Debt? Modern Monetary Theory says government can have it all

The $6 trillion budget President Biden has proposed may strike many Americans as an astronomical amount, but there is a school of thought that supports that spending binge and much more.

Modern Monetary Theory is a brand of economics whose supporters say signals a brave new world and whose detractors fear could lead to fiscal calamity.

“I’m not sure any White House economists would describe themselves as MMT adherents, but the policies they are pursuing sure do look a lot like MMT or MMT-lite,” said Tyler Goodspeed, a Stanford University economist and former chairman of the White House Council of Economic Advisors.

The core principle of Modern Monetary Theory is that a government that controls its money, and thus has what is known as a “sovereign currency,” will never default because it can print as much money as necessary to cover its debt. Should the money supply trigger inflationary pressure, the government can mop up the excess dollars through higher taxation.

In other words, the concept of “spending too much” is antiquated.

The $6 trillion proposal, coming on the heels of trillions spent on COVID-19 stimulus bills, seems to reflect MMT’s philosophy that there is no need to put a brake on spending. The theory seems tailor-made for fulfilling a progressive wish list, but there are economists across the spectrum who believe the school is rooted more in politics than economics. At some point, they warn, the old rules about printing money and inflation are sure to apply.

“There’s this fundamental tension between ‘this is a bold new world, the second coming of FDR or LBJ,’ and the fact they are looking only in the recent rearview mirror on inflation,” Mr. Goodspeed said.

Consciously or not, Washington seems to have embraced the idea that government spending binges are no cause for concern.

“There seems to be a presumption we could just get anything,” said Joel Griffith, an economy and taxation expert at the conservative Heritage Foundation. “Just in the past year, during COVID and since, we’ve seen an implementation of some of the ideas of MMT on a monumental level.”

Mr. Griffith pointed to the explosion in the federal deficit, which rose from $2.4 trillion in 2019 to $5.1 trillion in the last quarter of 2020.

Yet the 21st century has witnessed a series of bipartisan spending binges, and inflation has remained a lurking rather than pressing issue.

“There is a boy who cried wolf negative aspect to all this,” said Scott Sumner, an economist at the libertarian George Mason University’s Mercatus Center who opposes MMT but is not unduly alarmed inflation will spike. “People who have been warning about this or that might lose some credibility, and now the more dovish sorts have got the upper hand at the Fed.”

Mr. Sumner thinks a number of factors in addition to MMT have contributed to the spending frenzy that not only has gripped the Biden administration but also occurred under former Presidents Barack Obama and Donald Trump and has left the nation with more than $26 trillion in debt.

“There’s been a real change in the thinking about how much we have to worry about deficit spending,” Mr. Sumner said. “You could certainly tell a story of fiscal stimulus without MMT, and there is this perception now that we are comfortable with much bigger deficits.”

Indeed, the nation’s debt grew robustly under President George W. Bush, too, and Democrats and Republicans in Congress have shown no appetite for curbing spending. Mr. Bush created a new Cabinet-level agency — the Department of Homeland Security — and added $5.85 trillion to the national debt; then Mr. Obama blew it out with $8.59 trillion more.

Bipartisan blowout

Under Modern Monetary Theory, however, these enormous spurts in spending are not a problem. And the past decades’ low inflation has played into MMT proponents’ hands, economists said. The “quantitative easing” that began during the Obama administration, followed by trillions in COVID-19 themed stimulus bills in the Trump and Biden administrations, seem to lend credence to MMT’s laissez-faire philosophy on the government’s checkbook.

Biden administration officials did not respond to questions about how big a role MMT has played in the administration’s economic thinking and to what extent President Biden ascribes to the theory.

But MMT proponents have circled around Mr. Biden. One of the school’s most influential members, SUNY-Stony Brook economics professor Stephanie Kelton, was a longtime economic adviser to democratic socialist Sen. Bernard Sanders of Vermont became a key member of what the combined Biden and Sanders presidential campaigns called the “Economy Unity Task Force.”

In that role, Ms. Kelton was asked to “identify ways to transform our country,” according to her webpage.

Ms. Kelton did not respond to questions from The Washington Times.

Another high priest of MMT, Bard College economics professor L. Randall Wray, confirmed that he and other MMT economists have been working closely with lawmakers in Washington.

“MMT has definitely influenced the Dem side of the budget committee as well as some others,” Mr. Wray said. “I recently gave a presentation to the [Congressional Budget Office] and I think Stephanie Kelton did too, or is set to do one — by invitation so they are at least interested.”

Mr. Wray insisted it made sense for lawmakers to embrace MMT because its tenants are not hypothetical.

“MMT is not chiefly a theory; it is a description of reality,” he said. “Sort of like evolution vs creationism. We do have some policy prescriptions but most of our work is simply describing the way sovereign government spends. The ‘creationists’ — deficit hawks and doves — are describing a world that does not exist.”

Ms. Kelton has pushed MMT as a viable concept for Washington, writing “Biden could go bigger and not ‘pay for it‘ the old way,” and other pieces. Her ideas of unrestrained federal spending that can be modulated by ratcheting up taxes if necessary have also been embraced by progressive members of Congress like Rep. Alexandria Ocasio-Cortez, a New York Democrat who believes MMT is the ticket to a so-called Green New Deal and other enormous projects.

MMT has lurked among academic economists for some 40 years, with the American economist Warren Mosler generally regarded as its father in 1992. Still, most economists across the spectrum remain unconvinced.

While MMT is in some textbooks it remains a fringe notion that some scholars find intellectually ham-handed. Even Nobel Prize-winning economist Paul Krugman, a supporter of more spending, has labeled MMT “Calvinball,” a reference to the famous comic strip in which the characters sometimes played a game where they made up beneficial rules as they went along.

A relatively novel Ivory Tower theory with shifting principles should not leave Americans comfortable with ever-increasing debt, even if it has proved appealing to both sides of the aisle in Washington, according to many economists.

“There needs to be a very stern warning sent to Republicans and Democrats that if you’re going to dramatically grow the size of government by printing money to buy government debt or spend it, you are simply going to run the risk of higher inflation,” Mr. Griffith said. “This is not a new thing, they’ve just given it a new name and there’s no doubt these theories have worked their way into this administration.”