Antony Davies and James R. Harrigan: Modern Monetary Theory Isn’t Economics

Modern Monetary Theory, or MMT, is all the rage in the halls of Congress lately.

To hear the Progressive left tell it, MMT is not unlike a goose that keeps laying golden eggs. All we have to do is pick up all the free money. This is music to politicians’ ears, but Fed Chairman Jerome Powell is singing a decidedly different tune. Said Powell recently on MMT, “The idea that deficits don’t matter for countries that can borrow in their own currency … is just wrong.”

MMT advocates see this as outdated thinking. We can, they claim, spend as much as we want on whatever we want, unencumbered by trivialities like how much we have. But MMT is a bait-and-switch wrapped in a sleight-of-hand. It focuses on debt and dollars rather than resources and products. Debt and dollars are merely tools we use to transfer ownership of resources and products. It’s the resources and products that matter. Shuffling debt and dollars merely changes the ownership of resources and products. It doesn’t create more.

MMT begins with the government “printing money.” There’s more to it than that, but the effect is to create money that didn’t exist before and to place it in the hands of the government. The government then uses that money to pay for things politicians want.

But, other things being equal, if the money supply grows faster than the production of goods and services, inflation results. MMT advocates claim that the growth in the production of goods and services will probably be enough to counteract any inflationary effects there might be. Growth in the production of goods and services averages about 2 percent per year. Other things constant, the money supply would have to grow no faster than this to avoid inflation. But the money supply is already growing at 6 percent per year—and that’s without any MMT shenanigans.

So here’s the sleight of hand. MMT advocates say that we won’t experience inflation because the U.S. dollar is a reserve currency—foreigners hold lots of U.S. dollars. First, increasing the money supply, other things constant, does create inflation. But when a reserve currency inflates, the pain gets spread around the world instead of being concentrated within one country. In short, MMT advocates believe our government should print money and let foreigners bear some of the inflation pain. Second, there’s no law that says that the U.S. dollar must be a reserve currency. The British Pound was one, but as its value declined, foreigners stopped holding it. Foreigners will stop holding U.S. dollars too as their value declines.

And here’s the bait-and-switch. MMTers say that if inflation does become a problem, the government can simply raise tax rates to soak up excess dollars. In short, the government would print money with one hand, buying whatever it wants and causing inflation. It would then tax with the other, thereby removing dollars from the economy and counteracting the inflation. In the end, all that’s happened is that the government has replaced goods and services that people want with goods and services politicians want.

After a bout of MMT, we might have the same GDP and zero inflation, but what constitutes that GDP would have changed dramatically. Instead of having more cars and houses, we might have more tanks and border walls.

When called on the bait-and-switch, the MMT response is that, as with the private sector, the government’s decisions won’t be flawless. If voters are displeased with fewer cars and more tanks, all they need do is to voice their displeasure. This response ignores nearly everything we know about human behavior in both the private and public sectors. In the private sector, profit and loss feedback pushes businesses to correct errors. In the public sector, the motivation is simply to spend without constraint, errors be damned.

Not surprisingly, Progressives want you to believe that they have found a way around the laws of economics and that their new path will allow politicians to spend as much as they like. This isn’t economics. It’s magic dressed up in techno-jargon.

This article is reprinted with permission from Inside Sources. 

Antony Davies is an associate professor of economics at Duquesne University and Chief Academic Officer at FreedomTrust.

an is Director of Education at the Freedom Center at the University of Arizona.

This article was originally published on FEE.org. Read the original article.

 

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8 Responses to Antony Davies and James R. Harrigan: Modern Monetary Theory Isn’t Economics

  1. 2dogs

    Are MMT policies in any way different from policies of countries that have hyperinflation?

  2. stackja

    Money from the skies?
    Just open a blanket on the ground and collect all the money?

  3. Ƶĩppʯ (ȊꞪꞨV)

    Backdoor Marxism, as though keynesian wasn’t bad enough

  4. Nob

    I was in an electrical supplies shop in the UK last year when I took a call about operations on a Geothermal rig in Germany where I was running some equipment.

