Monopoly Money

I predict we are going to hear a lot more about Modern Monetary Theory (MMT) in the next few years. I am not particularly happy about it, but I think it is the way the cookie will crumble.

To the extent the hard left wing of the American political spectrum has coherent economic principles they are grounded in MMT. And it is the hard left and right wings of the political spectrum that have the momentum these days.

Here’s the gist of MMT:

Governments that issue their own currencies are not budget constrained. In other words, government spending is not constrained by tax revenues. As long as a government issues its own currency, it can run perpetual budget deficits of any size. A sovereign currency issuer can’t go bankrupt. The MMT people are actually right about this, and in my view this is what lends MMT a superficial degree of credibility. Because the MMT people can point to deficit hawks and say, “The Rich are lying to you!” which is a message that sells.

Since they are not budget constrained, governments can spend whatever is necessary to ensure maximum employment and an arbitrarily high standard of living for the population. To the extent tax revenues fall short of the required spending, the government will simply run a deficit. Under MMT, you really can have your cake and eat it. The government need only decide everyone is entitled to as many cakes as he wants. In fact, the only reason we don’t have MMT today is nasty, greedy Elites perpetuate the myth of balanced budgets the keep the huddled mass of The 99% in check. That’s the MMT view, anyway.

Sure, you can get down into the weeds on any number of operational details. But the above is all you really need to know to get to grips with MMT.

Why MMT Is A Bad Idea

The MMT people are absolutely correct that a sovereign government that issues its own currency cannot go bankrupt. That doesn’t mean MMT “works,” or is a particularly good idea.

Two reasons spring readily to mind:

Even with fiat money, inflation remains a constraint on government spending. A government can spend as much as it wants, as long as someone is willing to hold its liabilities (a government liability is always an asset to someone else). Yes, in theory this amount is still unlimited. The Bank of Japan, for example, has printed an extraordinary amount of money with hardly a whiff of inflation. Ultimately, the amount of money a government can print is limited by its credibility. Fiat money is a faith-based system.

When people lose faith in government liabilities (a.k.a money), they abandon them for stores of value like land, gold, bitcoin, whatever. Hyperinflation results as people try to unload their monopoly money as quickly as possible while it still has some purchasing power. I remember reading stories about Zimbabwe’s hyperinflation in the mid-2000s. Prices would rise so fast people would take the bus to work in the morning but wouldn’t be able to afford a ticket on the way home.

Now, the MMT people will argue the government can use taxation to “mop up” excess liquidity and maintain price stability. Maybe it can. Maybe it can’t. Personally I am skeptical. Regardless…

…MMT would require a massive government apparatus to administer. Let’s call this apparatus Gosplan. Under MMT, Gosplan does the following:

• Decides on the appropriate standard of living for all citizens
• Calibrates government spending and money creation to meet that standard of living
• Allocates labor between the private and public sectors via a job guarantee program
• Sets tax policy in such a way as to maintain price stability without upsetting the rest of the apple cart

Simple, right? What could possibly go wrong?

I suspect things would ultimately go about as well as they have with every other centrally planned economy in history. (spoiler: not very well)

The Enduring Appeal Of MMT

Sadly, I fear MMT will continue to get traction. It is an easy sell. Under MMT, there needn’t be any scarcity. Gosplan will ensure full employment, price stability and a fantastic standard of living. If you dare to dream, you can make it real. It’s the perfect economic platform for the populist left. If I were a hard left politician, I would be out flogging MMT at every opportunity. “Cake for everyone!” I would tell the euphoric crowds. “One for having and one for eating!”

Like socialism more broadly, MMT appears to offer a convenient “out” from some of the nastiness and brutishness of the human condition. As Will and Ariel Durant wrote in The Lessons of History:

[T]he first biological lesson of history is that life is competition. Competition is not only the life of trade, it is the trade of life–peaceful when food abounds, violent when the mouths outrun the food. Animals eat one another without qualm; civilized men consume one another by due process of law.

In theory, MMT is attractive because it eliminates certain economic risks that individuals face, allowing them to live more dignified lives. That’s an admirable goal. But here’s the thing. Risk can never be destroyed. The best you can do is lay it off on someone else. And that’s exactly what MMT would do.

Sure, MMT might nominally eliminate unpleasantness like unemployment and poverty. But the underlying risk of economic imbalances wouldn’t be reduced. Imbalances would just shift around. Most likely they would reappear in the form of supply/demand mismatches, like shortages and surpluses of certain goods, and, eventually, serious inflationary pressure.

Update (09/13/18): In response to some responses I received on this post, and as a reflection of related conversations, I wrote a brief follow-up post. The follow-up makes it clearer my views of MMT have more to do with human behavior, incentives and risk management. This portion is particularly relevant:

Politicians are always and everywhere incentivized to run deficits and print money. Hand politicians a license to run deficits of arbitrary size and they will print and print and print. This isn’t left versus right political thing. This is a human nature thing.

Under MMT, it would be up to self-interested politicians and their appointed bureaucrats to ensure we don’t end up with hyperinflation. Self-interested politicians and appointed bureaucrats hardly have an unblemished track record when it comes to economic management.