Modern Monetary Theory, which holds that the government’s capacity to finance its debt is limitless, is all the rage in Washington.
In April of this year, the Congressional Budget Office warned that we were on track to return to trillion-dollar budget deficits by 2020. That warning turns out to have understated the problem: The latest estimates suggest we will now reach the dubious trillion-dollar milestone this coming fiscal year, and the deficit for the current year is now expected to be close to $900 billion, $222 billion more than last year. Our current $21 trillion national debt will likely top $30 trillion by 2025.
Democrats were quick to blame last year’s Republican tax cuts for exacerbating the deficit, but tax revenues, fed by increased economic growth, are actually up one percent over this time last year. The real culprit is spending, which increased by 7 percent from last year, the largest year-over-year increase since 2009.
In short, economic growth will only go so far if no one in Congress is willing to tame spending, and the “minibus” spending packages that congressional Republicans and Democrats are currently negotiating to avoid a government shutdown won’t do the trick.
But not to worry; both the Left and Right have discovered a magic money tree in the form of a concept known as Modern Monetary Theory (MMT), an idea prominently promulgated by Bernie Sanders’s chief economic adviser, Stephanie Kelton, that is now being used to argue that lawmakers shouldn’t worry about the size of the national debt.
MMT essentially says that the government’s capacity to finance its debt is limitless. Since the U.S. government is the sole printer of dollars, it faces no binding revenue constraint because more dollars can always be printed. Therefore, the theory goes, the national debt is mostly a harmful fiction preventing us from having nice things such as “free college” or “free health care.” Yes, there might be a slight danger of inflation, but MMT advocates contend this can easily be contained through policies such as a $15 per hour job guarantee to stabilize wages.
Count me as skeptical.
Modern Monetary Theory might ordinarily be thought of as having a comfortable home on the loony left, but it is increasingly slipping into the discourse on the populist right. Recently, for example, John Carney, the chief economic writer at Breitbart, not only embraced MMT but argued that Republicans were better suited to implement it since deficits have historically grown larger under Republican presidents than under the “austerian Dems.” And while it is difficult to picture President Trump spending his “executive time” pouring over tracts on monetary policy, there is more than a little MMT to his suggestion to former chief economic advisor Gary Cohn, reported in Bob Woodward’s new book, that we should “just run the presses — print money.”
Seductive though MMT may be, mainstream economists have been less than kind to the idea. Even prominent center-left economists like Paul Krugman have described it as “a recipe for very high inflation, perhaps even hyperinflation.”
Unfortunately, the opposition of mainstream economists probably won’t be enough. History tells us that politicians, Democrat and Republican alike, need very little encouragement to keep spending. They’ve usually had the good grace to feel guilty about it, but Modern Monetary Theory offers them an excuse not to.
Expect to hear a lot more about it soon.