There’s a new genie that’s popped from the lamp to help pay for the wishlist of multi-trillion dollar programs, and it’s got a smart-sounding name: “Modern Monetary Theory.”
It’s also got a very heavy lift, because of the staggering federal spending ambitions of both Senators Bernie Sanders and Elizabeth Warren. Each candidate would more than double the size of the entire federal government.
To get a feel for the scale of the federal spending that front-runner Sanders is proposing, you could zero out everything the US spends today on the military, and you’d only pay for about 10% of his agenda. His agenda includes massive spending initiatives such as “free” college tuition for all, forgiving all outstanding student loans, enacting Medicare for All, paying for early childhood education, initiating massive infrastructure spending with a Green New Deal.
This agenda costs trillions. Nearly $10 trillion more in federal spending every year.
By comparison, in 2019, the entire US federal government revenue was $3.5 trillion. That’s everything — individual and corporate taxes, tariffs, etc. So adding another $10 trillion in spending on top of what we already spend (about $5 trillion) creates a huge gaping hole.
So, how do they propose to pay for these new programs?
Before we get to that, it must also be noted that Sanders, for his part, isn’t concerned much with the details of cost. His refrain generally is, if other countries have done it, then so can we. To wit, he recently told Anderson Cooper on 60 Minutes that he doesn’t know how much the “nickels and dimes” add up to for his program (it’s $97+ trillion over 10 years):
Senator Elizabeth Warren, by contrast, is to be commended for at least attempting to show how she pays for a more “modest” set of policy ideas which yes, still more than double the size of the entire federal spending, though about half the Sanders agenda.
But they also both rely upon clearly unconstitutional wealth tax plans as a key method to close the gap.
Even if this wealth tax plan were to pass Congress (and I don’t think it would), the idea of confiscating the already-owned property citizens would surely run into Constitutional challenge, and it’s highly unlikely that the Supreme Court of the 2020’s would rule in favor of such a plan. (Read more about why a wealth tax is clearly unconstitutional.)
For both Sanders and Warren, there are also significant hikes on personal income taxes, new charges on every investment transaction and significant hikes in corporate income taxes. Warren throws in some additional unique elements, like attempting to recapture the full corporate contribution to insurance plans (i.e., imposing a very high corporate tax levied on most corporations) to help pay for Medicare for All.
Yet the funding plans of Sanders in particular fall tremendously short.
When he or his supporters are confronted with the challenging reality of making the math work without massive borrowing or taxation, supporters often fall back to what has recently been coined “Modern Monetary Theory (MMT).”
MMT is a type of fringe neo-chartalist economic theory which ultimately says, metaphorically, “let the money printing presses fly.” The genie commands, “don’t worry much about the debt; it’s not a big deal.” MMT works hand-in-hand with a federal jobs guarantee. While other countries have tried printing their way out of fiscal crises (e.g., Zimbabwe, Argentina) with disastrous results on inflation and currency valuation, the new key lever in MMT is the government’s use of taxation and/or bond sales to attempt to keep inflation in check.
MMT is increasingly gaining a foothold among the most ardent left, because it frees big-government proponents from the nasty business of actually trying to pay for things with taxes or borrowing during the budgeting cycle; that’s all done after the big spending is initiated.
MMT essentially says that governments can print their own money to pay for programs, and keep inflation in check by “clawing back” money from the economy either through taxation or bond sales.
MMT proponents begin with a re-framing of what money itself is. They generally assert that money shouldn’t be viewed as the thing we use to exchange value and make trade easier between one another, but rather it should be viewed as a way for governments to structure deferred payment. To MMT supporters, currency should be viewed first and foremost as a public monopoly for the government. Any government without full employment can simply print money, and inflation will be kept in check up until there’s full employment.
This assumes that employment itself is pretty much always “full” private or government employment — i.e., the employee pool always consists of some mix of a government jobs and private jobs. (This dependency is why a federal wage or job guarantee is a key part of MMT proponents’ agendas.)
MMT suggests that, combined with a federal jobs guarantee, money could be pulled out of the economy via taxes or bond sales to limit runaway inflation, which has always plagued “just let the presses run” every time it’s been tried before. In fact, MMT advocates say that a government surplus isn’t actually noble or good — it should be avoided at all costs, because it represents value that could have been put to use in either the public or private sector.
They argue that a government can run the printing presses all it wants to pay for things, and as long as it uses taxation and government bond issuance to “claw back” the right amount of money from the society, it can keep inflation low.
Key tenets of MMT include:
- Government spending can expand the economy to its full capacity, eliminate unemployment, and fund major programs such as universal healthcare, free college tuition, and green energy.
- If the spending generates a government deficit, this isn’t a problem. That’s because a government’s deficit is the private sector’s surplus.
- Governments can control inflation by spending less or withdrawing money from the economy through taxes.
- Increased government spending will not generate inflation as long as there is unused economic capacity or unemployed labor.
Perfect Fit to “Fund” Massive Spending
MMT lets you skirt the difficult task of explaining how you pay for things.
