A resurgence of a popular economic theory among progressives is leaving an untenable fiscal situation for future generations to figure out.
Thanks to economists like Warren Mosler and Stephanie Kelton, President Joe Biden and the Democrats are leaning into Modern Monetary Theory (MMT) as a way to excuse the U.S. government’s uncontrollable spending, risking high inflation, recession, and unsustainable national debt.
Before spending billions of taxpayer dollars on social programs and proxy wars, U.S. Congress is typically expected to ask, “Okay, but how do we pay for it?” — because ballooning national debt requires massive repayments from the U.S. taxpayer. But with MMT, the Democrats have the freedom to spend future generations’ money in the name of social programs by calling the U.S. dollar a public monopoly.
Central banks trying to clean up inflation after injecting endless liquidity for 2 years. pic.twitter.com/0o7aRjn5hP
— Gold Telegraph ⚡ (@GoldTelegraph_) August 25, 2022
Modern monetary theorists believe that the national currency is controlled by the issuer (in this case, the U.S. government) and supported by the taxpayer. (RELATED: It’s Official: Revised GDP Numbers Show The Economy Is Definitely Shrinking)
MMT isn’t modern as the name suggests, but rather it is a repurposing of two different macroeconomic theories, Chartalism and Functional Finance. The theory was formed while in a steam room with former Secretary of Defense Donald Rumsfeld, according to its creator, Warren Mosler.
Mosler said he had never heard of Chartalism or Functional Finance before meeting Rumsfeld at the Racquet Club in Chicago, but through that meeting came Mosler’s book, ‘Soft Currency Economics,’ and with it, an excuse to spend.
MMT, as explained by Mosler: “The main takeaways are simply that with the $US and our current monetary arrangements, federal taxes function to regulate demand, and federal borrowing functions to support interest rates, with neither functioning to raise revenue per se. In other words, operationally, federal spending is not revenue constrained. All constraints are necessarily self-imposed and political. And everyone in the Fed operations knows it.”
Economics professor Stephanie Kelton agreed with Mosler’s economic theory and was instrumental in making MMT popular in the U.S. by advising politicians like Democratic Vermont Sen. Bernie Sanders.
In Kelton’s view, deficits don’t matter to the U.S. government because, as an issuer, it controls the amount of circulating money and is therefore not accountable to historical standards of economics, according to several of her speeches. This is unlike a family or individual who is a user of the currency and forced to live within typical budgetary requirements.
“If you are able to issue your own currency, then you don’t face the same kinds of constraints that a household faces. You don’t have a revenue constraint. You don’t face financial constraints,” she said in an interview for The University of Adelaide.
Although Kelton admits in the discussion that governments have a threshold to which they can’t print any more money before risking economic downfall, she argues that those in charge stop spending well before that point. “There are real limits to how much a government can safely spend, how it can operate its budget. But most of the time, what we discover is that governments, in spite of having more fiscal firepower, are often too afraid to run their policy in the maximum interest of benefitting the economy,” Kelton said.
Increased deficits today mean higher taxes or lower spending in the future. No matter what you think of our fiscal course this is true–even if you think we have lots of fiscal space it would still mean forgoing spending increases or tax cuts.
— Jason Furman (@jasonfurman) August 24, 2022
The Federal Reserve Bank of Richmond warned in an economic brief that, despite “toying with the idea that ‘deficits don’t matter,’” money can’t be printed and spent by policymakers without being “constrained in the long run by a government’s ability to satisfy creditors.” (RELATED: Biden Falsely Claims Inflation Disappeared In July)
“The idea that a government, as the monopoly issuer of currency, can always print money to cover budget deficits and fund government spending may appear reasonable. But it flies in the face of mainstream economics and historical experience,” the Fed said in its April 2021 brief discussing MMT and government finance. “We argue that its recent prominence is a product of the economic context of the past 25 years, where both interest rates and inflation were low. But in the end, MMT provides only an untested set of statements about the consequences of monetary policy.”
Typically economists, and the majority of everyone else, understand that government money, in its simplest form, is taxes taken paid by U.S. workers. And, if the government were to spend more money than it taxes and needed to borrow money to pay its debts, it owes the next generation (responsible for paying off the loan) a fiduciary responsibility.
Treasury Secretary Janet Yellen told investors at a conference hosted by Credit Suisse in Hong Kong in 2019 that she was “not a fan” of modern monetary theory because proponents tend to get “confused” about the risk uncontrollable spending has on potential inflation.
“[They say] you don’t have to worry about interest rate payments because the central bank can buy the debt. That’s a very wrong-minded theory because that’s how you get hyper-inflation,” Yellen said.
However, critics against MMT are playing politics and fear-mongering to prevent policymakers from realizing the U.S.’s true economic potential, Kelton noted in a 2018 lecture for Stony Brook University.
“They’re scaring us with these stories about how it’s unpatriotic, how it’s burdening the next generation, how it’s dooming us to a future of higher taxes, catastrophe for the nation,” remarked Kelton.
A country has sustainable debt when its debt-to-GDP (gross domestic product) ratio is 77% or less, according to the World Bank. The U.S. current debt-to-GDP ratio is at 137.11%, the U.S. National Debt Clock reported.
The Committee for a Responsible Federal Budget (CRFB) called the national debt a “generational issue” that “creates an increased burden on young and future Americans.” A child born in America will immediately be responsible for just over $92,000 of the almost $31 trillion in debt the U.S. holds, according to the U.S. National Debt Clock.
“The U.S. government is deeply in debt. While measuring the country’s fiscal position in trillions of dollars or percentage points of GDP may seem abstract, the adverse consequences of continuing on our current trajectory are real,” the CRFB stated. “Rising debt slows income growth, increases federal interest payments, pushes up interest rates, reduces our ability to respond to the next recession or emergency, burdens younger and future generations, and increases the risk of fiscal crisis.”