    The proprietor overheard and started ranting that the UK should be doing this and shutting down oil, gas and coal. I explained that it wasn’t that simple and most geothermal projects are small and local and state-funded in some way (one less obvious way is that they are guaranteed a certain feed-in tariff for 20 years, another is that HSE and environmental oversight, and therefore cost, is minimal compared to O&G despite the drilling being identical).

    Similarly most renewable energy production needs subsidies , and has done since the beginning, (e.g the first wind turbine I saw was powering a pig farm and funded by a Uni R&D department – 40 years ago) and 40 years later it’s no nearer to being self-funding expect by nobbling the competition with penalties such as RET certificates, so the rising costs are borne by taxpayers and consumers.

    He countered with, that’s no problem, the government can just print money. And something about Rothschilds having all the loot because they do it all the time.

    I’m a small-time businessman, not an economist, so all I could counter with was “but then you’ll devalue the currency and nobody will want to be paid with it”.

    After all that, he didn’t even have the part I was after.

    I don’t know how to talk to these idiots

  5. Mother Lode

    Modern Monetary Theory.

    Why is it so beloved an economic concept for those who for decades have sought to avoid economic realities?

    Modern: It is new and must be more effective than all that came before otherwise it would be a step back. (Reality: It is just a new fad like man-buns and smashed avocado.)

    Monetary: Still relates to a recognised economicalisticological concept so it sounds impressive and lends credibility. (Reality: It is about money – the sole focus of its adherents being how they can get as much as possible to turn into power.)

    Theory: must be new, and opens a whole new world of possibilities. And you need not be bound by old theories and practices – anyone can do it by just talking. (Reality: Can be applied slapdash whenever needed to ridiculous situations. You can’t put a car engine in a living person, but you can apply the theory of a car engine to a person’s metabolism. This theory will justify any number of loony ideas and if they go tits up, the theory just needs to be tweaked and it is as good as new.)

    It is a much desired debate-stopping catch all to package the despotic and suicidal whims of collectivists – much like The Precautionary Principle (I.e. If I can construct some insanely far-fetched scenario then only I have the right to make decisions. If I can imagine a meteor striking earth we should redirect the entire defence budget to raising awareness of meteors – especially as they pertain to women and minorities.)

  6. John Bayley

    There is nothing ‘modern’ about MMT. It’s just a rehashed mishmash of what used to be called ‘chartalism’.
    Leaving aside the ‘economic’ aspects of it, Doug Casey – caseyresearch.com – has summed up the moral part in one of the best way I have seen yet. An extract below.

    But what we should be talking about here is moral principle. It’s not a question of whether MMT will work or not work. It won’t. It will work about as well as the economic policies of Venezuela and Zimbabwe. Or Argentina, where I am at the moment. These schemes have never worked in all of history. They result in a vastly lower standard of living, along with social strife.

    MMT is about radically increased government control. The argument shouldn’t be over whether MMT will “work” or not. The argument should be about whether it’s moral and proper for people in the government – whether elected or appointed – to print money to change the economy into something that suits them better.

    Money represents the hours of your life that you spent earning it. That’s the basic principle here. It represents concentrated life – all the things you want to have and do for yourself, and provide for others in the future. When these people destroy the value of money, they’re destroying part of your life.

    “Inflation” isn’t caused by greedy butchers, bakers, and gasoline makers. It’s caused by an excess of purchasing media. MMT will give the State total control of its quantity and quality. If the government increases the money supply by, say, 10 times, general prices will go up by 10 times. The value of your dollar savings will drop 90% – perhaps most Americans won’t care, because they have no savings, just debt.

    In any event, some people will get hold of a lot more of that 10x increase than others. And they’ll get hold of it earlier, before prices really take off. Who? Inevitably cronies.

    Look, absolutely every government intrusion into the economy – whether it’s taxes or regulations or inflation – always benefits the people in and around the government. And damages society as a whole.

  7. Rafe Champion

    My Principal Economic Advisor, Dr Peter Smith, is not impressed with this article. He is writing a piece for Quadrant. By a coincidence he was at the University of Adelaide at the same time as one of the most acclaimed proponents of this new leftist stunt.

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