It allows big-government proponents to tout the benefits of massive programs, swinging for the fences, with funding questions answered by “just print more money, and pull money out of the economy with taxes and bond sales to keep inflation in check.”
Notable MMT Advocates and Detractors
MMT is a complex topic, and one rubric people turn to when dealing with complexity is to ask — “who is supporting it, who is opposing it, and what are their credentials?”
Now, to be sure, that’s not an infallible rubric. Many highly-credentialed people have created huge disasters (e.g., Jeff Skilling, CEO of Enron, was a Harvard MBA and McKinsey Consultant), and many people without credentials did amazing things (e.g., the Wright Brothers never owned a pilot’s license.)
But I was unable to find any supporter of MMT with a really strong CV. Perhaps you’ll be able to help me by offering a few up in the comments section.
|Stephanie Kelton, Stony Brook University Economics Professor, and advisor to Bernie Sanders|
Rep. Alexandria Occasio-Cortez (BS in Economics, Boston University)
Andres Bernal, doctoral student
Greg Carlock, a climate researcher
Randall Wray, Professor of Economics, Bard College
|Christine Lagarde, IMF chief|
Warren Buffett, Investor
Jerome Powell, Federal Reserve
Larry Fink, BlackRock CEO
US Treasury Secretary Larry Summers
Jamie Dimon, CEO JPMorgan Chase
Janet Yellen, former chair of Federal Reserve
Dozens of economists surveyed in Chicago Booth School poll (below)
Bill Gates, Investor and Philanthropist
Kenneth Rogoff, former IMF chief economist
Risks and Criticisms
From a high level, I think there are numerous problems with MMT:
- It’s novel and untested. MMT, in its complete form (including a federal job and wage guarantee) is still only in the minds of a few academics and policy wonks. It’s never been deployed in any country with any success. So there’s that. Seems like a pretty risky bet. If it doesn’t work out, it’s going to run up the public bill enormously in short order.
- It violates the intuition that there’s no free lunch. One of the certainties of life is that there are, in the end, no free lunches. A couple cannot run up unsustainable debt, because eventually, they cannot pay back what they owe, and it tanks their credit rating. While a government has the distinct advantage of being able to issue its own currency, metaphorically running one’s currency printing presses is the way that banana republics have often paid for their programs. The result has always been runaway inflation and terrible devaluation of the local currency compared to external currencies. With our economy more interconnected than ever, tanking the dollar versus other non-MMT economies would be a very dangerous bet indeed.
- Our Constitution Has Separate Budget and Central Banking Institutions: If MMT did indeed work, it would require very tight coordination between the entities which budget (the House of Representatives, the Senate and the Presidency) and the Federal Reserve. This would require not just institutional changes but perhaps Constitutional changes to tighten the connection, coordination and feedback loop.
- America benefits enormously by being the world’s reserve currency. We enjoy comparatively low borrowing rates, and it’s comparatively easy to attract foreign and domestic capital for government initiatives. If we adopted MMT, it’s quite easy to see that foreigners might change their view on US Treasuries or the dollar. A major source of America’s strength is that we are the de-facto reserve currency of the world. This means that wealthy nations, corporations and people have the trust and confidence that we have the means to pay back our loans, and that the dollar will be compare relatively favorably to their local currency over time. Adopting a “just run the printing presses” attitude has a real chance of permanently resetting that mindset.
- A simplified form of it has been tried, and failed spectacularly. The closest analogies were probably the deficit spending by the Socialist government of France in the 80’s and Germany in the late 90’s. There were brief experiments with running the presses in each of these countries to pay for massive social programs; they had to reverse those policies later. See Larry Summers’ comments in the videos below.
- It imagines a very tight timeline between spending and “claw back” to remove that spent money from the economy. The chief mechanism by which MMT theorists believe that inflation will be kept in check after profligate spending occurs is to claw back money from the economy via taxation. But in reality, tax revenues are highly seasonal — the main collection time for individual taxes is every April, and for corporations, every quarter. It’s also not like a discrete dial can be turned in our economy on taxes, since new tax rates are subject to the legislative process, which is hardly an instantaneous or in any way assured process.
