Some valuable advice was given to me when I began talking to policymakers almost 40 years ago: Elected officials have flytrap minds. Never put in a number that might turn out to be wrong, because you will never be able to pull that number out again — especially if it is convenient to what they want to do.
Fast forward to today. The federal government’s financial standing has already been eroded by one outbreak of ideological “science,” namely the “Laffer curve” that preaches that reducing tax rates increases tax revenues. Three cuts in tax rates have reduced the federal government’s revenues (in absolute terms, and also well below what they would have been otherwise). The last of these tax cuts, in 2017, has reduced federal income tax revenues despite continued economic growth, and the nation’s rising debt burden is now its largest since the massive borrowing required by World War II.
Just in time comes our next scientific breakthrough: modern monetary theory (MMT). Like the Laffer curve, MMT rests on simplistic observations that have just enough truth to take in those who need to believe.
Believers in MMT see crying societal needs: man-made climate change, insufficient access to health care and higher education, and low wages, to cite a few. By common reckoning, government lacks the resources to address all of those needs immediately. MMT solves that problem with a simple and (literally) true observation: The federal government can just print the money. Perhaps the anthem of MMT is this one sentence: “Anything that is technically feasible is financially affordable.” And that is what willing policymakers choose to hear: Anything. Without limit. It is so convenient — “too good to check.” Arthur Laffer would be proud.
But the MMT theorists don’t really mean “anything.” In their more guarded moments, they say, a bit more carefully, that “the relevant constraint upon spending is not some non-existent ‘fundraising constraint,’ but ‘the inflation constraint,’ also known as ‘the resource constraint.’”
In other words, policymakers need not worry about some mythical deficit bogeyman, but there are still limits to sustainable public spending: Policymakers must stop at the point where society’s productive capacity is fully utilized. At that point, further public-spending demands can be fulfilled only by bidding away society’s scarce resources from private spending — at progressively higher prices, resulting in inflation.
You might have thought that the Federal Reserve already targets “full employment” — maximum output at reasonably stable prices. After all, the unemployment rate is bouncing at 4 percent or lower. But to MMT adherents, the Federal Reserve and all other inflation “Chicken Littles” are and forever have been totally wrong. There has not been rapid inflation for 20 years or so. Therefore, there never will be inflation again. The MMT-justified spending programs will elicit massive new production; forget about the low unemployment rate, the resources will come from somewhere. So, again, “Anything that is technically feasible is financially affordable.”
Consider two things: The United States has enjoyed past periods of price stability, followed by periods of inflation. In the late 1950s and early-to-mid 1960s, the inflation rate was low. A president tried to buy “guns and butter” — a war, and a “Great Society” — at the same time. That, plus other bad news, and by the mid-to-late 1970s inflation was in double digits. Modern monetary theory would have smiled on the spending of the 1960s.
And wringing that inflation out of the economy was incredibly costly. The very people whom MMT advocates want to help were squeezed by what was called “the Great Recession” in the early 1980s.
Put it all together: Our economy is very close to its “resource constraint” today. Yes, inflation is low. But it always is before it rises. And once inflation begins, slowing it is hard and painful. MMT is the perfect theory for the video game generation, which never saw the 1960s economic miscalculations so much like what MMT advocates today, and apparently believes that such mistakes can be reversed painlessly by just hitting the reset button.
MMT has given inexperienced and economically uninformed policymakers a bad number: infinity. And those policymakers have seized upon it. However worthy the goal, the consequences could be catastrophic.