Why the Radical Left (and No One Else) Touts Modern Monetary Theory

You may not have heard about the fringe concept of Modern Monetary Theory (MMT), but you can expect that you'll hear a lot more about it in the future as Democrats pretend the theory supports the plausibility of fiscally outrageous policy proposals like the Green New Deal.

The greatest public strength of the theory is that you don't have to understand much about economics to embrace it.  Like socialism, it's anything but a new idea, but it's somehow hip for our growing number of underemployed liberal arts majors to subscribe to it and feel intellectually superior for doing so. 

MMT, you see, requires that you eschew any realistic understanding of money, which is easiest to do for those who've yet to, or have failed to, earn substantial amounts of it in a free market. 

Most everyday people can simply accept that money, or currency, has a specific value tied to it.  If it did not, you wouldn't go to work every day in order to exchange your labor for an agreed upon sum of money.  The restaurateur down the street would not feed you in exchange for money at an agreed upon price if money didn't have a specific value.  Neither of you feels that your efforts are simply charity meant to feed the government leviathan, which determines what your money is worth, do you?

It's really that simple, and this is where MMT fails on its most fundamental proposition.  Money has a going market value that we recognize every single day, and it is tied to a marketplace. 

MMT, inversely, posits that this understood value in the global marketplace is not truly value in our economy, but some arbitrary measure that we tell ourselves and others the money is worth.  That value can change willy-nilly via monetary policy — namely, tax cuts, spending cuts, or "printing money" for new spending.

Allow one of the leading proponents of the theory, Stonybrook University's economics professor Stephanie Kelton, to explain.  On Twitter, she committed to a hypothetical Q&A with her detractors. 

She offers the hypothetical question, "[c]an we afford the #GreenNewDeal?"

"A: Yes," she tweets.  "The federal government can afford to buy whatever is for sale in its own currency."

While that's undoubtedly good news for advocates of tearing down, refurbishing, or replacing every single building in America, or eliminating cows and pigs so as to reduce the damage their farts do to the climate, it would still cost trillions of dollars to accomplish.  Thankfully, for most people, there's still the pressing question of how to finance it.

Kelton's hypothetical line of questioning considers whether the answer is to "just print the money."  She replies, "Is there any other way?"

Here we enter more complex territory, but only slightly.  Debt is a serious consideration for any who take on the debt, from individuals to governments.  There's nothing new about this, nor is there a dearth of examples of nations that have suffered immensely by committing to fiscal policy enactments without concern for their debt and the potential devaluation of their own currency in doing so.

"They have his soul, who have his bonds," observed Jonathan Swift.  This has been truth for thousands of years, and it still is truth today.  How could any creditor hold anything of such value, if my bonds that I sold him are essentially worthless, and I can simply print more dollars to pay my debts when I have the need?

This is something fundamental to money and debt, though I've come to increasingly understand that it's not broadly understood.  Debt is purchased by someone with money, and that someone purchases that debt only if he believes that value will be derived by the purchase.

To break it down simply, consider this.  If I purchase a Treasury bond, I am purchasing the government's debt.  I am willfully giving my money, which is of a specific value in my day-to-day life, to the government.  This, in effect, is a contract, which should be protected by law.  If I purchase that bond, I expect repayment of the debt owed to me, along with the interest promised.  Otherwise, why would I give my money to the government for it to spend? 

Kelton responds that it's "not "borrowing" in any meaningful sense of the word.  "When people swap $$ for bonds, they're just holding another kind of government money."

But I already held the money.  I didn't have to "swap" it for bonds if the bonds and my money were interchangeable.  I saw value in the interest the government promised me, which is why I purchased the debt.  If my money is indeed just the government's money anyway, and the government can just print more money to compensate in the event that I don't purchase its debt, then why is the government issuing bonds at globally competitive rates in order to incentivize my purchase in the first place?  Isn't the idea that the government doesn't need my money belied by the fact that the government is incentivizing me to give my money to the government so that it can be spent by the government?

Here's where it gets fun.  MMT proponents suggest that the government doesn't actually have to pay back the debt, and the principal and interest belong to the government anyway.

"The government retires bonds all the time," tweets Kelton.  "You just debit (-) the seller's securities account and credit (+) a reserve account.  It's all done using a keyboard at the NY Fed."

Abracadabra!  The government's debt disappears, and the interest it owes becomes equalized on the U.S. government's balance sheet with a keystroke.

I suspect she means this about bonds the government loans itself, as it does with Social Security.  But does that make you feel any better about the Treasury bonds you might hold in your 401(K), or the fixed interest investments you hold, which are financed via purchases of Treasury bonds?  Are the Chinese, who hold over $1.18 trillion in American debt, believing they purchased value in doing so, likely to give us more money for our bonds, knowing that America is just playing with funny money, or are they likelier to stop giving us their money when they recognize that America isn't serious about its debts?

MMT is predicated on the notion that debt is a myth.  Even more subversive, it's predicated on the notion that the concept of money a myth.  Debt and money and balance sheets are just scary stories that moms and dads use to warn their children against spending what they want, when they want, keeping them within the chains of the idea that there's some sort of balance between the value they earn and the value they spend.

But despite these new bedtime stories that academics like Kelton are reading to their adult children in the classroom, value and currency remain distinctly and irrevocably tied, as we more archaic parents still teach our children.  A "modern monetary theory" doesn't change that, and no matter how much power you give the government to seize the means of production and redistribute wealth, you will not create an ounce of the wealth that capitalism has given the world.  Measures of human well-being, across the globe, have increased exponentially since the advent of the Industrial Revolution, and freer markets and capitalism have everything to do with that.

But that, I suppose, is another story altogether.

William Sullivan blogs at Political Palaver and can be followed on Twitter.