Key Figures in Finance Speak Out
A government may be able to do this once, but doing this systematically will make it impossible to sell bonds in the future.Kenneth Judd, professor of Economics, Stanford University
MMT is confused and kind of a mish-mash of things that don’t make sense. I wish they’d spend less time talking about theory and a lot more talking about what’s reasonable.Austin Goolsbee, former Chairman of the White House Council of Economic Advisors
If you could create growth by printing money, then Zimbabwe and Argentina and Venezuela would be some of the richest countries in the world.Stephen Moore, Economist and former WSJ Editorial Board member
In principle, a government interested in preserving its future ability to borrow at reasonable rates should be concerned with the credibility of its repayment promises.Benjamin Zycher, public policy analyst
Heaven forbid that our Keynesian-inspired, decades long, deficit-spending profligacy continues unabated and is exacerbated, turbocharged, by proponents of MMT.Larry L. Henry, opinion piece in Wall Street Journal
Among mainstream economists, there has been little support and some prominent commentators have been far from complimentary, including Paul Krugman, Kenneth Rogoff and Lawrence Summers. Proponents such as Stephanie Kelton and other MMT-ers have responded fiercely. And even writers potentially sympathetic to MMT politics and/or critical of the mainstream have found themselves under attack.IGM Chicago, University of Chicago Booth School of Economics
[MMT proponents write] ‘for most governments, there is no default risk on government debt’. When reading these words, my reaction alternates between languid concession and vehement opposition.Gregory Mankiw, professor of Economics at Harvard University
I’m not a fan of MMT — not at all, We don’t need to get into danger zones, and we don’t know precisely where they are.Warren Buffett, investor
There will come a point where the currency is so debased that further spending becomes difficult if not impossible.’Eric Maskin, professor of Economics, Harvard University
Countries all over South America have tried it with disastrous results. It was tried by the Socialist Mitterrand regime in 1981 and they had to reverse it, it was tried for six months in the late 90’s in Germany and they had to reverse themselves.Larry Summers, former Treasury Secretary
20+ Economists Challenge Key Assumptions
The vast majority of surveyed economists have major problems with MMT.
The Chicago Booth School conducted a survey in March 2019, asking dozens of well-credentialed economists from Stanford, MIT, Yale, Harvard, Cal Berkeley, and University of Chicago to weigh in on two questions that are central to MMT theory. If either of these assumptions are incorrect, MMT cannot stand on its own:
What Might America’s Debt-holders Think?
As of December 2019, the national debt was $23 trillion. When the US government borrows, it sells Treasury bonds. So, before re-jiggering the entire way we fund our government, we might want to consider the reaction of bond buyers.
Who holds America’s existing $23 trillion in debt and expects it to be paid back with a currency of predictably strong value?
Here’s how it breaks down:
OK, but who owns the Treasury bonds? As of September 2019, the ownership looked like this:
The public holds $17.1 trillion of the national debt. Foreign governments nd investors hold 39% of it. The top holders are Japan ($1.15 T), China ($1.07T), The UK ($332B) and several holders smaller than that.
One of the central claims of MMT proponents is that a sovereign currency issuer need not self-fund with taxes or borrowing (bond sales.)
But this ignores the reality that the government and private sector are highly interconnected. When the government fiddles around with the “value of money” (let’s say, by making a decision to fund a trillion-dollar infrastructure project and funding it by effectively printing currency), it has immediate impact on the value of those dollars held by private individuals and corporations. And there’s substantial lag in the feedback loop of budgeting, monitoring true employment levels (to test for full employment), taxation opportunities and collecting the money.
Anyone can spend first and obtain income later on credit. And everyone, including government, relies upon output and income to assure its credit. It cannot just immediately raise taxes to claw back the money, because tax rates will not only be delayed but will be different for all citizens. This fundamentally undermines the belief in, and thus the credit inherent in, the system. The word credit in our system stems from the Latin “credit”, meaning, “belief.”
So, put me down as an MMT skeptic.
Below are a few pro/con videos that might be helpful for more information.
 “Warren Buffett Hates It. AOC Is for It. A Beginner’s Guide to Modern Monetary Theory”, https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide
 Chicago Booth School Survey of Economists on two central MMT questions, http://www.igmchicago.org/surveys/modern-monetary-theory
 “Alexandria Ocasio-Cortez is a fan of a geeky economic theory called MMT: Here’s a plain-English guide to what it is and why it’s interesting”, https://www.businessinsider.com/modern-monetary-theory-mmt-explained-aoc-2019-3
 Warren Buffett Joins Scorn of Modern Monetary Theory and ‘Danger Zones’: https://www.bloomberg.com/news/articles/2019-03-15/buffett-no-fan-of-modern-monetary-theory-with-its-danger-zones
 Elizabeth Warren’s Savior: Modern Monetary Theory, https://www.aei.org/articles/elizabeth-warrens-savior-modern-monetary-theory/
 Modern Monetary Theory, explained: https://www.vox.com/future-perfect/2019/4/16/18251646/modern-monetary-theory-new-moment-explained
 Alexandria Ocasio-Cortez’s favorite economic theory derided by IMF chief Christine Lagarde as no ‘panacea’, https://www.businessinsider.com/mmt-aocs-favorite-economic-theory-is-derided-by-imfs-lagarde-2019-4
 What is Modern Monetary Theory?, Forbes: https://www.forbes.com/sites/miltonezrati/2019/05/28/what-is-modern-monetary-theory/#69a33c131869
 AOC’s Beloved MMT Earns Surprising Rebuke from Warren Buffett, https://www.ccn.com/aocs-beloved-mmt-earns-surprising-rebuke-from-warren-buffett/
 Debunking Modern Monetary Theory & Understanding It First, https://www.the-lighthouse.net/debunking-modern-monetary-theory-mmt-understanding-it-first/
 The Left’s Embrace of modern monetary theory is a recipe for disaster, Larry Summers, Washington Post