The Age-Old Fallacy of MMT
The explosion in government debt and government money creation during the coronavirus crisis has revived interest in the once heretical doctrine known as Modern Monetary Theory or MMT. Believers in MMT have long advocated for more spending and more money printing and have claimed that the current crisis demonstrates that such changes do not bring any danger of government default or create any threat of inflation.
In reality, MMT is just a revival of the old fallacy that we can get something for nothing. Its believers trumpet the false idea that money, not the actual economy, determines how much of the good things of life we can have. In reality, the only way to ensure economic growth is by savings and investment, which are inhibited, not encouraged, by too much printing and too much debt. The coronavirus has not changed these timeless truths.
MMT began its modern revival with the publication of University of Missouri economist L. Randall Wray’s “Understanding Modern Money: The Key to Full Employment and Price Stability” in 1998. Wray believed that the government could and should guarantee full employment to everyone, but he knew that such guarantees raised the specter of increasing deficits and eventual default. He therefore argued that no government that printed money need fear default, since they could always print more of it to pay off their old debts. While most economists said such printing would spur a hyperinflation, Wray said that the government could then take in that excess money again by increasing taxes. Since the main value of money, in his estimation, came from its ability to pay taxes, the government could never print, or spend, too much of it.[1]
Although MMTers are sometimes squishy about the mechanics of their ideal world, in most versions it embodies two fundamental fallacies. The first is simple. Although the MMTers are right that most “fiat” money today began to hold value because it became acceptable as tax payments, most of us don’t hold money just to pay taxes. Besides a few cents on sales taxes, and the occasional property tax check or an annual transfer to the IRS, the vast, vast majority of our spending goes to goods and services. Even in a world where the government taxes over 50% of all final output, money used to buy all of the investment goods, working capital, stocks and bonds, and intermediate goods leading to that final output is many, many multiples of direct tax payments. Therefore, even raising taxes to a much higher level will not “absorb” all of the excess money MMTers want printed. It will still creep out and create more inflation in the rest of the economy.
As an example of the value of money beyond tax payments, many foreigners today hold US dollars to buy goods or simply to save, even though they never have to pay taxes on that money. The story of the Somali Shilling, which retained some value even after the central government, and their demand for tax payments, collapsed, also demonstrates the value of money for goods or services, beyond any taxes.[2] In our own country, many times when the US government has raised taxes, like in World War II or the 1960s, too much Federal Reserve printing still led to inflation. At other times, like the early 1980s, lowering taxes did not lead to inflation, because printing was paired back.[3] Money printing, and not taxes and deficits on their own, appear to be the main drivers inflation.
The second, and more profound, argument against MMT is that its assumptions posit that the good things in life are actually infinite. Since MMTers believe that no amount of either spending or printing can create inflation, they have to believe that every new government dollar, whether borrowed or printed, can summon ever greater wonders of wealth. The simple failure of this logic can be demonstrated by imagining printing up enough money to buy everyone five cars, or enough to make our fields actually overflow with milk and honey. In an MMT world, such a reality has to be permissible, otherwise believers would have to acknowledge that too much money can chase too few real goods, and thus cause inflation. They would also have to believe that human time itself is worthless, because time is obviously a finite resource, and more printing cannot create more of it. Therefore, in an MMT world, all our efforts to build and create things could be discarded with, somehow, by just more spending and printing.
Some MMT proponents, such as Stephanie Kelton, a professor at Stony Brook University and a former advisor to Bernie Sanders, disavow the more extreme versions of this theory. They merely claim that the US can afford much higher levels of deficit spending and money printing because the economy is always operating far below its capacity. But this relies on a similar fallacy that there is vast untapped wealth waiting to be enlivened by the sorcerers’ wand of the printing press. As Kelton herself argues: “Anything that is technically feasible is financially affordable,” which ignores the fact that somehow the economy has to balance the value of all those “technically feasible” projects.[4] A mars colonization program, for example, cannot be created just by printing without crowding out some other projects we would like. Goods, resources, and human time all remain finite.
More important than any theoretical argument against MMT, however, is its actual failure on the ground. While MMTers pretend to posit an unimaginable future which has never been attempted, in reality many governments have tried to pay for increased spending and deficits with increased printing. The results have been lamentable. One analysis of the histories of Argentina, Brazil, Venezuela, and Peru demonstrates the obvious fact that when these government tried to fund their deficits by printing more money, the result was not an economic boom, but massive inflations and economic collapse, even when these countries tried to index their tax schemes to inflation.[5] The greatest inflation in human history, in Hungary in 1946, happened despite attempts by the government to index taxes to inflation there as well. The government there tried to use taxes to “absorb”excess printing, as MMTers argue, but failed. The stories of these failures could be multiplied ad infinitum.
In the early 20th century, Irving Fisher gave the name “The Money Illusion” to the idea that our wealth was determined by the amount of money in our pockets, and not the amount of actual goods in the world.[6] The MMTers are still caught in the illusion. Like the medieval scholastics debating about esoteric but meaningless terms, they confuse the nominal for the real.
In the short-term, it is sometimes necessary for central banks to print more money, or for the federal government to provide a temporary stimulus. During a time like the coronavirus pandemic, in fact, the increased demand for money can mean that even increased printing actually leads to lower prices, as it has recently, because there is not enough supply to meet that increased demand. Yet the goal of any monetary system over the long-term should be to keep the supply and demand of money stable. And, over the long-term, there is no substitute for stable money and steady finances for supporting economic growth. The only way to get more tomorrow, for better or for worse, is to save and invest today.
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