A Closer Look at the “Panacea”

People whose political opinions put them well to the left of the center of American opinion will naturally find themselves sympathetic to many of the policy proposals put forth by the Democrat Presidential candidates. People well to the right of center will naturally be hostile to those policies.

But almost everyone, including those in the center of the political spectrum, wonders how those policies would be paid for. The U.S. economy produces annual GDP of about $21 trillion, of which only a fraction is available, via taxation, to fund major government projects.

Yet Medicare for All is a $37 trillion item and Bernie Sanders’ proposal to deal with climate change tops out at $16 trillion. For the moment, we’ll set aside free college, universal child care, guaranteed jobs for everyone, reparations for slavery, affordable housing, etc., etc.

On top of all that, what should we make of the Green New Deal? No one can guess what it would cost because, among other things, it would dismantle much of American industry and replace it with greener technologies. Estimates of lost jobs run into the millions (although green jobs are supposed to replace them at some point). Those who have hazarded a guess at the cost of the Green New Deal are tossing around numbers as high as $100 trillion.

In other words, even if only some of the candidates’ policy proposals were actually enacted, federal spending would rise to levels, expressed as a percentage of GDP, that would be unheard-of outside Cuba, Venezuela and North Korea.

Little wonder that otherwise sensible people on the left are grasping at Modern Monetary Theory (MMT) like drowning sailors. If, as its proponents claim, MMT will allow the U.S. to spend unlimited sums of money without any downside, isn’t that the answer to a Progressive politician’s prayers?

But can the U.S. really spend tens—or hundreds—of trillions of dollars on new social policies without bankrupting the country, causing hyperinflation, and/or causing massive social disruption and violence?

The answer, of course, is “Don’t be silly.” If the Democratic policies are worthwhile, we simply have to find a way to pay for them. We can’t wish the cost issue away by engaging in magical thinking.

And MMT’s main tenets most certainly qualify as magical thinking. We can reach that conclusion by coming at it in two ways.

First, let’s set aside the True Believers in MMT, most of whom are advising the Progressive Democratic candidates. After all, they obviously believe their own hype. Instead, let’s look to serious economists who reside on the political left and who would be inclined to favor the Democratic policies if there were any way to pay for them.

If MMT made any sense at all, these economists would certainly be embracing it. But, to a man and woman, they aren’t. In fact, they mostly ridicule MMT.

Consider that paragon of leftist economic virtue, Paul Krugman. Krugman analogizes MMT to the game of “Calvinball,” from the comic strip Calvin and Hobbes. Calvinball is an absurd game in which there are no rules—or, rather, in which everyone can change the rules at any time to suit themselves. MMT, says, Krugman, “will inevitably lead to hyperinflation.”

Or we might look to Larry Summers, former president of Harvard, who believes that the U.S. should be spending a great deal more to combat unemployment, climate change, inequality, and so on. But in an article in Foreign Policy entitled “Who’s Afraid of Budget Deficits?” Summers ridiculed MMT as the solution to the costs of that spending. “[D]ebt cannot be allowed to grow forever. And the government cannot set budget policy without any limiting principles or guides as to what is and is not possible.”

MMT, Summers continues, “goes too far… the modern monetarist approach is a poor guide to policy in normal economic times, when it would prescribe large tax hikes to control inflation.”

And if we look beyond the left wing of the economic profession, matters only get worse. Most mainstream economists can’t be quoted on MMT because they consider it to be such a fringe idea they won’t spend any time thinking about it. If you’re an astronomer and somebody theorizes that Black Holes were built by little green Martians, you probably wouldn’t bother to write an article debunking the idea.

Fortunately for us, the University of Chicago surveyed hundreds of mainstream economists, asking whether they agreed with MMT’s main ideas (i.e., “spending doesn’t matter.”) Not a single economist agreed, not one. There is probably not another statement you could present to that group and not find at least one person to agree with it.

But, just to be hyper-fair to MMT, its proponents will occasionally admit that hyperinflation is a possible result of unlimited government spending. Specifically, they acknowledge that during economically strong periods, continued government spending could (could?) result in huge demand for a limited supply of goods and services, driving inflation through the roof.

They are certainly right about that. The classic example in the U.S. was Lyndon Johnson’s determination to spend big money on both the Great Society and Vietnam, at the same time that the U.S. economy was booming. The unsurprising result was the huge spike in inflation that struck the U.S. in the mid-1970s.

Ah, but the MMTers have a solution for that issue: Spending would continue during boom times, but taxes would be raised significantly to discourage private sector spending.

Oh, really? Progressive politicians would raise taxes on middle income Americans? Because, after all, that’s where the taxes would have to come from. Progressives like to talk about soaking the rich, but the problem is that there simply aren’t enough rich people out there to matter.

The only way to raise enough in taxes to discourage private sector spending would be to roughly double taxes on middle income taxpayers. Not going to happen, folks. Instead, we would get hyperinflation.

Next week, we’ll take a look at what history teaches us about MMT.

Next up: Modern Monetary Madness, Part III