Modern Monetary Theory: A Fairy Tale for Social Engineers

Commentary, Economy, Fergus Hodgson

Left to their own devices, politicos every now and then come up with a theory that allows them to promise free lunches. Modern Monetary Theory (MMT) is all the rage now in the United States and Canada among starry-eyed social engineers who see no limits to their intervention. Rather than arising from academic inquiry, debates concerning MMT are on the rise because socialist politicians such as Bernie Sanders and Alexandria Ocasio-Cortez have championed it to fund their pet projects.

Proponents of MMT want policymakers and voters to believe governments should not worry about deficits and debt as long as they are able to print their own currency. Against all logic and historical evidence, they claim that monetary expansion does not lead to inflation. A University of Chicago survey found zero leading economists willing to support MMT or to endorse the argument that countries “should not worry about government deficits because they can always create money to finance their debt.”

Even Larry Summers, former president of Harvard University and treasury secretary under President Bill Clinton —  a man hardly known for his free-market sensibilities — labelled it the “voodoo economics of our time.” Summers has warned that the embrace of MMT is a recipe for disaster. Kenneth Rogoff, a Harvard University professor and former IMF chief economist, called it the “modern monetary disaster.” Even Paul Krugman, the famed Keynesian economist and deficit dove, sees MMT as a descent too far into wishful-thinking territory. The Nobel-prize winner says that MMT arguments are both messianic and wrong.

The world has witnessed a tsunami of easy money and credit over the past decade with the US Federal Reserve’s quantitative easing rounds and their spillover effects. That did not bring about consumer price inflation because of a historic recession. However, MMTers believe fiscal and monetary expansion can be used in normal times to pay for trillions of dollars worth of new spending programs without accounting for deficits and national debts.

It’s the old promise of a free lunch. 

Programs such as the Green New Deal (GND) — which aims to make “100 per cent of the US power capacity clean and renewable” — have an unbearable cost for taxpayers and can only work through fictional and easy-money solutions such as MMT. The GND could cost up to US $93T, which would be impossible to fund with explicit tax revenue. Thus, like in a fairy tale, MMT advocates argue the government should have a magic wand to conjure up money out of thin air.

The Elephant in the Room: Inflation

The harsh reality is that MMT, if applied, will lead to inflation because it massively increases the money supply. This dilution of purchasing power will also impact the exchange rate, devaluing the national currency relative to foreign ones. The latter in turn leads to more expensive imports, which also contribute to higher inflation.

What proponents of MMT fail to mention is that society at large always ends up paying for government largesse, either through higher taxes or higher inflation. Latin-American countries offer cautionary tales about similar monetary experiments. The results have been disastrous: huge spending comes with huge costs, a fact exemplified by contemporary Argentina and Venezuela.

Limited fiscal and monetary expansion might be acceptable during crises when unemployment is high and output is low. In the United States, however, the economy is growing faster than expected and unemployment is below 4 per cent. A boost in federal spending would neither stimulate nor stabilize GDP. It would only divert labour and capital to the government’s hand-picked winners, as Steve Ambler from the C.D. Howe Institute points out. That is exactly what MMT proponents want and is why its most vocal supporters endorse the GND, Medicare for All, and other programs that require massive fiscal redistribution. 

MMT is not only bad macroeconomics and a monetary scam; it widens the door to cronyism and corruption. Every time the government funds new programs it becomes more vulnerable to capture by special interests. Benefiting big corporations might not be the intention of GND supporters, but that is exactly what will happen. Large firms from Wall Street are the ones with pockets deep enough to fund the best lobbyists who can get them a large piece of the new pie. Small businesses, on the other hand, will have to compete for the scraps.

The MMT mania has already crossed over the border to Canada. A comprehensive website touts the theory as an all-purpose justification for every conceivable progressive policy under the sun. With MMT, the advocates claim, it would be possible for Canada to invest more in education, research, public services, and job creation—as if throwing money at problems were enough to solve them. The Canadian economy would run at “near full capacity without triggering much additional inflation,” says Keith Newmand for the Progressive Economics Forum.

Any promise of outsized benefits that do not incur costs should be regarded with great skepticism. MMT is bad policy, and economists know that. It is snake charming from social engineers who dream of dominion over an uninformed public.