They say money doesn’t grow on trees but many of today’s leading progressives, including candidates for president, may beg to differ. An economic theory called MMT or Modern Monetary Theory, which essentially says deficits don’t matter so go ahead and create more currency, is shaping the agendas of Bernie Sanders, Elizabeth Warren, Alexandria Ocasio-Cortez and others. If the price tag on progressive dream items like government-run health care, the Green New Deal, free college and free income is too high, they argue, the solution is simple: print more money. According to MMT, money really does materialize on trees.
MMT backers look to countries like Japan whose debt is 2.5 times the size of its economy as proof that concerns about debt and deficits are overblown. But Japan has unique strengths that have allowed it to escape inflation and a debt crisis. As Ambrose Evans Pritchard writes in the London Telegraph, “Japan has been able to defy gravity for two decades … because it has a rich pool of captive savings and is the world’s top external creditor, commanding $3 trillion of net assets. America has no such cushion. Nor does Britain.”
Yet, MMT backers also point to examples closer to home – the U.S. economy and Republicans who, by their actions, also say deficits don’t matter.
As the national debt approached $22 trillion, President Trump declined to mention the debt and deficit for the second State of the Union in a row. White House Chief of Staff Mick Mulvaney reportedly explained this omission by telling Republicans lawmakers that “nobody cares” about the deficit.
Progressive economists like Paul Krugman and Jared Bernstein seized on Mulvaney’s comment and Trump’s sins of omission. They argued that Republicans were always hypocrites on spending and urged progressives to not hold back on their asks for more revenue for their policies. Krugman and Bernstein haven’t joined the MMT bandwagon but they’re right that Republican indifference on spending is empowering progressives on spending.
Republicans need a refresher course on deficits. First, they need to talk in human rather than economic terms. Spending and fiscal conservatism isn’t about dollars. It’s about freedom. Overspending and deficits are symptoms of a loss of freedom – especially for younger generations that will be strapped to unbearable debts from excessive promises that they have no benefit from or say in. You can’t counter socialism while ignoring rising deficits. Socialists always need other people’s money in order to enact their anti-freedom and anti-choice command and control policies. If you’re serious about stopping them you have to cut off their supply line.
Second, we need to go back to Economics 101 and the world of finite resources. As former Federal Reserve Chairman Ben Bernanke explained in 2011 when President Obama was in office, “By definition, the unsustainable trajectories of deficits and debt that the [Congressional Budget Office] outlines cannot actually happen, because creditors would never be willing to lend to a government whose debt, relative to national income, is rising without limit.”
Bernanke also quoted economist Herbert Stein, saying “If something can’t go on forever, it will stop.”
David Wessel, at the Brookings Institution, echoed this point recently when he wrote, “federal debt cannot grow faster than the economy forever.”
Many Democrats, including former White House Chief of Staff Erskine Bowles, also live in Bernanke’s world of finite resources. Bowles said our unsustainable spending trajectory is “the most predictable crisis in history.”
Meanwhile, Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff under President Obama said, “Our national debt is our biggest national security threat.” In just five years, interest payments on the national debt are projected to be $684 billion, which will exceed our annual defense budget.
Governments and politicians have been trying to escape the world of finite resources for centuries. It never works. In “This Time is Different: Eight Centuries of Fiscal Folly,” economists Carmen Reinhart and Kenneth Rogoff describe how 66 countries in five continents across eight centuries tried to live beyond their means only to pay a heavy price.
Rogoff recently described the MMT’s deficit theory as “just nuts.” He writes, “[T]he printing press is not a panacea. If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either. If that country tries to dump a lot of it on the market, inflation will result. Even moving to a centrally planned economy (perhaps the goal for some MMT supporters) would not solve this problem.”
President Trump’s decision to throw down the gauntlet against socialism during his State of the Union Address was wise. Tragically, the consequences of socialism are on full display in Venezuela where we’re seeing hyperinflation and despair.
But if the president wants to make a serious argument against socialism he has to confront the reality that Republicans are undermining his cause with their indifference to spending and deficits. Claims that socialism will drain the treasury from the left won’t resonate when Republicans are draining the treasury from the right. If he doesn’t sound the alarm MMT backers will impose a cost no economy can bear.