Modern Monetary Theory: Reality Check – OpEd
I’ve written extensively over the past years about the rise of Modern Monetary Theory (MMT) and all the terrible dangers it entailed from its very birth, not just for our economies, but for our societies too. Although it captured media interest and monopolized a lot of “expert” debates at the time, one wouldn’t be blamed for thinking it was merely a “flash in the pan”, just another crazy idea that the establishment entertained for a while to appease the most left-leaning elements in their ranks, but one that thankfully, quickly fizzled out.
Indeed, it’s been a long time since we saw any mention of it in the mainstream financial press. Most likely, the unsuspecting news consumer would reason, it just fell out of favor, it was simply too ridiculous to try and seriously defend. Regrettably, that assessment is as wrong as can be. This is because MMT instead of finding its way where it belongs, namely the dustbin of history, it is still being defended as a legitimate “alternative” to conventional thinking. It is even being put forward as a way to get us out of the inflationary mess it put us in in the first place.
For those readers who might fail to recall the tenets of this inspired theory, its main points are that “deficits don’t matter” and neither does debt, while taxation should not be used as a source of government revenue, but just as a way to cool the economy when it gets overheated. MMT teaches us that revenues are generally unimportant and unnecessary, since governments, as the issuers of the currency, can just basically print as much money as they need, hence the theory’s nickname “Magic Money Tree”.
Even if you have the patience to explore its arguments on a deeper level, MMT is still precisely as unhinged as it looks at first glance and it makes zero sense mathematically, economically or indeed rationally. But then again, in my view at least, it was probably never meant to make sense in any of those ways, because as I have repeatedly argued, it is merely a political strategy disguised as an economic theory. And if you look at it from this perspective, it is really great. It allows us to have our cake and eat it. We can literally make money, as in physically, magically manifest it. We don’t have to actually create or produce anything, or borrow money from someone who did all these tedious things. It’s a nearly perfect theory, and its only flaw is that it doesn’t actually work in real life.
As Jeff Deist concisely explained in a recent article: “The fundamental reality is that more money does not create any new goods or services in the economy. Money is not wealth. Wealth is productive capacity; the ability to create actual goods and services… Actual production requires the allocation of real resources and real capital. Resource allocation requires choices, whether made by political edict or in the marketplace. In both cases there are inherent opportunity costs to not allocating those resources and capital to other uses. Politics doesn’t magically eliminate tradeoffs. Resources are scarce even when money is not.”
MMT finally got its first real-word test during the pandemic. Not that any sensible adult was surprised, but it turns out that no, governments can’t actually print endless amounts of money without any consequences, chief among them being the massive inflation jump we’re experiencing now. Of course, before prices stared to soar, MMT fans were taking victory laps, celebrating the fact that everyone in the US and most people in other advanced economies received checks from the Magic Money Tree and nothing bad happened.
But even when the bad thing inevitably did happen, that reality check didn’t cause MMT proponents to rethink their stance. Instead, Stephanie Kelton, the most familiar face of the theory, dismissed inflation as a temporary sign of growing pains of the theory and then she argued that it’s better to have to deal with that, than with a weak economy. Most recently she pivoted to an even better rhetorical tactic, claiming that “lots of things contributed to the spike in inflation” and that its causes are “not a debate that will be settled anytime soon”. And she finally doubled down on her position in a recent profile by the NYT by insisting that the MMT experiment has absolutely not failed.
That’s the trouble with intellectual pride and with that particular kind of hubris that so many of today’s experts, “authorities” and politicians seem to suffer from. First, they dismiss all criticism of their positions, they march on blinded by arrogance and by the unshakeable belief that “they know best”, and even when reality itself proves them wrong, they dismiss that too. This is sad enough for them, but it is a true tragedy for all those they harm in they vain pursuit of being right at all costs.
One thought on “Modern Monetary Theory: Reality Check – OpEd”
The rise in inflation was not countered with any increase in taxes for the sectors experiencing the sharp, supply-side inflation shocks. For MMT to function as promised, increases in taxes have to happen as fast as the inflation is increasing. The Fed can’t increase taxes and we know that Congress will not.