasingly important in the American government.
Long story short: it is time that the general public learn about MMT, if for no other reason than to prevent the theory from winning over more supporters in prominent places. If those supporters become influential enough, MMT will be the guiding star for the federal government’s spending and taxation—and MMT will transform the Federal Reserve into a money-printing machine far beyond what we saw during the COVID pandemic.
Although MMT has not yet been put to work to its full extent, we do have plenty of examples of what happens when economists from the halls of academia get too much influence over economic policy. Let me just offer one example.
Back in the 1990s, economists who practiced libertarian Austrian economic theory were eager to help Russia after the fall of the Soviet Union. A well-known European economist, an expert in Austrian economic theory, gave President Boris Yeltsin some very bad advice.
The result was disastrous. After seven decades of communism, the Russian people were subjected to a new form of suffering: a free-for-all kleptocracy where the rule of law was defined by the rule of the fist.
Eventually, the Russian government stabilized their country and cleaned up some of the worst excesses of the failed economic experiment. They learned the lesson, but economists have not. They continue to churn out academic theories that can destroy entire societies if put into practice.
As a political economist, I sit right in between academic economics and the real world. Part of my job is to sort through the slush that the academicians crank out and do my best to make sure that it does not affect the real world.
A recent example from the slush flow is Modern Monetary Theory, MMT.
Over time, MMT has grown in influence and been picked up by such disparate outlets as a climate-change report from the United Nations and candidates for higher office.
Again, MMT has not yet actually been put to work in full anywhere in the world, but its proponents—whom we can find in Australia, Europe, and America—continue to make inroads into politics. A few years ago, a candidate for governor wanted to implement MMT in his territory.
If not stopped in their tracks, it is only a matter of time before the MMT’ers get their hands on enough government power somewhere to put their theory to work. There could be MMT proponents running the economic show next time a Democrat is elected president here in America.
Normally, when some economists come up with crazy ideas, other economists step up and present concise and powerful criticism of those ideas. Astonishingly, this is not the case with MMT. Its critics are surprisingly ill-educated on what the theory is really all about. They point out that it would create very high inflation. Some use Venezuela as an example and point to how it reached 345,000% inflation in 2019.
The only problem is that MMT proponents have a response to that criticism—a response that MMT critics, to my unending surprise, fail to learn about before they criticize MMT. Proponents of MMT simply explain how higher taxes will reverse inflation and bring back price stability.
Any common-sense-minded person hearing this argument will object that higher taxes are themselves inflationary. This is correct, but MMT advocates are on a mission to tell us that we can eat the cake and keep it. As a result, politicians and others who listen to both sides of the debate soon find that what MMT critics have offered thus far is not convincing. The MMT proponents have an answer to every point of criticism offered. Their answers do not make the theory less dangerous, but they prove that MMT is an inherently logical system—provided you accept its fundamental premises—and that it takes a lot more than casual conversation to poke a hole in it.
So far, my fellow MMT-critical economists have failed to move beyond the casual conversation. I see no effort from them to improve their arguments against this mad theory. The latest example of fast-food drive-thru McNomics appeared in The Hill on November 19th. Alexander Salter, an economics professor at Texas Tech University, teamed up with Phillip Magness, a policy analyst with the Independent Institute, in an effort to push back against MMT:
For the unfamiliar, modern monetary theory is a fringe school of economic thought arguing that the federal government, as the sole issuer of legal tender, can issue virtually limitless amounts of new money to fund itself. Bucking thousands of years of evidence that such reckless policies lead to currency devaluation, advocates shirk all blame when inflation occurs, insisting instead that prices increased due to “corporate greed” and “price gouging.”
They go on to claim that the federal government “essentially stumbled into a modern monetary theory-style monetary crisis” under President Biden.
Since I happened to be there almost a quarter century ago when the founders of MMT outlined its theoretical foundation, I know how easy it is for advocates of the theory to punch back against this inflation argument. They could go all-out and bring in the so-called horizontalist definition of money, but all they really have to do is say that when inflation starts rising, the government can cut down on money printing and instead start raising taxes.
Higher taxes, they say, ‘vacuum’ excess demand—caused by money printing—out of the economy and return it to government coffers. This would supposedly prevent inflation.
As a critic of MMT, I would counter this argument by pointing to the strong transmission mechanisms from money printing to inflation, and to the enormous timing problems associated with coordinating fast-moving monetary policy with lethargic tax policy.
