MMT: The Latest Liberal Economic Fantasy
A good definition of a liberal might be someone who tries to ignore the actual nature of reality. Thus, many politically correct formulations distort reality even to the point of denying the differences between the sexes.
Ignoring the nature of reality can get particularly dangerous when applied to economics. The nature of money calls for having sufficient control over the money supply to prevent the breakdown of the system. It calls for keeping debt levels low. Some liberals are now trying to turn conventional economy policy upside down by changing all the rules.
The new economics is called Modern Monetary Theory or MMT for short. MMT is gaining traction among high-profile Democrats and other liberals that are looking for ways to finance social and ecological programs that they hope to implement in the future. The present monetary system with its $22 trillion-and-growing debt is too rigid and constraining. Something new is needed to provide more flexible and expandable financing. The answer is MMT.
The Basic Tenets of MMT
Critics say that MMT is neither monetary nor a theory. It more closely resembles a political opportunity, since it puts everything in the hands of enlightened politicians. Its promoters keep the theory sufficiently vague to avoid close scrutiny. They tend to stay outside of the mainstream economic journals and inside social media.
Nevertheless, liberal economist Heather Boushey claims that the theory has moved to center stage in the political debate. It is the catchphrase of economists, pundits, and politicians who “hold it up as the answer to our economic problems.” Prof. Stephanie Kelton of Stony Brook University (with two co-authors) summarize the theory’s magic formula as “Anything that is technically feasible is financially affordable.”
The two basic tenets of MMT are dear to liberal hearts. First, governments can spend much more than they tax. Secondly, promoters claim that governments should use taxes, not as a generator of revenue, but as an instrument of inflation control and achieving equality.
MMT advocates say that deficit spending does not matter for countries like the United States that borrow in their own currency. Governments can issue money using mechanisms like the Federal Reserve to self-finance their budgets.
The MMTers claim that the present monetary policies of setting interest rates and controlling the money supply by the Fed are no longer needed as tools for balancing an economy.
The new tools for job creation and economic growth should be increased federal spending and taxation. When things get rough, the government can spend its way to full employment by printing up money. When the economy booms and inflation threatens, the government can contract the money supply by taxing it down to acceptable levels.
Creating a Climate of Instability and Distrust
MMT takes the control of policy out of the hands of economists and puts it into those of politicians. It replaces long-term planning with short-term spending. Such policies will have more immediate effects since increased spending impacts the economy directly. MMTers claims politicians will not abuse their newly acquired powers since they can be voted out if they err in judgment. More likely than not, politicians will probably be rewarded by the amount of MMT-funded pork that they can bring back to their districts.
Most conventional economists observe that failure to think in the long term creates an atmosphere of uncertainty and distrust that destabilizes markets. Moreover, the far-out ideas of MMT have never been tested, but, like deficits and taxes, that does not seem to matter. No one really cares that not even liberal economists like Paul Krugman give it much credence. Former treasury secretary Larry Summers, for example, called it “voodoo economics.”
It is a sad reflection of these Twitter times in which nothing has consequences, and everything runs on impressions and emotions. In the age of fake news, fake money makes sense. It is enough to “feel” and “believe” that it will work and finance the Green New Deal for it to gain acceptance.
Meanwhile, no one answers the real question of who is going to pay down the federal debt.