For all of its wonderment, the Harry Potter series does leave readers with one burning question in the back of their mind. How are there any day-to-day struggles in a world with such powerful magic? Cooking, dishes, travel, friendship, and yes even romance all seem to be achievable with the right spell or potion.
That same question surely applies to so many Americans that look at our budget and say, why can’t they just print the money? There’s a new group of economists that say we can! The Modern Monetarist Theory (MMT) crowd, most frequently vocalized by former Bernie Sanders aide Stephanie Kelton, argues that thinking of deficits and debt as a limiting factor for federal spending is wrong. MMT advocates argue that Congress should ignore the deficit scolds and pass a series of spending initiatives for items such as rebuilding America’s infrastructure, a green climate new deal, or a federal job guarantee. Yesterday, Congressional progressive leaders Rep. Ocasio Cortez and Rep. Ro Khanna voted against the House rules package because it includes Pay-As-You-Go rules that require offsets for new spending or tax cuts. In their view, there is no need to raise taxes or reform entitlements to offset new spending programs – fire up the printing press and spend. Expecto stimulus!
The theory behind MMT is that deficits and debt really do not matter. When the government spends money it is creating money. Since the United States controls the supply of the global reserve currency there is no pressure to tame deficits. We will always be able to come up with the dollars to pay off debts and deficits because we can always print more money. The real goal should be to ensure there is enough money injected into the economy to make use of all of our resources at full employment – that is if there is enough economic activity to provide jobs for those that desire them. Only then is there is a need to worry about the inflation that would come with so many new dollars in the system. Kelton believes that the economy has plenty of room for more deficit spending despite all the angst over the United States surpassing $1 trillion annual deficits this year. There is plenty of slack and the federal government can help alleviate that.
MMT does acknowledge that there is a spending limit at which inflation would become a problem. But that concern is hardly noted in any of the MMT advocates calls for Congress to ignore that pesky deficit boogeyman and charge forward with a wide range of new expensive federal initiatives.
But this is all cake and no veggies.
MMT advocates do not caveat to say that we should spend until the slack is gone – at which point Congress would need to cut back on spending or raise taxes. Rep. Ocasio-Cortez and Kelton’s far ranging ambitions on what MMT can be used for is broad – can you imagine what Congress would do if all fiscal restraints were thrown away?
Therein lies the fatal flaw.
Let’s assume that MMT is correct and America can create all those programs as easily as waving a wand. But under this regime, MMT fuses together fiscal and monetary policy and puts this highly nuanced and data driven field in the least technocratic place imaginable. A body where the chairman of the environmental policy committee threw a snowball on the senate floor to disprove climate change and a member of the Armed Services committee sincerely worried about whether an island would capsize due to overpopulation. We are currently two weeks into a partial shutdown because Congress cannot even manage to complete its most fundamental task – funding the government.
While there is a lot of controversy and discontents about monetary policy – the one thing that the entire spectrum would agree on is that it does not belong in the hands of Congress. Leaving aside what MMT would do to private investment, if our entire economic system was predicated on Congress being able to nimbly and timely increase taxes or cut spending – then that’s just begging for a disaster.
And if the fusion of fiscal policy with monetary policy requires a technocratic body to place limits – noting that Congress cannot even reign in its excesses under the world where deficits do matter – then we are talking about amending the Constitution to eliminate the power of the purse. There’s not much room for all of these caveats in the editorial pages or tweets about PAYGO.
Kelton and the MMT crowd have put a lot of work and thought into the theory – and it undoubtedly works when they put pen to paper. I also have no doubt that time traveling in Einstein’s theory of relativity works on paper too. But we don’t live in a world where approaching lightspeed is possible and we don’t live in a world where Congress can handle monetary policy or will forgo their right to fiscal policy. They have constructed a theory for a world that is not ours.
In this simple muggle world, where Congress is in charge of fiscal policy and the American dollar’s role as the global currency is set by precedent rather than permanent rights – the MMT theory is simply a dangerous excuse to keep borrowing resources from the future to spend now.