However, my main criticism would be against the MMT proponents’ new definition of money and government debt.
More on that in a moment. First, let me offer another example of academic laziness when it comes to MMT. Gregory Mankiw of Harvard University recently took a stroll-in-the-park approach to MMT (“A Skeptic’s Guide to Modern Monetary Theory”; AEA Papers 2020, 141-144), which is surprising given that Mankiw is considered an authority on macroeconomic theory.
His biggest problem with MMT is actually not the content of the theory, but that it was not the brainchild of Ivy League economics faculty:
MMT burst into the scene in an unusual way. From its name, one might guess that it arose at top universities, as prominent scholars debated the fine points of macroeconomic theory. But that is not the case. Instead, MMT was developed in a small corner of academia
Professor Mankiw probably could not find that small corner, the UMKC, even if he tried Google Maps. Adding to his irritation is the fact that MMT gained fame
when some high-profile politicians—particularly Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez—drew attention to it because its tenets conformed to their policy views.
Begrudgingly, Mankiw also admits: “Even ideas that arise in unusual ways can be right.”
I would be curious to hear what Professor Mankiw thinks about the fact that President Clinton’s blockbuster welfare reform, PRWORA, was originally formulated by a small group of grumpy policy wonks in Klamath Falls, Oregon. To his credit, though, Mankiw eventually overcame his disdain for intellectual diversity and tried to “figure out what MMT was all about.”
His short foray into the subject concentrates on how MMT could cause inflation. It is a brief but technically interesting exercise, sadly compromised by empirical laziness and his lack of understanding of economic theory.
At the end of the day, Mankiw lands far away from grasping the truly dangerous nature of MMT. He could never explain why MMT proponents should not be given access to the powers of fiscal and monetary policy. To do that, we need to understand how MMT proponents ‘assume away’ government debt.
A paper from the Federal Reserve Bank of Richmond in 2021 brings us closer to this assumption (“MMT and Government Finance: You Can’t Always Get What You Want“; Economic Brief 21-12, April 2021). Three Fed economists explain:
MMT advocates argue that by printing money, the central bank can become the holder of public debt. In support of this argument, it is true that with interest rates at zero, short-term debt and money are effectively substitutes.
This is an admittedly theoretical presentation of the main tenet of MMT. We need to give it a more practical form, and who is better suited to do that than Warren Mosler?
Mosler is an investor, an entrepreneur, and the man behind the outstanding automobile Mosler MT900. He donated generously to the research efforts that gave birth to Modern Monetary Theory.
He is also a former gubernatorial candidate. In 2018, while running for governor of the U.S. Virgin Islands, he offered an MMT-based method for eliminating the territorial government’s debt. The debt-elimination component of MMT was first presented by Mosler himself in an article for the Huffington Post in 2011:
- Let the government keep borrowing until it defaults on its debt;
- When it defaults, those who own government debt can use their bonds to pay taxes.
Mosler apparently thought the idea would catch on in a territory that had serious debt problems. It did not: only 4.7% of the voters trusted Mosler with the gubernatorial office. However, voter support notwithstanding, the point Mosler makes about the relationship between government debt and tax payments is the lifeblood of MMT: it takes to the empirical extreme the idea that money is what money does.
In other words, when a government levies taxes, it defines what taxpayers can use to pay taxes. By accepting U.S. dollars for tax payments, the U.S. government de facto gives the dollar status as legal tender in the United States. If the U.S. government decided to accept some cryptocurrency as well, that currency would also obtain status as de facto legal tender alongside the dollar.
The reason why tax payments define accepted currencies is that anyone with a tax obligation will need to hold enough reserves of that currency to make their tax payments. That does not mean other currencies are illegal; they will just become pointless when they cannot be used for such substantial—and mandatory—outlays as paying taxes.
What Warren Mosler envisioned for the U.S. Virgin Islands was an extension of the concept of legal tender by tax-payment fiat. Mosler wanted to turn the territorial government’s debt securities into money, a move that at least in theory has far-reaching implications. A company that needs to pay its taxes could accept government debt securities as payment for its goods or services.
In short, the very concept of money used in MMT is a challenge to mainstream economic theory. Its consequences in the form of, e.g., turning government debt into money are at least theoretically thought-provoking. Anyone who wants to criticize MMT for undoubtedly causing runaway inflation must be able to defeat all the components of the theory—or else the MMT’ers will win the argument.
If they do, and if they get to define the U.S. government’s economic policy, then our economy is in grave danger.
