All the rage in progressive policy and political circles in the United States, but not quite on the radar in Canada is a fairly new set of ideas and prescriptions called ‘Modern Monetary Theory’, or ‘MMT’, for short. Critics, somewhat unfairly, caricature MMT as simply a means of printing money to cover a vast, ambitious array of leftist wishes for their version of a statist utopia — but it does amount to debt monetization, and we have seen how dangerous this can be in the hands of politicians who cannot be relied upon to be disciplined and responsible.
For MMT to be successful, policy makers are supposed to monitor private sector indebtedness which can become dangerous – certainly true in 2006-8 in the United States, and, perhaps, now, in Canada. Government debt is not inherently as dangerous, MMTers contend, as the government supposedly cannot go bankrupt. They are also supposed to identify and fill in gaps in the economy with additional spending, borrowing at low rates they can enjoy by virtue of being ‘riskless’ and having the backing of the central bank to backstop that borrowing.
MMT proponents point out to the massive US federal government spending, borrowing and monetization of debt during and after the financial crisis and recession of 2007-9, without the inflation that was predicted by economists despite the increase in the money supply and the spending flooding into the economy. Reasons: there was considerable unused capacity, low demand by unemployed, underemployed and scared consumers and conservative businesses, and an abundance of labour and commodities that were inexpensive. Their sympathizers say that spending could and should have been even higher, then strong growth would have occurred – reminiscent of the old nostrum from progressive or neo-Marxist apologists that ‘socialism has not really been tried’ to explain its failure(s).
The MMT fans also note that there were huge budget deficits during World War II and inflation did not soar out of control, although rationing and price controls were used, and financial repression to keep interest rates low – even very negative, in real terms (war bond investors lost money, in real terms). The great goal of maximum industrial and armaments production generated ultra-full employment.
However, there is a big difference between an economy that is in free fall or well under-capacity and one that is at full employment, as Canada’s and the United States’ are now. It is not clear whether more spending is needed or would be actually harmful. For instance, on environmental programs. There may or may not be worthy goals in accelerating existing trends towards green energy and more fully capturing carbon dioxide and methane, and more complete recycling of waste — a ‘Green New Deal’ (GND). The environmental crusaders have seized upon MMT as a means to finance the GND’s utopian goals.
The MMT acolytes in the United States want to use MMT in practice for much-higher spending to bring about this environmental nirvana, which will cost trillions of dollars if fully implemented, and cause massive unemployment in fossil-fuel industries and those connected to them. Papering over these devastating dislocations with government money to those affected is certainly tempting but may have seriously damaging consequences. This could constitute a huge misallocation of resources, harming growth for decades. Aggressive solar and wind tax and subsidy programs in Germany and Spain brought about higher energy costs and, in the former, a heavier reliance on high-CO2-emitting coal.
While MMT theorists contend that spending more does not have to generate inflation, let alone hyper-inflation, they also stipulate that any huge increase in spending has to add value, not destroy it. Spending must be productive: research and development; putting the unemployed or previously unemployable into jobs where they could learn valuable skills; refurbishing buildings and other assets; massive infrastructure and education or skills training; making existing physical plant, infrastructure and government assets more productive and changing their use into higher, cleaner ones, and so on.
Paying people to do little or even nothing of value, creating extra capacity in industries where there is little or no demand for their output at reasonable prices, and other misallocation of financial resources will ultimately reduce the true, viable productive capacity of the economy, and, if as excessive as the radical left desires, will, indeed produce inflation: too much demand for limited goods or services.
The more excessive the spending and monetization of the debt borrowed to finance such spending, the higher inflation will go, as it has in Venezuela and Zimbabwe, and as it began to do in the United States, Canada and other Western nations in the 1970’s. This is not to be dismissed lightly; damage was vast.
Less inflammatory examples: ultra-low, even negative interest rates, massive debt monetization and large deficits over many years did not bring prosperity to Japan or Europe; changes to labour laws, deregulation and tax reform helped Spain, Germany and others recover, as did the general recovery in the global economy – nothing to do with government largesse, as such.
While there may be good reason for higher national deficits, paid for by central banks, in cases of severe economic stress in wars or bad recessions, it is dangerous to rely too much on investors’ trust and confidence that national debt will be paid back in currency that is not significantly devalued over time.
Theoretically, we should be enjoying actual slight deflation if monetary policy matched what it was during the time of the gold standard prior to the repudiation of said standard of the Great Depression and the financial repression of World War II (which did, indeed, have substantial inflation, which was barely masked or contained). That we actually have significant, if not substantial, inflation today is because government deficits are indeed already being monetized to a large extent by central banks.
MMT may have some limited merit to strongly jump-start a stagnant economy with clearly badly performing sectors, but it is not a means to justify extravagant deficit spending and to finance a dramatic increase in government size, power, control and dominance in our economy and our lives. Such spending and aggressive programs could easily be badly warped and misapplied. We should have little trust that our leaders will be wise enough to put huge, monetized debt-fuelled spending into productive uses that will not send us on the road to Caracas. History and reason indicate otherwise.